Inflation

  • 08 Dec
    A Random Walk Down Wall Street

    A Random Walk Down Wall Street

    • According to Burton Malkiel, both technical and fundamental analysis are futile.
    • You might agree or disagree, but there are extremely valuable investing gems in his book.
    • There is something more important than trying to beat the market.



    Introduction

    “Obsessing over stock charts puts holes in investors’ shoes and yachts in brokers’ docks.”

    One of the best books about stocks is Burton Malkiel’s A Random Walk Down Wall Street. It’s a book you should definitely read, if you haven’t already, as it gives a great representation of how Wall Street works over the long term and describes many stock market bubbles, stock valuations through time, the firm foundation theory and the castle in the air theory, and it dismantles technical analysis and fundamental analysis.

    Malkiel is strongly in favor of diversification, index funds, proper asset allocation, risk and long term investing, but the biggest value you can get from reading his book is the common sense related to personal investing and how the risk of investing is related to your personal financial situation and financial goals, not so much the stock market if you avoid doing stupid things.

    Let’s dig into some interesting concepts Malkiel shares and see how they apply to the current market environment.

    Is The Stock Market A Random Walk?

    The main point of the random walk theory is that short term stock price movements can’t be predicted by looking at past price movements as there is no correlation between what has happened in the past and what will happen in the future.

    The concept of a random walk is extremely difficult to grasp because it is in our human nature to attach a pattern and simplify the environment we operate in, a concept called statistical illusion. If we take a look at the S&P 500, we can definitely spot some trends and patterns.

    Figure 1: S&P 500 in the last 10 years. Source: Macro Trends.

    However, there aren’t any. The more historical data you use, the more you will see that there is no way of predicting what will happen next. Malkiel uses the following figure to show how a random walk can look.

    Figure 2: A pattern created by a coin toss. Source: Malkiel.



    The pattern of the S&P 500 isn’t much different than the pattern derived from a coin toss. So whenever you think you might be onto something, remember that a reversal is always around the corner and one short but strong bear market can erase gains that took a decade to build.

    After dismissing technical analysis, let’s see what Malkiel has to say about fundamental analysis.

    Malkiel and Cragg conducted a survey of Wall Street’s top analysts and found that they simply fail at accurately predicting earnings in every single industry both in the one-year and five-year periods. Other researchers like Sandretto and Milkrishnamurthi have reached similar conclusions.

    The book also includes a lengthy discussion about how trying to beat the market is futile. I could argue on that with value investing as it has proven profitable in the very long term. However, even value investing is on shaky grounds given the current accommodative monetary policies which are again a random walk as it was impossible to predict such a scenario 10 years ago. Malkiel argues that value investing did underperform in the 1990s and therefore it is again impossible to know whether past outperformance will replicate itself into the future. You may agree or disagree with Malkiel, but there is some extremely valuable information in his book.

    The Value Of Common Sense Shared By Malkiel

    I find the biggest value in Malkiel’s book is the common sense, which is extremely important in our investing life-cycle. I’ll share a few examples here. Let’s start with inflation.

    Most investors focus on the inflation rate measured by the consumer price index, but that rate has little meaning for an individual and you should think about how to protect your wealth from inflation even if it doesn’t seem important now when inflation is below 2%. The following figure will show how different items are differently impacted by inflation, so it all depends on what you want to buy in the future. If you want to retire on Hershey bars, you should worry.

    Figure 3: Inflation is different and, again, personal. Source: Malkiel.

    Another important factor is proper asset allocation which starts with proper diversification. Malkiel shows how important it is to be well diversified internationally and to rebalance accordingly through time. A portfolio of 20 well diversified international stocks (including U.S. stocks) leads to the same returns with lower risk.

    Figure 4: International diversification leads to lower risk. Source: Malkiel.



    The third Malkiel concept I want to touch on here is risk and age. A young person that has the best earning years ahead of them can afford to take higher risks as the increased future salaries can cover for eventual portfolio declines and even take advantage of lower prices and consequently higher dividend yields. A person close to or in retirement can’t take the risk of a lost stock market decade or any kind of potential portfolio decline.

    Conclusion

    Reading Malkiel’s book leads to an intriguing discussion with oneself, especially if you try to beat the market with a certain technique. However, I believe A Random Walk Down Wall Street is an essential read for anyone who owns any kind of investment vehicle.

    I might not totally agree with what Malkiel is saying, but I’m still young and can take a lot of risk as he would say. Nevertheless, where I agree with Malkiel is that investing is and always will be a personal issue.

    I would build on Malkiel’s work by saying that beating the market is irrelevant. What is relevant is that your investments, their risk and reward, are related to your personal financial life cycle goals. Malkiel’s book is an essential read for determining the relation between the risk reward of your investment strategies and your life goals.

    © 2017 Investiv

  • 06 Dec
    This Is Why You Need To Think About Dividends

    This Is Why You Need To Think About Dividends

    • Dividends and inflation have accounted for 99.7% of returns from 1929.
    • A global look at the dividend environment shows that there are excellent opportunities for dividend growth.
    • The dividend environment has also been distorted by the accommodative central bank policies as yields are very different now, while the companies paying them aren’t that different.



    Introduction

    Back in October, I wrote an article that discussed 8 charts that show how the stock market doesn’t always go up.

