RE: Dow hits milestone 11,000

and flip side - as for the article you cited that claims corporate profits are not likely to grow enough to support today's valuation levels...

it is counter-intuitive, but the truth is that there is very little if any correlation between corporate profits and the general level of stock prices. Company by company, sure, but overall...not so much.

I can't find the research that shows that, but I believe it to be true. I am still looking - brilliant piece of research.

Stock prices move much more on animal spirits than anything as mundane as corporate profits or gdp growth.

slight correction. I found the piece of research.

The research shows that economic growth and future stock market returns are inversely correlated. That is to say that the best time to buy stocks is in times of slow or negative economic grwoth, like now.

So I was sort of right - you must not use poor growth as a reason not to buy stocks - you actually WANT to buy stocks at times of poor economic growth.

Here's the link. You probably have to register to read it:

http://www.osam.com/Pdf/Commentary_Sep17-10.pdf

page 2:

http://www.osam.com/Pdf/Commentary_Sep17-10.pdf

not following your logic.....the overall market is the sum of individual companies. if movements in the price of individual companies track their earnings, then the movement of the broader market tracks the movement of aggregate earnings of the companies that comprise it

agip wrote:

it is counter-intuitive, but the truth is that there is very little if any correlation between corporate profits and the general level of stock prices. Company by company, sure, but overall...not so much.

Well, my "buy and hold" strategy (which isn't exactly that) has done me well since 1989. I've still made over 10% annually as an average, and that's enough to build serious money. Even the 2000s have been good to me...starting off bad early on, but then 43% gain in 2003, 20+% gain in 2004, 2005, 2006, 8.7% gain in 2007, 39% LOSS in 2008, 34.7% GAIN in 2009, and so far in 2010 I'm up 9.4%. With very little effort on my part, my investments are making decent returns. Why invest another way that takes way more time and effort and statistically doesn't do as well? I will invest in individual stocks for fun once my house is paid off (while still putting money in retirement accounts and staying completely debt free), but as my main source of wealth building? Nah.

Agreed that diversification is king for the common investor. That being said, don't expect some of those stocks to pay off in the near term.

I am very interested on how you have a 9.5% YTD return using this diversification strategy when the market is only up 5.5%. This seems to imply that you are using a modified diversification strategy. In other words, diversifying across stock types (highy yield, growth, dividend, etc), but selectively picking companies within those stock sectors. Am I correct?

It's not unreasonable to me that you are up 9.5%...just interested how you are doing it. In full disclosure, my YTD return is 6%, but I've done that taking far less risk than the market (I'm invested in 35% cash and bonds).

Bill Gross wrote:

not following your logic.....

the overall market is the sum of individual companies. if movements in the price of individual companies track their earnings, then the movement of the broader market tracks the movement of aggregate earnings of the companies that comprise it

agip wrote:

it is counter-intuitive, but the truth is that there is very little if any correlation between corporate profits and the general level of stock prices. Company by company, sure, but overall...not so much.

The markets are only correlated to earnings if companies use those earnings in a equity friendly manner. This is not the case currently. They are cleaning up their balance sheet and hoarding cash instead of investing, buying back stock and raising dividends. If you ask many corporate strategist they will tell you that they are very bullish on corporate debt, but not corporate equity (despiste the market being significantly undervalued given current earnings). The market is FAR more complicated than almost everyone on this board gives it credit.

[quote]Flagpole wrote:

Well, my "buy and hold" strategy (which isn't exactly that) has done me well since 1989. I've still made over 10% annually as an average, and that's enough to build serious money. Even the 2000s have been good to me...starting off bad early on, but then 43% gain in 2003, 20+% gain in 2004, 2005, 2006, 8.7% gain in 2007, 39% LOSS in 2008, 34.7% GAIN in 2009, and so far in 2010 I'm up 9.4%. With very little effort on my part, my investments are making decent returns. Why invest another way that takes way more time and effort and statistically doesn't do as well? I will invest in individual stocks for fun once my house is paid off (while still putting money in retirement accounts and staying completely debt free), but as my main source of wealth building? Nah.

[quote]flip side wrote:

Flagpole, one point regarding this...you are not up 10% in your portfolio (even though it has average 10% return per year). Here is why...

Let's assume by starting off badly in the early 2000s you mean down 20% each year in 2000, 2001 and 2002. If you started off with $10k at the begining of 2000 that would mean it is worth $7,290 at the end of 2002.

In 2003 you had a gain 43%, that puts your holdings back to $10,424.70.

Between 2004 and 2006 you had 20% gains, that means at the end of 2006 your portfolio was worth $18k.

In 2007 you had a gain of 8.7% you portfolio is worth $19,581.09

In 2008, you had a loss of 39% making your portfolio worth $11,944.46

In 2009, you had a gain of almost 35% making your portfolio woth $16,089.19

In 2010, you have a YTD gain of almost 10% (let's assume that is the gain for the full year), your portfolio will be worth $17,601.58

That's a gain of $7,601.58 of 10-years or approximately 7.6% per year. When you present value that over 10-years the gain is only 5%. Still VERY good in a time period when the market actually lost money, but definetly not 10% on average.

It's important to understand how compounding and present value work when calculating your returns.

he said 20%+ returns - you don't have a complete data set

What are you talking about?

