Financial topics

[freddyv]

freddyv, you are right that my statement would be disproved if there is an index fund that can track sp500 indefinitely, but there is not.
I challenge you to show us an index fund that has tracked an index 50-60-70 years or more, and if there is, my statement is that it will lose at some point in the future.

You ignore the point about liquidity. You cannot just sell one company and buy another one. The selling and buying make the price move, and you will not hit the replacement price exactly.
You will sell for less than the index and buy for more, and the larger a portfolio, the bigger a liquidity problem.

Find us an index fund. It will be behind the index unless it is very new.

Read the following:
http://pages.stern.nyu.edu/~adamodar/Ne ... nFunds.htm

"Mr. Weiss studied performance for diversified U.S. stock funds over the 36 years through year-end 1997. The 109 funds that were around for the entire period gained an average 10.9% a year, compared with 11.6% for the S&P 500"

It certainly suggests that index funds lag the actual return of the index they track but that only makes sense because of the expenses involved. For many investors it still makes sense since they wouldn't otherwise have the time to properly manage their investments. But please note that these funds were tracked back to 1961, so that pretty much refutes your belief that no fund could exist that long; Aparently many can.

You seem to be taking a small thing (that there are expenses involved in tracking a fund) and saying that since this is true it is impossible to make money in the stock market. That doesn't make sense and reality doesn't back up your belief. The key is to not get too locked into a belief system, which I would suggest you have done, and to be a little bit ahead of the big changes.

I would suggest that your other argument, that every stock must eventually go to zero, simply shows a lack of perspective. We will all go to zero as will the sun and the earth, that does not mean that I can't enjoy the days that I have. The key, my friend, is to know when a company is going to go to zero and when it is going to go upwards.

In summary I can tell you that I have personally profited from stock funds over a period of decades and that I continue to profit from the stock market because I look at the big picture and consider the facts and history available to me. That every index fund will eventually fail may be true, that one should never invest in an index fund because of that is not. The question I now pose to you is this: how have you profited from the market in the past and how will you do so in the future?

--Fred

[mkrogh]

freddyv,

The funds will underperform the index and in the long run they will get crushed. It is when the severe bear market arrives, that liquidity will disappear and the index funds will go belly up.
I am surprised that you use the period from 1961 to 1997 as a reference period after reading this blog. I am talking about the long term which includes the generational crisis.

Your comments about my lack of perspective is absurd. I am stating what I consider a fact, and it doesn't tell you anything about how I live my life.
I do invest and I have also made money in the market over the last decade. The last half a year has been bad for me, even though I got out of the general market 2 years ago.
I got caught in the commodities downturn. I hadn't believed commodities would tank this much, even though I expected a crisis.

If you want, you can interpret the statement that stocks go to zero, to mean that you must get out before it crashes. It doesn't mean that you should never invest.
For instance, if you can buy a company that will pay dividends that add up, in a few years, to more than what you paid, it is a good investment, even if it eventually goes to zero.

What would I do in the future. I own just one stock now, and then just cash. I think the best strategy going forward is to run a company oneself instead of giving money to a public company with
a CEO that doesn't even know me. I think this crisis will also be a serious blow to passive investment, i.e., throwing your money at something we hardly understand without transparency, and then just hoping that something good will come back. I am really skeptical about the whole model of public companies.

Owning a company used to mean that you took responsibility. now it means that you know nothing, gets the information about your own company through the media. If you call the management, they will tell you that they, by law, are prohibited from telling you anything. The markets are a travesty, and is basically just a giant game or casino.

Please, do not assume things about me that I haven't said. For instance, I never said that you cannot enjoy the days you have. I am not a negative person or pessimistic person at all. But I do have those opinions about the public markets, and the ways companies are run by management that doesn't even know the shareholders. I haven't even talked about fundamental analysis. I can do that in another post, but the conclusion is that I would call any company with a price/dividend ratio above 4-5 overvalued. p/e ratios of 10-20, I consider a pyramid scheme. Basically, the share certificate has almost no intrinsic value. People are just hoping someone else will buy them out. how many people do you think want to own their shares for their intrinsic value? Intrinsic value can only be dividends, share buy backs, and the influence of being an owner. The reason that venture capitalists are looking for an IPO, is because they get a valuation on the stock market that is absurd relative to the dividend prospect.
All this will end, and I guess that the current crisis will do that.
We shall see. Actually, I don't even think you can trust the e in p/e. Creative accounting is widespread. All the earnings were increases in goodwill or something like that.

