arren Buffet recently posted an optimistic letter to the New York Times, stating that American Stocks are currently being traded at very attractive prices. If you believe that the S&P500 represents the level of pricing of the US stock market, you’ll have to at least partly agree with Buffett since the current Price-to-Earning (P/E) of this index is more than 20% below its 100-year average value.
The P/E ratio is usually calculated as the stock price divided by some measure of the company’s annual earnings. Most analysts use last year’s Net Income for calculating the current value of the P/E and next year’s forecast earnings to calculate the forward P/E. However, history has shown that this measure is very volatile, and more troublesome, too optimistic. Therefore, it is preferable to calculate the P/E ratio based on the earnings of a longer period; usually it is averaged on the past 5-10 years.
At current heights, where the S&P500 index is traded around 900 points, the 5-year P/E ratio is around 12.5. Last time it went below 12.5 was more than 20 years ago, in late 1985. Over the past 137 years, the average 5-year P/E ratio stood on 15.6, more than 20% higher than the current P/E. The current average 10-year P/E is a bit higher, around 14.5, but it is still lower than its average (16.4).
This could be a sign that many stocks are traded at attractive levels. However, one has to keep in mind that the P/E ratio usually falls way below its average before the market starts to rebound. Moreover, if the market does go into a lengthy recession, it’s possible that the earnings of many companies will decrease dramatically, thus lowering their P/E in the future.
No one knows for sure if the stock market has already bottomed out, and many stocks could still fall further down in the near future; however, I think that most of them are traded at reasonable levels and are definitely not overpriced like they have been in the past. So, if you haven’t done it already, you should start digging the market, searching for great businesses that lost too much value and are currently being traded way below their intrinsic value.
Humor is known for its unique curative properties. It can also distract you from checking your positions frequently. Following is a “new” glossary for the stock market and Wall Street that was sent to me a few days ago. I don’t know where it originated from, but it is definitely worth reading. I doubt if these new definitions will cure the market, but they will definitely make you laugh.
CEO - Chief Embezzlement Officer
CFO - Corporate Fraud Officer
BULL MARKET - A random market movement causing an investor to mistake himself for a financial genius
BEAR MARKET - A 6 to18-month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no s…
VALUE INVESTING - The art of buying low and selling lower
P/E RATIO - The percentage of investors wetting their pants as the market keeps crashing
BROKER - What my broker has made me
STANDARD & POOR - Your life in a nutshell
STOCK ANALYST – An idiot who just downgraded your stock
STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves
MARKET CORRECTION - The day after you buy stocks
CASH FLOW - The movement your money makes as it disappears down the toilet
INSTITUTIONAL INVESTOR - Last year’s investor who’s now locked up in a nuthouse
MOMENTUM INVESTING - The fine art of buying high and selling low
‘BUY, BUY’ - A flight attendant making market recommendations as you step off the plane
FINANCIAL PLANNER - A guy who actually remembers his wallet when he runs to the 7-11 for toilet paper and cigarettes
CALL OPTION - Something people used to do with a telephone in ancient times before e-mail
YAHOO - What you yell after selling all you owned to some poor sucker for $240 per share
WINDOWS - What you jump out of when you’re the sucker that bought Yahoo for $240 per share
Warren Buffett, the greatest investor of all time, used to say that you should be fearful when everyone is greedy and greedy when everyone is fearful. Nowadays, most investors surely fear that the market is going into a long recession, a recession that will make stock investing a non-attractive investment component. As history clearly shows, the market eventually recovers and Buffett’s phrases become true in reality.
Recently, Warren gave an exclusive, detailed, interview to Charlie Rose (featured by Google Videos). It is very interesting to see how Buffett still strongly believes in his investing philosophy despite the steep market drop.
The average analysts or your investment advisor will probably tell you just the opposite, but I definitely agree with Buffet that if you have a long term investing horizon, now is the right time to buy new stocks, and definitely not sell your holdings. Even if the market drops further down, there are already plenty of undervalued stocks in the market; these stocks could possibly be cheaper next month, but they will surely trade at substantially higher prices a few years from now. Since the price movements of stocks cannot be predicted in the short term, it’s not a wise idea to wait for next month.
