thrill wrote:Buying individual stocks as a layman is retarded (no offense if you do).
Timing the market is also a bad plan as well.
I guess I agree with both of these. but now the alternative to "going it alone" is blind faith in Wall St. stock pickers (mutual funds)...
or burying coffee cans of cash in your back yard.
Despite their recent failures, the Wall Street crowd is still remarkably better at picking stocks than your average Joe. Your mutual funds may be down 20%+ so far this year, but I'm sure that if you had gone alone, you'd probably be as-bad or worse.
I've read that 85% of mutual funds don't beat the market.
Well then you better pick your mutual funds wisely.
What percentage of individual stocks don't beat the market? I'm guessing that's 85%+ too.
Mutual funds are professionally managed though.
Anyway, a big the reason those managed funds don't beat indexes is because of liquidity policies and many other things I don't understand. Basically, as the better a fund does, the more people invest in it, and the more people invest in it, the more stock managers have to buy up - this often causes the stocks to be overvalued thereby driving the fund performance down. At least that's how I understand it.
With that in mind, it actually serves as a plus for individuals investing in the market. Depends on how you want to define "layman", but self-managed stock portfolios CAN be successful investments for the "average Joe". It really doesn't take that much knowledge.
Transmogrified Tiger wrote:I've read that 85% of mutual funds don't beat the market.
I'm uneducated about the stock market. What would constitute "beating the market?"
It just means to outperform an index. Usually the S&P 500.
You want your fund's squiggly line to be higher than an index's squiggly line.
Is there a way to invest in "the market" itself? Or what? I was under the impression that mutual funds were a safer investment because they are basically stocks that own a lot of other stocks, so they are less risky than owning an individual stock. Does that make sense?
Once they con't to cute rates down to an acceptable level, I'll buy some stocks, and I'm somewhat content that the stocks I am eyeing are down more based on % than the actual market.
BenNX74205 wrote:Is there a way to invest in "the market" itself?
Yes. Index funds. As far as I can tell, if you aren't a gambler, this is the most sensible way to invest in stocks.
Exactly. There are a plethora of low cost index funds available. One can invests in index funds of large US stocks, medium-sized stocks, small company stocks, international stocks, industry-specific stocks.
Vanguard was the first to popularize index investing. The argument is that very few actively managed funds outperform the market, so why pay someone more to manage your portfolio? Now most investment companies offer (relatively) low cost index funds.
Hungary Jack wrote:With stock prices at the current level, I wonder what the P/E ratios are for the trailing 12 months. Stock prices must be incredibly cheap right now based on earnings ratios. At some point, after the smoke clears, stock prices will rise dramatically. I wish I knew when...
Late this morning, after several gyrations, the Standard & Poor’s 500-stock index was below 900. That meant the five-year p-e ratio was just below 12. (The corporate earnings data isn’t all available yet, so this is an estimate.) It was last that low in late 1985. Over the past 100 years, the average p-e has been about 15.5.
So stocks are pretty darned cheap right now.
But there's more:
The p-e ratio typically falls well below its long-run average during a bust. It fell to about 6 in both the 1930s and early 1980s...Remember that there are two components to the p-e ratio: the ‘p’ and the ‘e.’ Based on the kind of recession we may now be entering, it’s entirely reasonable to think that corporate earnings will fall, maybe significantly. That would mean that stocks would also have to fall just to keep the p-e ratio in its current place.
OMG. It could be a long way down.
Thanks for that article Jack.
I'm not smart about these things, so I'll echo the worry over the "earnings" part of equation. If they are using a base of earnings from a 5-10 year period for these companies - I'm guessing those earnings are likely overstated. I've heard companies wrote off a lot of bad assets starting with the Enron and Worldcom shams, but it seems to reason a large amount more are coming and not yet reflected in the 5/10 yr avg. ...at least that's part of what I'm inferring from the article. Its a damn vicious cycle
True, but keep in mind that 10-year averages reflect boom-bust-boom cycles, and are probably fairly reliable. And a lot of the massively overvalued tech stocks pre-2000 did not have earnings, which makes it hard to overstate them.
The bigger distortion post 9-11 is the era of incredibly cheap money that drove a lot of crazy asset valuations. But most (good) earnings measures adjust for accounting related distortions
that can result from hocus-pocus asset valuations that can pump up non-operating earnings.
