2011 Year-End Valuations
From the December 2011 newsletter:
As mentioned last year, valuation ratios such as P/E are not very useful in making one year market predictions. This is disappointing, since they do a fair job of predicting longer-term returns of at least 5-10 years. As a result, you will not see a market forecast from us for 2012 or any other single year, unless we can support it with a high standard of evidence.
The next best thing is to evaluate the markets today using those valuation ratios and consider how that affects future returns in the 5-10 year time frame. It’s not as exciting, but it’s far more responsible and reliable based on historical market data.
Valuing Real Estate (REITs)
From the September 2011 newsletter:
In prior newsletters, I made the case for using the P/E ratio to value the stock market and to predict future returns. Now let’s apply the same analysis to real estate, or more specifically REITs.
One crucial feature of REITs is that they are required to distribute almost all their income to maintain their tax status. This means earnings (the E in P/E) can be closely approximated by dividends. And dividend data is far easier to find for individual investors. Even better, the REIT industry provides historical data on their website for budding data scientists.
The Value of Diversification
From the March 2011 newsletter:
When I list “full diversification” as one of core components of Mariposa’s investment strategy, what does that really mean? What’s the point of diversification?
Before answering those questions, let’s first discuss one interesting, but often overlooked, property of investments: the difference between the realized, annualized return and the average return. For example, if you experience returns of +10% in one year and then -10% in the next, your realized return is not 0%, but slightly negative (-1% if you’re calculating at home). I like to think about this relationship as a simple formula:
Stock Market Predictions Using Q
Last month, we used the P/E ratio to predict stock market performance over next 1 to 20 years. This time, let’s try using another valuation metric: the Q ratio. An easy way to calculate Q is by using the Federal Reserve’s Z.1 data, which was just refreshed last Thursday. And as mentioned previously, we know that predicting stock market movements profitably is extremely difficult, so we need to proceed with care.
Using data since 1945, the chart below shows the historical relationship between Q and S&P 500 returns over the following 1 and 20 years (annualized and adjusted for inflation).
Predicting the Stock Market Using P/E
From the November 2010 newsletter:
As the year comes to a close, you will without a doubt see financial magazines and newspapers predicting what the markets will do in 2011 and suggesting what you should do about it. Most will be supported by a good story, not necessarily evidence.
We already know that successfully predicting stock market movements is extremely difficult–just ask mutual fund managers, Wall Street research analysts, or even your grandparents’ market experts. So if you want to consider it, whether for fun or for profit, you need to be particularly skeptical and careful with your research.
Stock Market Experts of the 1930s
If you have even the slightest interest in investing, you probably notice stock market experts everywhere, whether they appear on CNBC, write for newspapers or blogs, or even serve as your advisor. Readers of this blog know to be very skeptical of their advice. We’ve already exposed the disappointing results of using Morningstar mutual fund ratings, mutual fund managers, and Wall Street earnings forecasts.
But has it always been this way? These studies generally use performance over the last few decades to support their conclusions. The stock market and its experts have been around a lot longer than that.
Morningstar Ratings Update
Last week, I posted on this blog an article from my newsletter criticizing Morningstar ratings. Surprisingly, the VP of Research at Morningstar found it and responded in the comments the very next morning, so we went back and forth a little.
If you’ve ever wondered what it would be like if two investing nerds got together to talk about their views, here’s your chance to see for yourself.
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