Warren has already started using his large cash reserve to buy many additional stocks. As usual, he is focused on strong and stable companies that have lost value or their earning was decreased in the short term, such as General Electric (GE) and others.
Note that as always, Buffett recommends that the average (passive) investor that doesn’t want to spend the extra time required to evaluate companies’ fair value and pick his stocks by himself, to concentrate on buying a low cost Index Fund or an Exchange Traded Fund (ETF). This doesn’t require any additional research and it gives the market the opportunity to do the work for you.
The U.S. government bailout plan seems to be on hold for now. As a result, the market continues its free fall. Since the beginning of the crisis in October 2007, the U.S. market has lost about 25% of its value. The emerging markets sunk even deeper – about 36%. Usually, the best time to buy stocks is after these kinds of declines; is it still the right move to make now?
The financial sector should mostly be affected by the current crisis. However, many other, non-related companies have lost value tremendously. There is no logical reason why healthcare companies, for example, won’t continue earning substantial cash in the near future. Thus, the recent declines have made many stocks very attractive. In addition, the U.S. should mainly suffer from this crisis. However, other countries (not only emerging countries) that should not necessarily be affected from it also experienced sharp declines, which has made investing in them currently attractive.
After the commodities bubble burst, commodity prices declined sharply to a point that seems much lower than to what it should be traded at. Therefore, investing in the stocks of commodity-related companies (but definitely not in future contract) at current prices could be interesting.
On the other hand, the common analyst on Wall Street will tell you just the opposite. They will tell you that the financial sector is still scary and unstable. Thus, other banks will probably collapse in the near future and drag the market further down. Also, the level of volatility is currently too high for you to jump into stocks; you could lose substantial amounts of your investments in a relatively short period.
Analysts will probably also tell you that there is a growing number of companies that predict declines in their earnings in the next few years, since the sub-prime results still affect not only the real-estate sector, but other sectors as well.
So, who’s right?
Well, Wall Street has always had a short memory. Too late after every main market drop occurred, they recommend you sell your position and keep your savings in treasury or cash; and, crisis after crisis, they were wrong. Usually, after the market bottoms out, it quickly soars. If you’re not holding stocks at that point, chances are that you won’t catch this fast moving train before it leaves the station. So, the best advice is to invest in stocks all the time and definitely after substantial market declines.
It’s definitely not the right time for everyone to invest in stocks. Since the market is currently very volatile, the short-sighted investors who check their positions on an hourly or daily basis should probably reduce their exposure to the stock market. However, for long-term investors, those who intend on investing for at least 3-5 years into the future and can bear additional temporary losses, the current period is the best time to invest. I’m sure that in 5 years from now this crisis will be history. By picking the right stocks now, your chances of earning money are much greater than losing money in the long term.
Whether you’ve been investing for a long time or you’ve just started, there is always something to learn and improve on. Practicing virtual stock trading is crucial, but improving your investing and trading knowledge is as important to improving your stock picking skills.
In general, there are two different concepts for analyzing a stock. The first one is the fundamental analyses, which focus on fundamental parameters of the company such as its financial strength, earning growth prospects, quality of management, products or services, and other. This method is based on the underlying assumption that price follows value, which means that the price of the stock will eventually represent the true value of the business.
The other method, technical analysis, on the other hand, examines technical properties of the stock, such as its price fluctuations, changes in volume, and other issues. This method assumes that past behavior of the stock can be used to predict what will happen in the future if similar patterns are repeated.
More explanations of fundamental analysis and technical analysis are available in our blog. It would take me far too long to explain these concepts in more detail. So, let’s let the nice instructors from zecco explain these issues further.
After failing to find a buyer this weekend, Lehman Brothers filed for the largest bankruptcy in U.S. history. Meanwhile, another investment firm, Merrill Lynch, agreed to be acquired by the Bank of America for $50 billion. Another collapse came from the insurance giant AIG, which needed immense sums of cash to save itself from bankruptcy. Despite the U.S. government plan to fund financial companies with up to 800 billion dollars, it seems that the story is not over yet and that another merger is on the horizon, as both Wachovia Bank and Morgan Stanley (MS) need urgent funding support.
Could these occurrences have been predicted in advance? Definitely. One person that wasn’t caught unprepared is Nouriel Roubini of NYU’s Stern School, whose alarming predictions about the housing market and financial system have been heard in the past.