So how will I profit in the future? I will own one or two stocks, sit on cash, work. I have my own company, that I founded with some colleagues. We can try to build that up.
I really think the message for most people will be to produce something of real value, and not to make money by passive investing. Lots of people made money in the last decades without ever being able to say what they actually contributed to humanity. They had no product. I consider this coming change a positive thing.

How do you plan to profit in the future?

[mkrogh]

John, when you talk about the average p/e ratio, it is important to make the distinction whether, the companies in the basket are constant or not. when I said there was no law of mean reversion, ?I was talking about a constant group of companies.

you seem to be talking about the average of whatever companies are around at any particular time. Then there is an average, and mean reversion, okay, But, it is totally irrelevant for an invesmtent
purpose. If you buy stocks because the p/e ratio is below average, you will still lose even if new companies are founded and eventually obtain higher p/e ratios. you rahsres will be gone, and the new companies wil be owned by someone else.

The following model shows it clearly.

In 2008, there is only one pubic company, called Company_2008. Company_2008 is founded on January 1, 2008. It quickly starts making $1 billion in earnings, and it trades with a p/e of 11.
On December 31, 2008, disaster strikes and it goes bankrupt.

On January 1, 2009, a new company is founded, Company_2009, which also gets to earnings of $1 billion, and p/e of 9.

So it continues forever, with one new company per year, and alternating p/e ratios of 11 and 9.

The following statements are all true.

1. The average p/e ratio is 10
2. Earnings are always $1 billion.
3. All investors lose 100% of their invested capital, or a little less if dividends are paid during the year.

This shows that historical average considerations can be extremely misleading if they forget about the replacement problem. Do you see what I mean?

Assume p/e ratios are low in 2012. They are high in 2030. Earnings are higher in 2030 than in 2012. So, it must be good to invest in 2012?

Almost anyone would answer yes.
No, is likely the correct answer because of the replacement problem. The companies in 2030 are not the ones from 2012.

[ojavaid]

> Maybe this is more geopolitical, but, is there a single country on
> earth that has a financial system that is not tied to government
> and therefore must simply take its lumps without any sort of
> "robbery" (as in Atlas Shrugged)? I feel such a place might be a
> very attractive investment and/or living option for the long
> term.

There are indeed countries whose banks are doing well, because they
didn't allow themselves to be pulled into the massive credit bubble,
and so they're not now suffering from deleveraging.

They are: Lebanon, Afghanistan, Iraq, Iran.

** Stock markets in Iraq and Iran are surging.
** http://www.generationaldynamics.com/cgi ... 17#e081017

What do these countries have in common?

They're all in generational Recovery or Awakening eras, so the
survivors of the last financial disaster in their countries are still
alive and kicking.

Banking in Lebanon: http://edition.cnn.com/video/#/video/wo ... .oasis.cnn

[abs]

John -

What is your take on the outlook for Israel? I imagine many of the wars that have occurred since its inception could be interpreted as a generational crisis? Based upon the article linked below, it would seem that Israel's banking system is stable and in better shape than many others . . .

http://www.jpost.com/servlet/Satellite? ... 6404741763

Andrew

[John]

> John, when you talk about the average p/e ratio, it is important
> to make the distinction whether, the companies in the basket are
> constant or not. when I said there was no law of mean reversion,
> ?I was talking about a constant group of companies.

> you seem to be talking about the average of whatever companies
> are around at any particular time. Then there is an average, and
> mean reversion, okay, But, it is totally irrelevant for an
> invesmtent

> purpose. If you buy stocks because the p/e ratio is below average,
> you will still lose even if new companies are founded and
> eventually obtain higher p/e ratios. you rahsres will be gone, and
> the new companies wil be owned by someone else.

You're absolutely right that the Law of Mean Reversion does not
provide the kind of specific investment advice that you're looking
for. But it does provide a great deal of investment guidance.

Let me summarize once again the Generational Dynamics forecasting
methodology.

Generational Dynamics distinguishes between "long-term forecasting"
and "short-term forecasting."

Long-term forecasting yields predictions that are nearly 100%
certain, but within a time window that can be years long.

Short-term forecasting is a technique that matches day-to-day
current events to anticipated events within the long-term time
window, in order to calibrate the window and determine where we are
today within the window.

