On Apr 21, 4:17 pm, darknes...[at]yahoo.com wrote:

- quote -

Nope, if you look at Shiller's stock market data, you would have
recovered the 1929 stock market investment by 1935, and the 1999
investment by 2006 (in real terms).

- quote -

You would have recovered the 1968 stock market investment by 1972
(afterwards, you had a big bear market from 1973-1981).

- quote -

That depends on your model. If the recent rise in corporate earnings
is structural -caused by globalization, which tends to reduce the
share of labor income and raise the productivity of capital investment
anywhere, and therefore corporate earnings shares- then the current
share of corporate earnings/GDP -about 10 percent- could be
sustainable and you are not going to have a cyclical slow down in
future corporate earnings growth.

- quote -

Really? Have you calculated the alphas for these large cap companies?
Alpha is the real measure used to claim that a company is trading a
discount or not (a positive alpha means that the companies risk-
adjusted expected returns are abnormally high). For what I know, it is
almost impossible to find large caps trading at statistically
significant positive alphas right now.

On Apr 22, 4:12 pm, darknes...[at]yahoo.com wrote:
- quote -

Not true. The Swedish, Australian and South African markets did better
than the US market between 1900 and 2006 (and the Canadian market
comes very close to the US market). Just check Table 5 here:
http://www.finfacts.com/irelandbusin...10009169.shtml

In general, the markets of those countries not affected internally by
major wars -those who didn't have their physical capital destroyed by
a war- did much better than the rest of the markets.

- quote -

It all depends on future events. If you assume that the probability of
a new major war in Europe -for example- is almost as low as in the US,
then there is little reason to assume that the stock market is going
to do substantially worse for these countries. For the US, since there
is no evidence of a long-term economic growth slow down, it is hard to
justify that corporate earnings are going to grow at a lower rate than
in the past ( and therefore stocks returns are going to be lower as
well).

- quote -

Right. The same for long term returns of the stock market. Companies -
and stocks- are worth -in an equilibrium- the same as the discounted
stream of future earnings. If there is no slow down in future earnings
===> no reason for lower stock market returns in the long term.

On Apr 21, 3:17 pm, Jose Bailen <jose.bai...[at]gmail.com> wrote:
- quote -

The reason stocks grant you outperformance, is there is a chance they
will not ie it is a risky asset. (efficient market theory)

The other reason is likely that there are structural biases in
markets, which mean investors overprice near term certainty (ie don't
hold enough risky stocks relative to less risky assets). Also
investors appear to overweight recent information. (behavioural
investment theory)

Historic returns can lead one astray, especially recent historical
returns. They are about to do so in real estate, I suspect.

- quote -

That's assuming, of course, that stock returns are not serially
correlated? ie that the performance in one year, doesn't have a
correlation with the performance in a subsequent year?

Whereas, in fact, as I understand it, stock returns are 'weak form
mean reverting'. A period of superior performance tends to be
followed by a period of weak performance, and vice versa?

There is, of course, massive survivor bias in the data. The biggest
world stock markets in 1890 included Berlin, Buenos Aires, Budapest,
Cairo, Shanghai. All of these dropped to zero at some point during
the subsequent 116 years-- investors were wiped out. Looking at the
market which did the best (the US market) over that time, and
asserting that that is the future outlook for stock returns, is data
mining at its worst.

It's like buying a portfolio of residential investment properties in
1890. I have friends whose families carefully invested their money in
Prague, Budapest, Vienna, Berlin pre WWI-- and lost the lot.
Similarly in the US you could have invested your money in Cleveland,
Buffalo and Detroit. Or in Los Angeles and New York and Atlanta.

The actual return from equities over the long run is good, but not as
good as the US data implies.

In the same way, while
- quote -

What you actually have to know is the underlying theory of *why* the
sun rises and sets every day *that* gives you confidence in its
continued trend.

On Apr 21, 2:35 pm, Sandra Loosemore <san...[at]frogsonice.com> wrote:

- quote -

Of course, past performance is never the guarantee of future results,
but strong empirical evidence suggests what future results may be with
a high probability. When you have 136 years data, you can be sure that
the results are pretty robust and significant. In the same way, while
you can always argue that the fact that the sun rises every day -it
has been doing it quite consistently in the past- doesn't mean that it
should rise tomorrow, it seems that given empirical evidence, it is
quite likely that it will actually rise again tomorrow.