    Aside from these charts, I discussed the research of Professor Emeritus Edward F. McQuarrie, from the Leavey School of Business at Santa Clara University. What’s interesting from his research is that he found that dividends and inflation contributed to 99.7% of investing returns since 1929, which is a mind-blowing number. More →

  • 23 Nov
    The Stock Market Will Crash In 2018 – Here’s What Could Trigger It

    The Stock Market Will Crash In 2018 – Here’s What Could Trigger It

    • All indicators show a stock market crash is imminent, but what will the trigger be?
    • I’ll discuss what can happen and how bad it could get.
    • As for the timing of it, the best thing is to be prepared for anything.



    Introduction

    To see whether the stock market will crash in 2018 or not, we have to first see what makes a stock market crash and the best way to do that is to look at the 2001 and 2008 market crashes because the financial environment prior to those crashes resembles the current market environment. More →

  • 21 Nov
    Worried About The Current Financial Environment? Here’s What You Need To Know

    Worried About The Current Financial Environment? Here’s What You Need To Know

    • Today, we’ll discuss the sustainability of developed financial systems as they are now.
    • We’ll also take a look at the much talked about Chinese slowdown.
    • I’ll finish with a take on gold and what could happen.



    Introduction

    In today’s article, I’ll discuss the financial environment we are living in.

    It’s very important to see the fundamental trends and forces surrounding what looks like a stable and strong financial system. The fundamental forces are crucial because in the long term, those forces eventually prevail and have a huge impact on all financial assets. More →

  • 13 Nov
    Inflation Points To A Recession On The Horizon – Here’s What You Need To Know

    Inflation Points To A Recession On The Horizon – Here’s What You Need To Know

    • Everybody expected high inflation after 2009, but it didn’t happen. There are specific reasons for that.
    • However, higher food and energy prices are pushing inflation higher. The low unemployment rate should help too.
    • Today, I’ll discuss how to best position yourself for an inflationary environment.



    Introduction

    There is one little bell always ringing in my mind: inflation, inflation, inflation.

    From all my analysis, inflation is something that could really shock the financial world. In today’s article, I’ll first show the current inflation levels for the most important economies, and then will dig deeper into what can happen in the next few years and how could that affect your portfolio. More →

  • 08 Nov
    Is Everything Now Too Big To Fail?

    Is Everything Now Too Big To Fail?

    • Today, we’ll discuss how the “too big to fail” concept has evolved since it was first used back in 1984.
    • The U.S. stock market to pension funds relation shows that even the stock market is simply too big to fail.
    • In Europe, the situation is even worse. Everything there is too big to fail, from countries to corporations to junk bonds.



    Introduction

    “Too big to fail” is a concept that you probably recognize from the 2009 financial crisis when many corporations, particularly financial institutions, were considered too big to fail due to the negative impact their demise would have on the whole economic system.

    In order to prevent massive negative effects on the economy, and also to prevent a 1930s depression-style situation, governments intervened and bailed out the distressed assets. More →

  • 27 Oct
    These 8 Charts Will Change Your Mind On Buy & Hold Investing

    These 8 Charts Will Change Your Mind On Buy & Hold Investing

    • If you take a different perspective on the stock market, things aren’t all that rosy.
    • If the stock market has done well in the last 15 years, it probably won’t do that well in the future.
    • I’ll share 5 things that will enable you to reach satisfying returns in the long term, no matter what happens in the stock market.



    Introduction

    Today, I’ll discuss two academic research papers that look into slightly longer stock market periods to analyze returns in order to stress the importance of DIY investing and taking responsibility for our financial lives.

    I’ll conclude today’s article with some insight on what to look for in stocks to outperform the market in the next 15 years. More →

  • 03 Oct
    Good Debt Explained: Why You May Want To Take Out A Loan To Invest

    Good Debt Explained: Why You May Want To Take Out A Loan To Invest



    • Investing isn’t only about choosing the right stocks, it’s also about proper capital allocation.
    • Taking on leverage to invest can be smart but it can also be incredibly dumb.
    • From an historical perspective, it could be a very smart thing to be ready to refinance your home and invest in stocks.

    Introduction

    Buffett and Munger praise themselves for never taking out loans for Berkshire and one of the most famous Buffett quotes is:

    “If you’re smart you don’t need debt, if you are not smart, you better stay far from debt.”

    However, this is another half-truth that he tells the world. More →

  • 26 Sep
    The Best Strategies For Investing Late In The Economic Cycle

    The Best Strategies For Investing Late In The Economic Cycle

    • What has to be done in the late part of the economic cycle isn’t a secret. I’ll describe the how and what.
    • However, as always in investing, the question is why we aren’t doing the rational thing.
    • I’ll ask you a question that will help you answer how much and whether you should rebalance.

    Introduction

    Yesterday, we discussed how the economy is in the late part of the economic cycle and everything is leading toward a recession.

    No one knows exactly when the next recession will start or what the trigger will be. So the only thing to do is to be prepared. More →

  • 11 Sep
    Out Of This World Debt Levels Will Damn Future Generations

    Out Of This World Debt Levels Will Damn Future Generations

    • Debt levels are the key driver of economic growth in developed countries. So keep an eye on debt.
    • The velocity of money, household debt, car loans and sales aren’t telling a good story.
    • Globally, the situation isn’t much better. However, there are a few exceptions.

    Introduction

    In today’s article, I’ll analyze the current global debt environment.

    Debt is an economic factor that is unwatched as long as things are going well but as soon at things turn south, everyone will be screaming about a debt crisis and the end of the financial world as we know it.

    Given this, it’s extremely important to know what is going on, how sustainable the current debt levels are, what the impact of debt on the economy is, how to position your portfolio, and perhaps even how to take advantage of potential black swans arising from future debt instabilities. More →

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