In the specific case of financial investing that we're dealing with
here, it works as follows:

• We know from generational trends that we're headed for a new
  generational panic and crash, with near 100% certainty, sometime
  within the time window of 70-90 years after the 1929 crash. This is
  the long-term prediction.
• We match up events leading up to the 1929 crash with events
  occurring today -- a real estate bubble, a stock market bubble etc.
  By comparing events from the 1920s to events today, we can narrow the
  expected window of the crash.

I first went through the exercise in 2002, and I came up with an
estimate of a new stock market crash some time in the 2006-2007 time
frame.

As you can see, the generational panic and crash did not happen in
that time frame, but the global credit crisis DID begin in August,
2007. I feel certain that a crash would have occurred by now,
probably by the end of 2007, if it weren't for the extraordinary
monetary steps that have been taken by the Fed -- steps that were not
taken in 1929. These steps have not prevented the generational panic
and crash, but they have postponed it.

So you're right - this information doesn't tell you what the price of
IBM will be on December 19. And frankly if I had a way of predicting
that, I would be rich.

But this information does provide guidance. It tells you that
"capitulation" will not work. It tells you that any rally will be
short-lived. It tells you other stuff that's been discussed on the
Web Log and in this forum.

Here's the long-term P/E ratio graph that I posted in August 2007:


(S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2007)

As you can see, this graph gives you some valuable information: It
tells you that the P/E ratio is poised to fall to 5 or so, probably
by 2012. That doesn't give you specific investment advice, but it does
give you general advice that you can use as part of your decision
making process.

Sincerely,

John

[John]

Dear Omar,

> Banking in Lebanon:
> http://edition.cnn.com/video/#/video/world/2008/11/13/perry.lebanon.financial.oasis.cnn

What I found really interesting about this video is listening to the
Lebanese bankers and, and they sound just the way I remember bankers
talking in the 1960s-70s, but not the way Wall Street bankers talk
today.

Lebanon is in a generational Awakening era, at just about the same
point on the timeline where America was in 1970. This provides
additional support to the concept that all societies, even very
different societies, tend to act alike during the same generational
era.

Andrew --

> What is your take on the outlook for Israel? I imagine many of the
> wars that have occurred since its inception could be interpreted
> as a generational crisis? Based upon the article linked below, it
> would seem that Israel's banking system is stable and in better
> shape than many others . . .

> http://www.jpost.com/servlet/Satellite? ... 6404741763

This is an interesting article. It indicates that the Israeli
bankers did what bankers in other countries did not do -- when the
global credit crisis began, they quickly began putting their affairs
in order, building up reserves and selling off weak assets.

Beyond that I really have no idea what the Israeli banking system is
like.

Sincerely,

John

[aedens]

Sir,
Being pressed for time today can you remeber that scammer's name you linked for the coming carbon energy credit scam to unfold very soon on ill advised investors. The only message from history also is capital generally goes to where it treated best. Thanks if you get time, it just that it popped back in my mind today. Since my Company is in the Dynamic Basic Material Sector Intellidex Index " i just work there" and as like else where its been cold-slow in some sectors and warm in a few of our others " As I usually convey if you do not know a stock better than wife right now stay divendend minded or fixed to preserse capital. IMO
Aedens

[John]

> Being pressed for time today can you remeber that scammer's name
> you linked for the coming carbon energy credit scam to unfold very
> soon on ill advised investors. The only message from history also
> is capital generally goes to where it treated best. Thanks if you
> get time, it just that it popped back in my mind today. Since my
> Company is in the Dynamic Basic Material Sector Intellidex Index "
> i just work there" and as like else where its been cold-slow in
> some sectors and warm in a few of our others " As I usually convey
> if you do not know a stock better than wife right now stay
> divendend minded or fixed to preserse capital. IMO

Louis Redshaw, from Barclays Capital in London, where his title is
Head of Environment Markets.

** UN Climate Change conference appears to be ending in farce
** http://www.generationaldynamics.com/cgi ... b#e071214b

John

[ojavaid]

Paul Volcker is back, and he warns of tough times ahead:

In speeches, interviews, public policy reports and congressional testimony, Volcker, 81, has laid out a fairly clear outline of what he thinks is wrong with the present-day financial system and the government's management of the economy.

His concerns go to the very core of how America lives and how Wall Street operates. A child of the Great Depression and a man of legendary personal thrift, Volcker thinks Americans have been living above their means for too long.
...

"The market was being run by mathematicians who didn't know financial markets," he said this year after the crisis struck.

http://www.latimes.com/news/nationworld ... 8304.story