Why I believe we are about to embark on a historic bull market run
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ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
To me, there is a paradox here. I don't see how the fundamentals, even if well understood, tell you anything about the future stock price movement, relative to the broad market.
Those fundamentals are available to everyone. If they look good, and have good expected future prospects, the stock price has been driven up to those expectations. If they look bad, the stock has been driven down based on those expectations.
So as I see it, fundamentals are a wash, they are accounted for. Now, will that stock do better than expected? That will drive the stock price up beyond the market, as expectations were exceeded. But how can we, on average, expect expectations to be better than expected (the paradox)?
Another way to look at it, I could find a stock with absolutely terrible fundamentals and buy the stock at rock bottom prices, which would be very risky, as the company is on the verge of going to zero. But then the company turns around, and my investment goes up 10x or 100x. On bad fundamentals. It's all about performance versus expectations.
Is there room for someone who can spot expectations that are out of whack? Sure, that person could make money. I'm skeptical that it can be done on some sort of scientific, repeatable basis, and even more skeptical that I can do it
But if you can, more power to you. But if that process can't be defined and replicated by others (the scientific method), it may just be voodoo or luck. But even if it is skill, if it isn't transferable and repeatable, all I can say is "good for you", but it isn't of any value to me or anyone else, is it?
-ERD50
ncbill
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Sure, but remember picking individual stocks (or a basket of stocks like "dividend aristocrats") is taking on more than market risk, so your expected return should "beat the market."
Though there's no guarantee...it certainly doesn't appear to do so WRT dividend stocks on a total return basis.
RetireeRobert
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Warren Buffet speaks: https://finance.yahoo.com/news/warr...s-are-significantly-overvalued-182944741.html
To me, there is a paradox here. I don't see how the fundamentals, even if well understood, tell you anything about the future stock price movement, relative to the broad market.
Those fundamentals are available to everyone. If they look good, and have good expected future prospects, the stock price has been driven up to those expectations. If they look bad, the stock has been driven down based on those expectations.
So as I see it, fundamentals are a wash, they are accounted for. Now, will that stock do better than expected? That will drive the stock price up beyond the market, as expectations were exceeded. But how can we, on average, expect expectations to be better than expected (the paradox)?
Another way to look at it, I could find a stock with absolutely terrible fundamentals and buy the stock at rock bottom prices, which would be very risky, as the company is on the verge of going to zero. But then the company turns around, and my investment goes up 10x or 100x. On bad fundamentals. It's all about performance versus expectations.
Is there room for someone who can spot expectations that are out of whack? Sure, that person could make money. I'm skeptical that it can be done on some sort of scientific, repeatable basis, and even more skeptical that I can do it
But if you can, more power to you. But if that process can't be defined and replicated by others (the scientific method), it may just be voodoo or luck. But even if it is skill, if it isn't transferable and repeatable, all I can say is "good for you", but it isn't of any value to me or anyone else, is it?
-ERD50
What you stated has some truth to it. However, fundamentals are important as "part" of the investor's decision making process but not the "sole" reason to buy, to stand or to sell. For example, the dot com crashed occurred because the fundamentals of valuation was not supported by earnings. An investor who purchased before the dot com crash and then immediately sold at a profit can easily say that he ignored the fundamental and he has made money.
When I was a younger investor, I paid a lot of attention to a consensus of broker's recommendations from the various institutions. This is because I believed the brokers are smarter than me. I had co-workers at work who talked about buying GM stock when the GM stock price plummeted during the 2009 financial crisis. My co-workers bought the stock but I warned them that every institutions had recommended "sell". Their stock then became worthless after the GM was bailed out by the government.
Investors who took a risk based on their gut feeling usually do not do well unless they get lucky. This is why people become passive investors and play the long game. I was a passive investor for 90% of my portfolio but the other 10% I was a active investor because you learn very little being passive. The passive investors in this forum think I committed a felony by not being a passive investor for 100% of my portfolio.