On Apr 21, 1:35 pm, Sandra Loosemore
- quote -

Headline - Financial Planning - Stocks, Bonds, Housing mix

Where you start in investing is pretty clearly important.

Stock investments made in 1929, or 1999, took/ will take a long time
to make back what you paid for them (the more so now: in 1929,
dividend yields were generally higher). Adjusting for inflation, 1968
was a very bad year to invest as well (by 1979, you had lost at least
half your money).

The best rule of thumb I know of is to take 1/PE of the market
(trailing). Which right now, in the US, is 1/15X or 6.7%. Which
gives a forecast for *real* returns of 6.7%, and nominal returns of
say, 9%. Compare that to 1999, when stocks were trading at 22X and
over 30X for the largest stocks.

The wrinkle being that we are likely at a profits maximum, so the true
PE (adjusting for the cyclical rise and fall in operating margins) is
more likely to be higher than lower.

But 5-6% real is a number I am comfortable with, for the US stock
market index.

By contrast real return bonds (TIPS) are going to give you less than
2% real, and ordinary bonds are going to give you around 4.5-5%
*nominal* ie maybe 3% real.

Strikingly, very large cap companies are at a discount to the market
as a whole, which is the first time this has been the case in a long
time, if ever (not since 1990 at least, and Barton Biggs says as cheap
as he has ever been able to show they were). The GEs, Pfizers,
WalMarts, Exxon-Mobil's, Citigroups etc. of this world look darned
cheap, taken as a group.

Applying the same logic to US housing, you get forecasts of returns,
going forward, which are strikingly low (on the basis of current
rental yield or Price-to-Income multiples). The wrinkle is that the
US has unusually favourable demographics, and zoning is *tightening*.

My conclusion. Own your own house, (massive tax advantages in so
doing), but invest the surplus in stocks. And don't buy a house (in
most US markets) right *now*.

And tilt your portfolio towards US large cap value.

Jose Bailen <jose.bailen[at]gmail.com> writes:

- quote -

Eh. Past performance is no guarantee of future results.

Just because there hasn't been a loss period greater than 18 years in the
past doesn't mean that there might not be one in the future.

-Sandra the cynic

On Apr 20, 11:33 pm, kastnna <kast...[at]auburnalum.org> wrote:

- quote -

These are the actual probabilities of negative REAL returns in the
stock market (1871-2006 data, i.e., 136 observations, source:
Shiller).

1-yr negative returns: 42 years (probability of 42/236 = 30.9%)
5-yr negative returns: 25 5-yr periods out of 131 5-yr periods ==probability of 19.1%
10-yr negative returns: 11.1%
15-yr negative returns: 5%
20-yr negative returns: 0%

In fact, the probability of negative returns for periods longer than
18 years is zero (the last 18-yr period with negative real returns was
the 1902-1920 period).

Therefore, if you can hold a diversified portfolio of stocks for
periods of 18 years or longer, you will always get a positive real
return, even in the worst case scenario (that is, in the scenario in
which you bought at the peak of the stock market and then you have
many adverse shocks that affect your stock market investments).


======================================= MODERATOR'S COMMENT:
Posters to this thread should relate comments to general financial planning.

On Apr 20, 2:56 pm, Jose Bailen <jose.bai...[at]gmail.com> wrote:

- quote -

I won't pretend to predict the future, I can't say what trends will
and won't continue. Romer and Siegel are fine. There are plenty of
other respected and logical arguments on both sides of the debate.
Crestmont research, for example, disagrees - and logically.

That still doesn't address my primary concern. The presence of margin
requirements, and as a result margin calls, does not allow your
strategy to achieve the "long term" it needs if the market suffers an
early downturn.

Even if we asume that past trends will continue, in the past 30 years
(the length of a traditional mortgage) the S&P 500 has posted a
negative annual return roughly 1/3rd of the time. I'm not leveraging
my house on a 33% chance that I may get in on a down year and get
margin called. Furthermore, there are many day-to-day ups and downs
that can trigger margin calls that aren't reflected in the annual
returns. Just my risk tolerance showing here, not necesarily everyone
else's.

