Very nice. Thanks for pointing this link out. When you start to think about it in terms of fixed vs income producing it does start to take on a whole new meaning. I guess I have to stop looking at the balance and start looking at what that balance can generate. As buffet points out there are a lot of companies (and for my liking ETF's that limit single company risk) that provide nice dividends year in and year out.
I guess markets hitting new highs, and all the talking heads got me worried about the market will "Crash" again. All this talk of 1 last run before the market completely melts down and never comes back. Talk of peak oil, energy prices, high unemployment, gap between the rich and poor, youtube conspiracies, and the like.
Maybe I should turn the internet off! Might make me sleep better at night. I will plan on taking about 200k out into a cash position, but let the rest ride. I am looking at those High Dividend ETF's as a place to start moving into income producing vs my coffee house gowth style.
Thank you all for reiterating what I have read many times over from many threads, you guys have certainly made me re-evaluate my go to cash strategy.
I am glad you re-evaluated. Buffett is not infallible, but I can't tell you how much I've learned about investment by reading his annual letters. It helps that I am shareholder, but I was reading them long before I bought a share of Berkshire stock. There are lots of things I learned from reading the letters.
But the three most important are
- When you buy ETF/Mutual fund you are not entering a casino or even an ebay auction, this isn't a zero sum game. You are buying the rights to receive the future earnings/dividends of collection of great companies that make valuable products and generally make a profit selling them.
- Be fearful when others are greedy and greedy when others are fearful
- Price is not equal to value
Before reacting to a big change in the market either direction. I find it helpful to step back and ask yourself; will the crisis, or more often the impending crisis, or perhaps rosy economic news, dramatically change the number of iPhones Apple sells 2, 5 or 10 years from now, boxes of Tide P&G sells, cans of cola shipped by Pepsi or Coke, microprocessor made by Intel. Almost always the answer is no. Although the events in 2008 were so devestating the answer was a definite yes.
If we look back at the economic news over the last year the results were generally positive. The Euro doesn't look like it will collapse, the housing market is recovering in the US, China is taking steps to avoid a bubble in their economy. All in all things are slightly better than a year ago, although serious problems remain in the developed countries, but the emerging markets are doing quite well indeed. It seems more likely that Apple, Coke etc will sell more stuff in the next couple of years than it seemed a year ago. The stock market has responded by going up.
Now we are starting to see signs of people being less fearful. like individuals investors getting back into the market. But I have not seen much in the way of greed, neither the taxi cab driver, nor my barber have asked for or offered stock tips. Nothing like we saw back in 1999 of day trader, and crazy IPOs for tech companies, or stories of house flippers in 2006/2007. But your instincts are right when the market goes up become nervous.
IMO what Buffett such a great investor is he has a keen understanding of what things (especially companies) are worth. He pays very little attention to what the markets say (i.e stock quotes) a company or stock is worth. Instead he does an independent analysis to determine the value and than looks at the price. Now there a lot of people especially academic who say it is foolish to try outsmart the market. I think they are wrong, I'll note that all of them are poorer than Buffett, and most of them are working and I am not.
Now there are a zillion way of valuing the stock market, but I always try evaluate things by making both an absolute valuation and a relative valuation. The chart below is the historic Price/Earning ratio (P/E) of the S&P over the last 150 years. At 17.23 if we eyeball the chart it looks a tad overvalued. Since earning are predicted to increase this year the P/E on forward basis is 13.8. A reason to be cautious but not enough to say crash ahead, like was evident in 1999.
But on relative basis compared to bonds or cash, the stock market is cheap. As Buffett say they bonds are priced to provide return free risk.
The ten year T-bill is yielding 2% and corporate are 3% (AA) and of course cash is ~0%. If we convert the P/E ratio of the stock market it currently is yielding 5.8% and if earning projections hold the ratio will be 7.2%. Of this 5.8%, 2.1% is returned to the shareholder as dividends which are receive favorable tax treatment compare to bonds. Now compared to other assets classes like real estate, and maybe commodities stock are fairly valued or perhaps a tad expensive. But it isn't easy to invest in any of these in a 401K.