My opinion: Everyone think differently as demonstrated by this forum. These differences in opinions can cause volatility. NOBODY is right or wrong. However, ignoring the fundamentals is something that people should do so at their own risk.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Buffett: "I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two."
Buffett : “The only value of stock forecasters is to make fortune-tellers look good."
also, that Buffett ratio concept is over 20 years old, now, and the world has changed quite a bit. While US GDP has about doubled, world GDP has increased by 160%. Arguably, the US GDP may no longer be a good surrogate for the total market available to US corporations. (If it ever was.)
Montecfo
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I think you are right. People's views of investing here skew toward passive index investing. That's fine as far as it goes. I think it is a great tool for young investors and for most folks in general. If holding indexes allows people to Stay Fully Invested, that is worthwhile.
Investing in individual stocks is not for everyone but it may allow you to beat the market or achieve reduced volatility, as well as to manage taxes more effectively. That is, if you have the correct mindset, particularly a contrarian bent.
Most folks here achieved FI through indexing. They will continue to favor that view. It is not surprising. But trying to convince stock pickers that they are doing it wrong is probably a waste of time.
Or so it seems from here.
Well, it does provide some insight into the eternal question of “what will you do all day”
I agree there’s a time and place for everything, and the threads in the stock picking forum aren’t really the best for folks that don’t believe in stock picking.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
There is bound to be a few hard-liners on a subject in just about any forum, but I'd be surprised if the vast majority here were not fine with the idea of putting 10% (or even more) into individual stocks. This is often referred to as "fun money", "gambling money", or "testosterone trades". And I think it can keep an investor on his/her toes, and more aware of where the market is. I learned a lot just following companies in various markets. I really don't think you are being judged as harshly as you seem to think.
I'm still unsure of how the same fundamental info that everyone has access to can be used to advantage in finding stocks that will do better than the market.
What I can see though, after thinking about this a while, is fundamentals could tell you something about how volatile a stock may be. A stable company with good management, a strong history, and no clear changes in market competition is likely going to continue to be stable, based on those fundamentals. Another stock that is counting on some breakthrough that may or may not come to fruition, has a lot of risk. So I can see where fundamentals can help see that. You might choose to invest in the risky companies, expecting "alpha". Whether you can be diversified enough to keep that smooth is questionable, or a lot of effort.
Personally, I'm fine with grabbing the gamut of those in a broad index fund and taking average returns. But I'm still kinda interested in the techniques people use to try to bias the system in their favor.
-ERD50
FYI. Here are the top 10 holdings in Vanguard S&P500 index fund VFIAX:
Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Berkshire Hathaway, Johnson&Johnson, JP Morgan, Chase and Visa Inc
Warren Buffet is the CEO of Berkshine Hathaway. People, who is critical of Warren Buffet, may not realize that they may indirectly own some shares of Berkshine Hathaway as a mutual fund investor.
If they do not, then they are indirectly criticizing investments of an S&P500 Index fund.
I am not one of them. I actually admire Warren Buffet because of his success. At a cocktail party today, a young 20 something couple asked me what should they invest in for their IRA. I recommend Vanguard S&P500 Index fund to start out. They have to go thru their learning curve before taking on other investments such as growth funds versus value funds.
I hope the anti-Warren Buffet people does not criticize me for this recommendation....just because Warren Buffet is involved in this S&P500 Index fund.
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Sunset
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Well, it does provide some insight into the eternal question of “what will you do all day”
I agree there’s a time and place for everything, and the threads in the stock picking forum aren’t really the best for folks that don’t believe in stock picking.
So true.
A good friend of mine told me one summer he made 25% a couple of years ago picking stocks. He also said it was a bunch of w*rk and he spent 4 hours per day doing it, not counting the hours of time he got up before the market opened to research stocks.
