Sound Advice

  Stock Valuations 101 Although there may be gurus who hearken to the influence of the Zodiac or lunar cycles, the valuations of most stocks are based on what's known as the price-earnings ratio.  In simple terms, that's the price of one share divided by the earnings per share.  The latter is the amount of earnings for the company as whole divided by the number of shares outstanding. The price-earnings ratio depends on several key factors.   Perhaps of greatest importance is the company's rate of growth. The rule of thumb is that the faster the rate of growth, the higher the price-earnings ratio, but there's a limit to what would be considered reasonable.   A typical range of price-earnings ratios is between 10 and 20 times. That's true of both individual stocks and the stock market as a whole.   Larger, more mature companies will probably grow more slowly while some small companies might well increase their profits more rapidly. There are caveats. ...

It's All Relative Two of the questions I hear regularly are "When to buy?" and "When to sell?" Those kinds of inquiries suggest that there's an absolute level at which a security is worth adding to one's portfolio as well as a price when it's time to say adios. It would be nice to think that the process could be that tidy, but it's not. For starters, it's essential to understand that the word "absolute" is meaningless in the world of investing. The market is never "too high" or "too low". Wherever it is at any given moment is where investors think it should be. What's more, from the perspective of those who think in terms of absolutes, the averages have often stayed well below and well above what one might think of as a normal level for extended periods, sometimes years. So efforts to evaluate in this way usually prove to be a waste of time. Short-term market movements are never predictable and anyone...

Dow 100,000 In 1999, James K. Glassman, a syndicated columnist, and Kevin A. Hassett, an economist, published a book entitled Dow 36,000: The New Strategy For Profiting From The Coming Rise in the Stock Market .   The authors’ thesis was that stocks were significantly undervalued.   What’s more, they projected a quadrupling of the Dow Jones Industrial Average within three to five years: 2002 to 2004. They couldn’t have been more wrong.   The Dow index peaked just above 11,700 in early 2000, then dropped below 7,700 in September 2002, just prior to the time Glassman and Hassett had forecast their 36,000 target. In 2007, the Dow climbed back to 14,000, then plunged in half by March, 2009.   What went wrong? The authors’ argued that investors viewed dividends from stocks as significantly riskier than they should have.   Based upon a reduced risk view of dividends, they suggested that valuations should be based on a multiple about six times the historical ...

Inflation Worries Inflation has not been a persistent and serious threat to the economy since the 1970s and early 1980s.  The Fed knows how to defeat inflation.  Raise interest rates to onerous levels and quash demand in the economy via a serious recession.  In turn, companies lose the ability to rapidly boost prices, and employees no longer have the leverage to demand outsized wage hikes. We don’t want to repeat that cycle. At a minimum, however, we are starting to see upward pressure on prices.  How long might this last?  The Consumer Price Index jumped 5.0% in May, from the year-earlier level.  Remove food and energy, and so-called core inflation surged 3.8%. Fed officials continue to insist any increase will be “transitory,” their word of choice in describing what they see as a temporary rise in prices tied to the reopening of the economy.  That may be the case for hotels and airlines ready to see a jump in summer bookings.  But there ...

The All-Weather Portfolio   The continuum of possibilities within the world of investments has two axes: reward and risk. In virtually all cases, as the potential for reward increases, so does the exposure to risk. For the great majority of portfolios, the key constituents are stocks and bonds. Each of the major asset classes is subdivided into many smaller segments. Stocks can be divided into domestic and international. Within each of those categories, they can be further divided by the size of the companies they represent. Of those that are international, the countries may be labeled developed or emerging. To make things more confusing, there are companies such as Coca-Cola or 3M that are ostensibly domestic, but in fact derive most of their revenues from outside the U.S.   The converse would be Royal Dutch Petroleum and Nestle, based abroad, but with a considerable presence in North America. One of the most basic rules of thumb is that over extended periods of time, g...

Planning:  Failure is not an option   Why do we put off taking action that is important to our financial health?   In the past, I have explored some of the financial "emergencies" that can be avoided with planning or prevention.   It’s easy to understand why planning is so important.   It's less easy to understand why clients procrastinate on important things that are in their best financial interest. Nine out of 10 people would agree that planning makes sense.   Just knowing that we should plan, however, isn’t going to change most financial behaviors. We already know what needs to be done.   The bigger question is why we put off doing it. The answer to that question is almost always emotional.   Our procrastination often has deep roots in anxiety, fear, and grief. Many of the blocks to planning can be tied to things we experienced earlier in our lives that were never resolved.   For example, I once had a client, a business owner in h...

Don't Expect Another Big Gain   As has often been the case after the market has turned in an unusually broad advance, the gurus of Wall Street continue to build their cases for more of the same.   This most certainly is a replay of a recent film entitled Dumb and Dumber.   Successful investors are best served by planning for the worst while hoping for the best.   That's especially so in the wake of a few years when almost every asset class delivered fine returns.   But a bet on a back-to-back bingo of this sort ignores the writing on the wall, which is anything but encouraging. For starters, stock valuations are stretched.   To be sure, there are seers who find ways to look ahead and opine that when you look far enough ahead today's prices don't seem that high.   The problem with this approach is that Wall Streeters don't use binoculars.   For these folks, the future is a concept that views the next few quarters, not the next few years. ...