Currently, Roubini forecasts another 20% drop in stock prices, and reiterated a prior view that there will be no major independent broker/dealers standing before this crisis ends. In other words, investment companies such as Goldman Sachs and Morgan Stanley should be seeking emergency funding today, or face a similar fate as Lehman later.
I’m more optimistic than Mr. Roubini, but his words must be taken into consideration.
Telepresence refers to a set of technologies that allow a person to feel as if they were present, to give the appearance that they were present, or to have an effect at a location other than their true location. That’s what Wikipedia says about it. In simple words, it means that you can be in California and be seen and heard live by an audience in New York.
Cisco Systems first introduced this technology in October 2006. This product was built to provide high-definition video and spatial audio designed to link two physically separated rooms so they resemble a single conference room even though the two rooms may be on opposite sides of the world.
Since 2006, the product has been improved and was recently presented by the company’s CEO in a presentation to investors.
Most companies and private users won’t be using this expensive product, soyou probably shouldn’t run to buy Cisco’s stock (CSCO) the moment. However, I’m sure that Cisco will definitely continue to grow and lead global technology in the future.
In any case, Cisco is among the NASDAQ stocks that are traded in Yalicoo’s stock trading competitions, so continue to keep an eye on the developments in the company. If the stock price continues to decline, like what has been happening since October 2007, the stock might be attractive in the near future.
Many investors think that the current financial crisis is much more significant than previous ones. However, as you can understand from the documentary movie below, this crisis has many features that former crises such as the Enron crisis have witnessed. There might not be any accounting frauds, but there was probably inappropriate financial behavior, which received legitimization from the inspecting authorities.
Financial banks that give unlimited credit to every home buyer without considering his ability to return his loans, and rating companies that give higher rates to these banks could be the main causes for the current crisis.
The current level of government regulation is still on debate and will probably not increase in the near future. Therefore, the best way to reduce the risk involved in investing in these kinds of companies is by learning how to value stocks and knowing the right time to buy and sell. Watching and learning from other investors in a virtual stock trading community such as Yalicoo can teach you these things, and dramatically increase your chances of avoiding investing in dubious companies such as Enron.
If you’re someone who doesn’t enjoy analyzing securities in your spare time, Exchange Traded Funds, or ETF for short, offers a terrific way to put your stock market investments on autopilot. ETF is a security that tracks an index, a commodity or a blend of assets like an index fund, but trades like a stock on an exchange. By owning an ETF, you get the diversification of an index fund but under much lower expenses than those of the average mutual fund.
These days, the variety of ETFs is so wide that there are more than 60 companies offering hundreds of ETFs in the U.S.; there are ETFs that invest in commodities, technology, health care, real estate and even in currencies. The variety is so huge that it can be confusing even for the experienced investor. However, there is one ETF that invests in one specific sector that I think has very promising long term prospects – the PHO ETF, which concentrates on the water industry.
Unlike oil, water will not run out, as it covers 70% of our planet. However, 97% of this water is saltwater and not drinkable. The tiny fraction of potable water is decreasing every day and will run out in the not too distant future. Therefore, companies are developing technologies to purify the unlimited amounts of saltwater, which can then be bottled and sold at prices much higher than the price of the tap water we drink. Drinking water won’t run out tomorrow, however, a long-sighted investor sees this supply shortage and the growing purified and bottled water industry as an interesting investment opportunity. Many investors have already identified this opportunity and the stocks of the water industry companies have risen sharply in the past few years.
Obviously, it is hard to guess which company from this sector will become the next Starbucks of the industry; thus, the PowerShares Water Resources (PHO) ETF holds a combination of leading and promising companies from the water industry, giving you the opportunity to benefit from the growing water industry, while holding a diversified non-risky portfolio of water-related companies. The PHO tracks the Palisades Water Index, which beats the S&P500 index dramatically, as can be seen in the figure below.
Economists estimate $500 billion will be spent in the next 25 years on research and infrastructure related to clean water initiatives and an additional $100 billion for researching health concerns regarding water pollution. In addition, the recent bearish market had substantially lowered the prices of most over-valued water stocks. Combining all these considerations, I feel confident saying that the current (long-term) buyer of the water PHO ETF will beat the market in the long run.