It sounded like a job
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I guess my point was that the fundamentals that we all know about have less than perfect effect on the price arrived at by the buyers and sellers. Part of the irrationality is how, when the flight to cash occurs, everything plummets somewhat equally. Not equally, of course, but if an issue is at $100 because fundamentals say so, and the S&P drops in half, there's no vacuum scooping shares at 99.99. Ok, that's an absurd imagination! I really don't believe that index funds ruin individual share pricing, long term, but there's so much more than the unemotional company facts that are driving prices. The best we can hope for is that "the market" for an issue will eventually "come to it's senses" before the logically minded investor looses patience.
bobandsherry
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There's a fine line for some between job, hobby, interest and passion.So true.
A good friend of mine told me one summer he made 25% a couple of years ago picking stocks. He also said it was a bunch of w*rk and he spent 4 hours per day doing it, not counting the hours of time he got up before the market opened to research stocks.
It sounded like a job
When I have to do something because someone tells me to and when, that's a job.
When I can do something I enjoy it's a hobby. When I can learn something more about subjects I enjoy it's an interest. Both can turn into a passion. But clearly I'm in control as I can walk away whenever and resume whenever too.
All of the above can be rewarding, including financially.
NW-Bound
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Regarding the question about whether the market is overvalued, everyone can see that the P/E is indeed higher than its traditional value. However, the interest rate is low throughout the developed world, and compared to that the earnings and dividends of many stocks look pretty good.
There are many speculative bubbles being inflated in a few sectors. I stay away from them, a lesson I learned in 2000. There are plenty of good stocks left to choose from. I can make enough off them to be happy, and do not need to take higher risks. I just continue to do my own things.
There are many speculative bubbles being inflated in a few sectors. I stay away from them, a lesson I learned in 2000. There are plenty of good stocks left to choose from. I can make enough off them to be happy, and do not need to take higher risks. I just continue to do my own things.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
If you interpreted my quotations as somehow being anti-Buffett you're wrong. In fact I have Charlie and Warren here watching me.FYI. Here are the top 10 holdings in Vanguard S&P500 index fund VFIAX:
Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Berkshire Hathaway, Johnson&Johnson, JP Morgan, Chase and Visa Inc
Warren Buffet is the CEO of Berkshine Hathaway. People, who is critical of Warren Buffet, may not realize that they may indirectly own some shares of Berkshine Hathaway as a mutual fund investor.
If they do not, then they are indirectly criticizing investments of an S&P500 Index fund.
I am not one of them. I actually admire Warren Buffet because of his success. At a cocktail party today, a young 20 something couple asked me what should they invest in for their IRA. I recommend Vanguard S&P500 Index fund to start out. They have to go thru their learning curve before taking on other investments such as growth funds versus value funds.
I hope the anti-Warren Buffet people does not criticize me for this recommendation....just because Warren Buffet is involved in this S&P500 Index fund.
The guy is impressive but poorly understood. I have read both of the bios. Early on he was a disciple and then an employee of Ben Graham. There he learned value investing; finding "cigar butts." As he evolved and acquired companies he became very hands-on. The stories and legal battles are fascinating and did much to increase his wealth. The point being that he was not a stock-picker; he was shopping for companies to take over and run strategically. Insurance companies with cash that could fund cash-hungry companies, for example. Fast forward to recent years he has been much more of a stock picker and really not all that successful. I think it has been close to 10 years since he has beaten his own benchmark.
Most important to me in teaching my Adult-Ed investing class, he is a great source of pithy quotations.
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RetiredAtThirty-eight
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Most of the profit I have made over the years has come from identifying large disparities between what people think and the underlying reality. Almost without fail, the bigger the disparity, the bigger the profit. Tesla was a prime example of this. And I believe it still is but it could take as long as 2-5 more years for the market to realize this.
I don't look at a companies financial statements because I think my analysis of them will result in determining a dollar amount of what a share is worth today - I look at them to better understand the business and the potential opportunity. I don't care if they are profitable today if they have a high likelihood of becoming profitable in the forseeable future or are not profitable simply because they are re-investing all their 'extra' revenue into building a larger, more valuable business.
In short, different people will see different things when looking at a financial statement. I look for companies that are not well understood. Often this is the result of ingrained human biases or even deliberate misinformation.
