Novel Investor

Compounding investing wisdom...

Stocks Can Fluctuate Widely in a Year

by Jon

Indexes might be relatively efficient but underneath it all is something different. Individual stocks can fluctuate quite a bit in a matter of a year. That was the basis for Graham’s argument in the last post for using certain criteria to profit from those moves. Mr. Market can quote ridiculous prices for individual companies and it happens more often than you might expect.

Well, curiosity got the best me. I did some digging to see just how much stock prices fluctuate in a given year.

I settled on the S&P 500 stocks (via Wikipedia since the ticker symbols were readily available), dropped it into a spreadsheet, and pulled the data from Google Finance. For the record, there are currently 505 stocks, from 500 companies, in the S&P 500. Continue Reading…

Happy Hour: Following Expensive

by Jon

Market valuation is always a hot topic at the start of every year. Predictions are another. And there’s always someone who combines the two, citing current valuation for what the market will do over the next year.

Let’s stick to what we know. The current U.S. valuation hovers around a CAPE of 28. You can read more about the CAPE ratio here. For the short version, 28 falls on the expensive side of things, meaning on average expensive markets tend to perform poorly over the next decade.

But expensive does not mean that a market correction or crash is imminent or guaranteed. The funny thing about averages is that it turns a large basket of numbers – added up and divided by the total number of numbers – into one number. Some people choose to focus only on the one number and ignore all the rest but we can’t. Continue Reading…

Ben Graham Explains Why Rules-Based Strategies Work

by Jon

The idea of rules based investing, or systematic investing, is not new. Ben Graham offered new and old methods that worked with each iteration of The Intelligent Investor. He also offered up different methods outside of the book too.

In my last post on following simple principles, Graham refers to an article he wrote about three such methods, along with a 50-year study he did. Out of curiosity, I dug around for the study, but only found the article.

His three methods were interesting, but Graham makes the point that the lesson is not that his three methods are the best or only methods that work. Rather, the lesson is that any systematic approach should work and continue to do so as long as it’s based on sound investing principles and three other requirements: Continue Reading…

Happy Hour: Macro Opinions

by Jon

Howard Marks released his latest memo this week about focusing on what’s knowable and doing your best to ignore what’s not. Put simpler, stick with the things you can control and stop trying to predict future events. Everyone has an opinion on what happens next, but having an opinion and knowing are not the same thing.

Here’s Marks: Continue Reading…

Ben Graham on Following Simple Principles

by Jon

Ben Graham on successThe idea of following sound principles is one of the main lessons in The Intelligent Investor. The other, of course, is the cycle of optimism and pessimism in the markets. The sound principles help to avoid mistakes and think independent of the crowd.

The cycle is what gets people into trouble. Those basic principles get tossed aside for what appears to be something better. But with markets, there’s always something better. The shiny object syndrome exists around returns. There is always something outperforming, which causes people to pile in, only to watch it lose – literally and figurative – to something else. Continue Reading…

Happy Hour: Easy Games

by Jon

So thousands of published blog posts debating active versus passive and it turns out nobody was right (okay, maybe someone was right). That’s the latest from Michael Mauboussin’s “Looking for Easy Games”, on how the balance between active and passive impact each other. It’s your must read this week.

Mauboussin digs through the giant shift from active funds to passive funds over the past decade, its effect on markets, and, most important, how an investor subscribing to one (or the other) may benefit from an imbalance between the two. Continue Reading…

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