A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #133 — Stock Market Prices Don’t Reflect Economic Realities

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I’ve posted Entry #133 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Market Prices Don’t Reflect Economic Realities.

Juicy Excerpt: Why doesn’t everyone look at it this way? We get caught up in the short-term craziness. We look at prices instead of values (which can be properly identified by making an adjustment to the nominal price to reflect the P/E10 value that applies at the moment). We take the risk out of stock investing when we force ourselves to ignore price movements, which are chaotic because they are driven by emotion, and focus in instead on value movements, which have been highly stable for 140 years now.

Put $10,000 in an index fund and in 12 months time you will have an asset worth about $10,650. In 24 months, you will have an asset worth about $11,300. In 36 months, you will have an asset worth about $11,950. Like that.

Stocks provide safe and steady returns. They always have. They always will.

The only reason we don’t see it that way is that we get caught up in the short-term craziness. We shouldn’t. We don’t invest for the short-term. We invest for the long-term. So when we want to know the value of our portfolios, we should check out the long-term lasting values. not the short-term temporary values.

Adjusted prices are the real prices.

VII #98 — It’s Better to Get Stock Prices Roughly Right Than Precisely Wrong

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I’ve posted Entry #98 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Better to Get Stock Prices Roughly Right Than Precisely Wrong.

Juicy Excerpt: One of our favorite rationalizations is to demand perfection of the numbers used to make valuations adjustments while permitting lots and lots and lots of slack in the numbers we use for all other purposes. It is of course true that P/E10 is not a perfect tool. It is possible that the proper adjustment in 2000 was not to reduce our portfolio values by 65 percent but by 60 percent or 70 percent. The adjustment indicated by the P/E10 valuation metric is merely the best adjustment available to us today, nothing more and nothing less. The thing that shows that the objections to making valuation adjustments are purely emotional in nature is the failure of those making the adjustments to impose the same perfectionist standards on the non-valuation-adjusted portfolio numbers.

Beyond Buy-and-Hold #90 — The Returns Sequence That Happens to Pop Up Makes a Big Difference

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I’ve posted Entry #90 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s titled The Returns Sequence That Happens to Pop Up Makes a Big Difference.

Juicy Excerpt: The returns sequence factor is a significant factor. You really do need to understand the concept to be an effective investor. It would be wrong of me to entirely ignore this factor. But the full truth here is that, while the dollar figures are huge, this is far from being the most important factor bearing on your long-term stock return. There are two reasons.

It’s Price Increases That Are “Lumps” for Most of Us

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I recently posted a Letter to the Editor to the Early Retirement Planning Insights site entitled It’s Price Increases That Are “Lumps” for Most of Us.

Juicy Excerpt: The Passive Investing model encourages us to think of price increases as good news and to think of price drops as bad news. For those who expect to be buying stocks for some years to come, the realities are precisely the opposite (not for the first time!) of what is taught under the Passive Investing model. It is generally price increases that are “lumps,” not price drops. A price drop causes the value of the shares we already own to diminish (the lump side of the equation) but it also makes all the shares we have yet to purchase more appealingly priced (the more important side of the equation for most).

Podcast #135 — Today’s Stock Price Reflects Our Assessments of the Past, Present and Future

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I’ve posted Podcast #135 to the “RobCasts” section of the site. It’s called Today’s Stock Price Reflects Our Assessments of the Past, Present and Future.

The “experts” often talk about how the stock market anticipates future events. That does happen. But that’s not the only reality that needs to be taken into consideration. Today’s market price can also reflect beliefs from the past that have been proven to be unfounded. For example, investors are not willing to accept immediately that stock prices will not be returning any time soon to the prices that applied pre-crash. This is one of the reasons why it is not right to say that today’s market price is “efficient” or “rational.” It is investor emotion (reflecting beliefs about the past, present and future) that determines stock prices.