Everyone wants a 'bargain'. The best bargains don't look like bargains from a fundamental analysis. They are bargains because they will perform better than most people can imagine. I rarely buy low p/e companies, almost never. Generally, they have a low p/e for a reason. I'm not opposed to buying low p/e, it's just that it's pretty rare for me to identify one that has good potential.
If I can do it, so can others. It amounts to being able to analyze without pre-conceptions. I trust no information explicitly, I process huge amounts of it, most of it is not even specific to any company being analyzed, and sort and filter until it all makes sense. This generally involves discrediting a large portion of the information being analyzed. If I can't identify bad information, then there is probably not much of an investment opportunity. Anyone can learn to do this.
What you will find is that "professional" stock analysts have a lot of information at their fingertips but are very poor at making sense of it. And that's one big reason why their average performance is very low. Another reason is that they rely too heavily on past results, particularly for companies that are still in the early growth phase. And a third reason is they are lazy and fail to question their preconceived notions.
This is actually a good thing for the individual investor once they learn to not afford any weight to what the analysts say. When I see misunderstanding or misinformation, I see profits. The secret is to know more, and therefore understand more, than the analysts and the average investor. This doesn't amount to intelligence - it amounts to knowing what you do and don't know and how to process it to make the most sense of it. Most people are very poor at this and it leaves a huge door open for those who want to out-perform the "professionals" who are taught that a spreadsheet is more important than critical thinking skills.
RetiredAtThirty-eight
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Where do you live that it's safe to go to cocktail parties? Does everyone wear masks and keep their distance from each other? I can't imagine that would be any fun!
All of the people was either vaccinated or had COVID19 and recovered. This include myself. We did not invite anyone who did not meet one of these two conditions.
BTW...Here is my experience with the COVID19 virus: Do not try to recover at home with OTC medicine which I found to be useless. You need to consult your doctor over the phone and get prescription medicine which is more stronger. I speculate some folks may have attempted to recover with OTC medicine and then their condition deteriorated past their ability to recover.
Back to the forum discussion: Everyone has various opinions on fundamentals but I like to make a point: A fundamental is like the speed limit of 65 mph on the freeway. Driving faster than 65 mph translate to a "higher risk" of an accident or a speeding ticket. It does not mean that situation is going to happen at a given day.
It simply means there is a "higher risk". I disagree with people who dismiss the fundamentals because it is similar to a guy who is states that he drive faster than 65 mph all the time. In his mind it must be OK to drive faster than 65 mph and ignore the speed limit sign. My point: If you continuously drive faster than 65 mph or you continuously ignore the fundamentals, the "probability" increases that you may get hurt.
IMO...ignoring the fundamentals is like...should I say it?....gambling. Some people will get lucky while other people won't.
RetiredAtThirty-eight
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I certainly don't advocate ignoring fundamentals! My point is simply there is no one way to interpret them that is correct. For example, a p/e of 1000 might actually belong to an under-valued company while a p/e of 10 might belong to a ridiculously over-valued company. A competent investor doesn't rely on "standard rule of thumbs" or "one size fits all" generalizations, they must actually understand the company they are analyzing.
In my experience, professional brokerage analysts often don't understand this most basic truth.
Re. cocktail party: I'm glad to hear you were all being safe! It must have been a party for doctors and nurses or something similar because, around here, very few people have received both doses unless working in the medical/senior citizen industry. The speed of the roll-out has been beyond dismal and there is a massive shortage of available vaccines. I noticed in Israel last week more than half of the country had already been vaccinated with two doses! At this rate they will have the entire country vaccinated by the time we reach 25%!
In the USA we are behind most of the developed world for some reason.
P.S. Thanks for the advice on how to best recover from COVID-19. My strategy is to not get it in the first place!
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I certainly don't advocate ignoring fundamentals! My point is simply there is no one way to interpret them that is correct. A competent investor doesn't rely on "standard rule of thumbs" or "one size fits all" generalizations, they must actually understand the company they are analyzing.