"20+% gain in 2004, 2005, 2006,"

so says flagpole. That could be anything from 20.0% to 29.9%.

You put it in your calculation as "20.0%"

so you don't know what his portfolio did for three years. Your data are incomplete.

agip wrote:

"20+% gain in 2004, 2005, 2006,"

so says flagpole. That could be anything from 20.0% to 29.9%.

You put it in your calculation as "20.0%"

so you don't know what his portfolio did for three years. Your data are incomplete.

If I make it 30% in those years his return sky rockets to an annualized 8%. I'm giving him the benefit of the doubt here. Also, my calculations in 2000, 2001 and 2002 as down -10% not down -20% as i suggested.

Regardless if the calculations my point is that you cant do a simply average when calculating returns. If you are up 100% for 20 straight years and then down 100% in the 21st year this means that your return is 0% note 97%.

It's not that difficult.My main retirement money is split between Fidelity and Vanguard with a non-retirement fund (American Fund).I've got some stinkers in there (nothing under 4.25% though), but...FIDELITY...Artisan Mid Cap Inv CL is up 15.65%.Fidelity Small Cap Discovery Fund is up 15.51%My other Fidelity funds are mostly in the 8-9% range with the stinker in the group being the Diversified International at 4.25%On the Vanguard side...Small Cap Index fund is up 13.1%Windsor II fund is only up 2.9%Extended Market Index Fund is up 12.7%and a few of my other funds are in the 6-8% rangeBased on my allocation, I'm up 9.4% YTD as of this morning.

Dude, my 10% annual average gain is from 1989 to now, NOT 2000 to now. However, even though 2000s haven't been AS GOOD as 1989-1999, it was still ok, even with the HUGE drop in 2008.

Wall Street Strategist,Trust me when I tell you that I'm very aware of all the math. I am an Excel spreadsheet wizard, and I have everything calculated there beginning with 1989 when I started investing. I have it broken down into several categories including amount invested, return, percentage increase per year, etc. Sorry if this sounds arrogant, but you're barking up the wrong tree if you think you're telling me something I don't know about how to calculate returns. I'm well aware that if you lose 39% in one year and then gain 39% in the next year that you've not gotten all the way back. Math through advanced Algebra level is a second language to me...a language I'm fluent in.

Wall Street Strategist wrote:

agip wrote:

"20+% gain in 2004, 2005, 2006,"

so says flagpole. That could be anything from 20.0% to 29.9%.

You put it in your calculation as "20.0%"

so you don't know what his portfolio did for three years. Your data are incomplete.

If I make it 30% in those years his return sky rockets to an annualized 8%. I'm giving him the benefit of the doubt here. Also, my calculations in 2000, 2001 and 2002 as down -10% not down -20% as i suggested.

Regardless if the calculations my point is that you cant do a simply average when calculating returns. If you are up 100% for 20 straight years and then down 100% in the 21st year this means that your return is 0% note 97%.

Forgot to comment on one thing. You are 35% in cash and bonds!? Maybe you are a LOT older than me, but that's the main reason why your returns are not as good as mine YTD. I'm currently 86% stocks to 14% bonds. At the beginning of the year I was 87% stocks to 13% bonds, but as things have changed a bit this year, without me doing anything, there's been a 1% shift. I'm ok with that for now.

I'm a lot younger than you i can assure you of that. My equity portfolio is managed by UBS Private Wealth Management. I have a lot of additional money in private equity and real estate which are delivering significantly greater returns than 10%. I'm just not a huge fan of equities at the moment for the reasons I previously mentioned.

And as I stated Im not surprised by your returns given that I've generated 6% taking far less risk. In fact, Id argue that you are under performing right now at a YTD return of 10% given your risk profile. Given 90% equity and an actively managed investment approach, I'd be targetting 15% returns.

Wall Street Strategist wrote:

I'm a lot younger than you i can assure you of that. My equity portfolio is managed by UBS Private Wealth Management. I have a lot of additional money in private equity and real estate which are delivering significantly greater returns than 10%. I'm just not a huge fan of equities at the moment for the reasons I previously mentioned.

And as I stated Im not surprised by your returns given that I've generated 6% taking far less risk. In fact, Id argue that you are under performing right now at a YTD return of 10% given your risk profile. Given 90% equity and an actively managed investment approach, I'd be targetting 15% returns.

I never consider it underperforming when I return better than the major indicies, ESPECIALLY when I have 14% bonds in there too. I'll take 9.4% annually any time...you can get wealthy on that providing you invest as much as you should. Anyone invested in a moderately conservative way that I am (14% bonds) should be very happy with over 9% return so far in 2010. I expect to end the year even north of that.

My strategy though also includes dumping in extra money following a bad year, because I have certain milestones I set for each year. The only year since 1989 I wasn't able to meet that milestone was after 2008...39% loss with the amount of money I have in there now was just too much for me to cover.

I think your strategy makes a lot of sense. I just prefer not to benchmark myself against the markets. My standards are higher than that.

Wall Street Strategist wrote:

I think your strategy makes a lot of sense. I just prefer not to benchmark myself against the markets. My standards are higher than that.

Then you should stop putting so much in cash and bonds.