Posts filed under ‘Miscellaneous’

Market will fluctuate

This is an actual quote from nearly a century ago by American financier J.P. Morgan when asked about market direction, and it is at the level of other two life certainties, death and taxes.  Looking at recent market movement, it definitely fluctuates.  This week capped the best 3-day comeback in years, after investors apparently decided that low oil prices are, in fact, pretty good for the economy.  Back in October, the market came very close to an official correction due to Ebola fears and other factors, which, in all truthfulness, I no longer remember.

Over the long term, stocks outperform other liquid investments, such as bonds and treasury bills, and rise, on average, about 10% per year.  But that rise does not follow a straight line — market, well, fluctuates.  These fluctuations can be quite extreme in either direction, but tend to be sharper going down.  A decline from 10% to 20% from a peak is called a correction.  Corrections are very common and occur, on average, every 18 months or so.  A bear market is a decline of 20% or more.  An average bear market results in a loss of 30% and lasts 9 to 18 months (sometimes longer).

During the last 100 years, we witnessed 18 bear markets, which included 9 protracted bear markets with declines of more than 30%.  Two of these severe bear markets happened this century, in 2000-2002 and again in 2007-2009.  In fact, corrections and bear markets are recurring and expected events.  While it is undeniably hard not to get emotional during market declines, in rational terms, worrying about that is just about as productive as worrying about rainy weather.  You don’t assume that several days of rain signify the beginning of the next Great Flood.  Yet, if you listen to financial media during these times, you would be convinced that not only the Great Flood is upon us, but that the Ark has already sailed.

The 19th bear market will happen.  That’s as certain as that J.P. Morgan quote.  Maybe it will start tomorrow, next month, next year, or 5 years from now.  The pullbacks are a natural part of the market life cycle.  A savvy investor should not fear or get upset with such corrections, but be prepared for take advantage of the low prices and a coming upswing in the market.

December 19, 2014 at 10:24 pm Leave a comment

Invest for the Long Term

With major market indices keeping hitting new highs seemingly every day, what should investors do?  While no one knows what will happen tomorrow, next month, or next year, I do know that investing for the long term works.  In fact, I will say that over the long term, staying out of stock market is more risky than being fully invested.

While that statement may leave you scratching your head, consider that since 1900, the stock market returned about 10% annually on average, while the nearest competition, bonds, returned only 4%.  The difference is huge: $1000 invested at 10% will grow to $17,449 in 30 years, while that same $1000 will reach only $3,243 at 4%.

The domination of the stock market has been quite consistent over short intervals as well.  According to Stocks for the Long Run by Jeremy Siegel, over 5 year periods stocks outperformed other investment vehicles 70% of the time. Over 10 years, 80% of the time.  And over 30 year periods, stocks always outperformed other investment types.

This outperformance does come with a price of short-term volatility.  However, as history shows, over long term, stocks are in fact less risky, if you define risk as opportunity cost.  In my view, investing in “safe” securities and realizing subpar returns is far greater risk than the risk of short-term fluctuations in the stock market.

December 3, 2014 at 10:55 pm Leave a comment

Business Headlines are Boring

Have you noticed anything missing in leading business headlines these days?  For the last three years, prior to 2013, various media outlets have bombarded us with dire news regarding European debt crisis (remember PIIGS?) and Greece in particular, Chinese slowdown, Japanese collapse and overall global recession.  Since the media now is remarkably silent on these issues, it would be good to check in on the current status.  So here it is:

  • Europe is now officially no longer in recession, with Germany’s economy rising the fastest.  The debt situation in Greece has stabilized.  Italy and Spain are also doing much better.
  • Chinese slowdown, for all practical purposes, was a no show.  In 2013, Chinese economy grew at 7.6% rate, which would be considered outstanding for most countries.
  • After a prolonged recession, Japan is growing again, and its stock market is one of the best performing markets this year.
  • Overall, global economy growth never turned negative during these past crises, and is projected to accelerate from 2013 into 2014.

But you wouldn’t know it, from looking at the major news stories.  And no wonder — negative headlines always attract more attention and are never as boring as good news.  Keep this in mind when the next disaster du jour arrives.

September 18, 2013 at 1:56 am 1 comment

A Really Long-Term View of Stock Market History

For the last 80 years or so, stock market performance can be described in terms of alternating so-called secular bear and bull markets.  From 1929 to 1942, stocks declined significantly in the aftermath of 1929 crash and the Great Depression.  From 1942 to 1965, prices increased eight-fold.  This was followed by volatile but flat period to 1982.  After that, from 1982 to 2000, prices again went on a tear and increased twelve-fold.  And now, in 2011, the prices are at the level of 12 years ago.

The book “Unexpected Returns” by Ed Easterling tries to provide some explanations for this behavior.  According to the author, company earnings actually grow at a relatively constant rate and increase about three times during an average secular period (either bull or bear) of 16 years (bull markets tend to last longer than bear markets).  But it is the P/E ratio that drives the equity valuations.  During periods of declining interest rates, P/E ratios tend to expand, again by a factor of about three, from an average low of 8 to an average high of 25.  This, together with 3x earnings growth, results in prices increasing roughly ten-fold.  This happened in secular bull markets of 1942-1965 and 1982-2000.

On the other hand, rising inflation tends to compress P/E ratios again by that same factor of 3.  And 3x earnings growth simply means that stock prices are stagnant (with a lot of volatility in between), as was the case during secular bear market of 1965-1982 and is the case today.

There is no denying that we are currently in a secular bear market.  The question is, are we anywhere near its end?  Well, at its beginning in 2000, P/E ratio actually was abnormally high, at 40.  Today, it is about 13.   So we already had a “mandated” 3x compression in P/E.  However, we are still ways off away from an average P/E bottom of 8.  Also, while previous secular bear market had rising inflation, this time it actually declined slightly from the level in 2000.  An optimist may make a case that low inflation justifies higher P/E ratios and thus we should be close to the start of another secular bull.  A pessimist, on the other hand, will argue that prices must swing from that high P/E of 40 to below average.

Of course, no one knows if the next secular bull market is around the corner or if it is still a few years off.  In all likelihood, we won’t even recognize it until several years pass after its actual start.  But the prices tend to be mean-reversing and it is clear that equity valuations today are depressed.  So, it is important to have your portfolio ready for the coming rebound.  It is easy to be a stock investor during secular bull markets — all you have to do is buy an index fund and you would do just fine.  During secular bear markets, however, investors need to pick stocks with extra care.  But this is not mission impossible by any means — just ask Apple investors how they did in the last ten years.  I am here to help.

September 2, 2011 at 2:54 am 1 comment

42 Rules for Sensible Investing

Please take a look at this short video introduction to my book, 42 Rules for Sensible Investing.

September 21, 2010 at 3:55 pm Leave a comment

Finally – Good News on Jobs

showimageWe are finally getting good news on the employment front.  As you can see from the chart, new jobless claims have been declining for the last seven weeks.   According to this CNN Money article, for the first time since the recession began in 2007, more employers are planning to add jobs in the next six months, compared to the ones planning to eliminate them.

We have already seen other signs of recovery in industrial production and housing, but not yet in employment.  So this development is very significant.

October 27, 2009 at 4:31 pm Leave a comment

42 Rules for Sensible Investing

My new book, 42 Rules for Sensible Investing, is now available from!

December 24, 2008 at 12:30 am 2 comments

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Leon Shirman's long-term investment philosophy is summarized in his book, “42 Rules for Sensible Investing”, also available from Amazon.


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