Re. cocktail party: I'm glad to hear you were all being safe! It must have been a party for doctors and nurses or something similar because, around here, very few people have received both doses unless working in the medical/senior citizen industry.
In the USA we are behind most of the developed world for some reason.
P.S. Thanks for the advice on how to best recover from COVID-19. My strategy is to not get it in the first place!
1. On Post #330. I stated: However, fundamentals are important as "part" of the investor's decision making process but not the "sole" reason to buy, to stand or to sell. Therefore I am in agreement with your rule of thumb point.
2. My daughter is going to college to be a nurse so her friends are generally working nurses that my daughter met during her internship. I am retired and an unpaid volunteer in a nearby city. Some of my co-workers are also unpaid volunteers who are generally senior retirees. There were a few young people who already had COVID-19 but they recovered. They know me since I play basketball with them at the gym. I am an older guy but I maintained my fitness since I was ex-Army. Before i retired I commuted by bicycle 40 miles a day or 2 hours one way. My 4 hours total commute include a 1000 foot hill. My fitness and no underlying health conditions enable me to survive COVID19 without any effects.
3. We are behind other countries because there is a lack of coordination at the top. The federal government punted to the states. The states have less resources than the federal government and the states had to fend for themselves. We then became 50 separate and independent countries and the nurses at that party were pretty angry about that situation. I do not want to point fingers since pointing fingers does not help. I am just hoping our nation will learn from this bad experience and do better the next time.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
From this long reply to my post, I'll try to summarize a few points here:
Thanks, I thought that was very well written response to my post.
I think the area we disagree on to some extent, and that you seem to maybe contradict yourself on, is that "any one can do this".
When I traded individual stocks, I was always looking for what I hoped was a "misunderstood stock". I agree with you that that is the path to successful trading. I was very successful at this with AAPL, which I bough lots of at very near the low ~ 1997. As it rose, I felt that it was becoming more and more understood, and less chance for continued over-performance, but I did very well, and had a 13 bagger with the last shares I sold. I was wrong about continued over-performance though (and I'm not going to calculate how wrong, it would be scary), I've lost track of all the splits since then.
But I don't think I can do that often enough and reliably enough, to beat the market with any consistency, so I choose not to. Again, if you feel you can, more power to you.
But can the average poster here (and I'm pretty sure that makes them above average investors) do it reliably? I kinda doubt it. I had a pretty good handle on what Apple customers were looking for, and the weakness in Apple's product line up at the time It was too complicated, too many products, too much overlap, which all led to inefficiencies in production, marketing, sales and support, making them too expensive and lowering profit margins. The iMac, while far from perfect and still too expensive, provided relief from that for a large group of customers who were hanging on to old models rather than buy new. And that's why I though Apple had a much better chance at some success in 1997 than the market did. And I knew of Apple insiders that were selling/cashing in their stock/options. Who was going to be right?
And maybe I was just lucky - Apple certainly could have gone belly up, but I felt it was a good bet. I just don't think it's easy to spot those "misunderstood" stocks correctly often enough to make it a good bet against just accepting market returns.
I'm certainly not questioning your ability to do it. And I'm sure it can be done. I just question how transferable and reliable it is for the average poster to this forum, or even, say, a 5% subset of those here who are interested in trying.
-ERD50
Thanks, I thought that was very well written response to my post.
I think the area we disagree on to some extent, and that you seem to maybe contradict yourself on, is that "any one can do this".
When I traded individual stocks, I was always looking for what I hoped was a "misunderstood stock". I agree with you that that is the path to successful trading. I was very successful at this with AAPL, which I bough lots of at very near the low ~ 1997. As it rose, I felt that it was becoming more and more understood, and less chance for continued over-performance, but I did very well, and had a 13 bagger with the last shares I sold. I was wrong about continued over-performance though (and I'm not going to calculate how wrong, it would be scary), I've lost track of all the splits since then.
