What did we learn from the Bubble?

[ats5g]

From Cliff Asness in the Financial Analysts Journal:

Rubble Logic: What Did We Learn from the Great Stock Market Bubble?

Some constructive advice
Investing is simple, but not easy. - Warren Buffett

Despite all the criticism I have leveled at our collective understanding, we basically know how to invest. A good analogy is to dieting and diet books. We all know how to lose weight and get in better shape: Eat less and exercise more. But as Warren Buffett would say, that is simple—but not easy. Investing is no different.

Some simple, but not easy, advice for good investing and financial planning in general includes
• diversify widely,
• keep costs low,
• rebalance in a disciplined fashion,
• spend less,
• save more,
• make less heroic assumptions about future returns,
• when something sounds like a free lunch, assume it is not free unless very convincing arguments are made—and then check again,
• stop watching the stock markets as if they were on ESPN, and
• work less on investing, not more (after finishing this article, of course).

Perhaps the most important advice, in true Hippocratic fashion, is: Do No Harm! You do not need a magic bullet. Little can change the fact that current expected returns on a broad set of asset classes are low versus history, and explicitly or implicitly “levering up” low expected returns to make them high is not usually a great idea. Stick to the basics with discipline, and ignore Bubble Logic.

- Alec

 

[wabmester]

Great article.   Probably about a year's worth of thread fodder in there.

In case the link above didn't work for you, try this one.

I didn't follow his argument against the fed model, though.   He argues that you can't compare E/P to the yield on the 10-year because E/P is real and the 10-year is nominal.

If he really believed that, then we should be comparing E/P to the real yield, which is about 2%.   So stocks should be fairly valued at a P/E of 50 today by his logic, which is counter to his argument that the fed model allows stocks to get overvalued.

 

[maddythebeagle]

spend less and save more

hard to argue with that