But I don't think I can do that often enough and reliably enough, to beat the market with any consistency, so I choose not to. Again, if you feel you can, more power to you.
But can the average poster here (and I'm pretty sure that makes them above average investors) do it reliably? I kinda doubt it. I had a pretty good handle on what Apple customers were looking for, and the weakness in Apple's product line up at the time It was too complicated, too many products, too much overlap, which all led to inefficiencies in production, marketing, sales and support, making them too expensive and lowering profit margins. The iMac, while far from perfect and still too expensive, provided relief from that for a large group of customers who were hanging on to old models rather than buy new. And that's why I though Apple had a much better chance at some success in 1997 than the market did. And I knew of Apple insiders that were selling/cashing in their stock/options. Who was going to be right?
And maybe I was just lucky - Apple certainly could have gone belly up, but I felt it was a good bet. I just don't think it's easy to spot those "misunderstood" stocks correctly often enough to make it a good bet against just accepting market returns.
I'm certainly not questioning your ability to do it. And I'm sure it can be done. I just question how transferable and reliable it is for the average poster to this forum, or even, say, a 5% subset of those here who are interested in trying.
-ERD50
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OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yup. Me too. Actually it took me 30 years of doing a lot of wild stuff before reality set in. Of course I made money during that time but I almost certainly made less than I could have with a less frenetic and more knowledge-based strategy.
There is well over a half century of research and statistics to say that stock picking doesn't work. In 1952 Markowitz proposed to approximate market behavior as a random process and it got the paper 46,000 citations and him a Nobel for Modern Portfolio Theory.
From Michael Jensen's 1967 study: "The evidence on mutual fund performance indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance. "
Investing icon Ben Graham had, near the end of his life (1976), given up on stock picking: " ... I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors."
And, of course, we have two decades of S&P SPIVA and Manager Persistence reports. All of them point to the same conclusion.
@RetiredAtThirty-eight gets apoplectic, of course, when I point out that stock picking results from thousands of pickers studied over many decades are consistent with randomness. That's certainly his right, but AFIK there is no statistical data or research that shows that investing skill exists. Here is a video I have linked before: Kenneth French on picking a manager: https://famafrench.dimensional.com/videos/identifying-superior-managers.aspx
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RetiredAtThirty-eight
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I say "anyone can do it" in the same sense I say anyone can maintain their own motorcycle. Certainly, one cannot do either of these things without putting in the time and effort to learn how.
The reason there are studies that purport to show stock-picking doesn't work is because the average returns of all investors is the overall market return. This is just to say for every investor who is good at it, there is an investor that is bad at it. But only because they haven't learned how to be good at it.
Of course, everyone can't be good at it at the same time because all investors are competing with one another, but those who put in the time and effort can become better than average. It might take more time and effort for some people than others but one thing I know is that most brokerage analysts are not well trained. The problem is that people who are good at it have better things to do than teach others how to do it. Basically, all of the people purporting to offer instruction for a fee are not very good at it or they wouldn't need to sell instruction. If you know what you are doing, the markets are 1000 times more lucrative than selling classes or books on how to do it.
OldShooter
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
You have said elsewhere that you don’t read. Too bad, really, because if you had read the studies you would know that those statements are complete nonsense.
Another one of your knee-slappers is your repeatedly-claimed superiority to the tens of thousands of analysts out there. By coincidence I have been re-reading William Bernstein’s “The Investor’s Manifesto” this week. (Yeah, I know – there’s that “reading” thing again.) Here is one of his comments on that general topic:
“You are not as good looking, as charming, or as good a driver as you think you are. The same goes for your investing abilities. In an environment filled with incredibly smart, hard-working, and well-informed participants the smartest trading strategy is not to trade at all.”
Maybe you are not familiar with Bernstein. If that's the case please condescend to read his bio: https://en.wikipedia.org/wiki/William_J._Bernstein More: Efficient Frontier Are you smarter than Bernstein too?
Hoping this discussion can continue without the snark, It’d be a shame to shut it down after so many thoughtful posts.
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