On Apr 20, 7:43 pm, kastnna <kast...[at]auburnalum.org> wrote:
- quote -

This historical rate or return -of about 7 percent in real terms- is
relatively robust, it has been there for about 200 years (see Siegel's
"Stocks for the Long Run") and there is little reason to think that is
going to be lower in the future. In the long term, stock market
returns are driven by corporate earnings, which grow at about the same
rate as GDP. There is no evidence at all of a slowdown in GDP growth -
in fact, if anything, the evidence is more to higher average GDP
growth in the last few decades, just take a look at Paul Romer's
papers-, so there is no evidence of lower earnings growth and
therefore lower stock market returns in the future.

<darkness39[at]yahoo.com> wrote in message
news:1177084327.829603.18630[at]l77g2000hsb.googlegroups.com...
On 20 Apr, 12:38, Jose Bailen <jose.bai...[at]gmail.com> wrote:

- quote -

That plan looks good on paper, but if it is meant as practical advice for
someone, there is many a slip twixt the cup and the lip. In the area where I
live, I have seen this plan recommended in periods when interest rates are
low and the stock market is near its peak. I have never seen it recommended
when interest rates are high and the market is low.

The pitch goes something like this. Salesman says: "Real estate doesn't look
good these days, and houses just sit there, but the stock market has
returned 11% historically. So take out a home equity loan and invest in
mutual funds. If you pay 6% interest on your home equity loan, you will
still be ahead by 5%. And I have a fund for you that has done just great in
the last few years!"

No mention is made of the fact that interest rates could change in the next
few years, and since they are extremely low at present, the most likely
direction is UP.
And no mention is made of the fact that 11% historical returns in stocks is
over a long period and nothing is guaranteed in the next 3 years or 10
years. This scenario is especially disturbing if the person seeking advice
is 65 years old (and also disturbing if there is a 5% front end loan on the
great mutual fund recommended).

On Apr 20, 6:38 am, Jose Bailen <jose.bai...[at]gmail.com> wrote:
- quote -

Very true, but it still doesn't account for margin calls. A market
downturn could trigger a margin call that would wipe out your equity
and still leave you with a mortgage to service. Furthermore the
HISTORICAL return on stocks has been 10-11% and there has been much
debate as to whether that trend will continue.

On 20 Apr, 12:38, Jose Bailen <jose.bai...[at]gmail.com> wrote:

- quote -

Which is, de facto, the choice most investors make. They have one
home, they can pay off the mortgage, or invest in the stock market.

However the thrust of this thread was whether to buy that first home,
and have equity in that first home (presumably due to rising prices)
which can be tapped to buy stocks.

Without that first step, no leveraged stock buying.

It's not as crazy as it sounds: if you buy a
- quote -

See above. I agree perfectly.

Where it really pays off if you have tax shelters available on the
stock investing: either due to post tax investment vehicles (IRAs or
ISAs) or pre tax ones (401ks or pensions). This can, however,
compound liquidity problems.

the interest rate on mortgage debt is about 6.5%
- quote -

Tax is the thing to be careful of-- a lot depends on your after tax
return. The other factor may be UK-specific: most mortgages here are
floating rate, it's expensive to fix beyond 5 years (almost no one
offers it).

I would be leery of assuming a long run return of stocks, going
forward, of 10-11 per cent. 8 is my ruling assumption. (6.0% real)
before costs. A good rule of thumb is to take the inverse of the
market trailing PE (15 times in the US) as a real return: (6.7% in
this case)-- but recall my caveat about corporate profit margins.
Yes globalisation improves the returns to capital, but over time, that
gets competed away (more investment takes place, returns are driven
down).

If you invest the money in real estate, you can potentially build up a
portfolio with a *lot* more gearing. However everyone and his wife is
investing in real estate right now: UK yields (commercial and
residential) are probably as low as they have been since the 1930s.
This suggests to me that we are at the peak of a property cycle.

Property takes patience, local knowledge and hard work (especially in
the early years). Right now I see lots of investors who lack all of
the above.

On 19 Apr, 14:55, Sandra Loosemore <san...[at]frogsonice.com> wrote:
- quote -

Sandra

Thank you, very interesting.

I think for most investors it is a call on 'do I pay down my mortgage,
or do I put more cash flow into stocks'?

The answer depends on:

- risk tolerance
- stability of future cash flows (eg job)
- nature of stock investing eg a match on a 401K from your employer is
probably a no-brainer
- risk of 'over consuming' on housing. Housing price booms, subtly,
tilt all of us towards having larger portfolios in housing, and
consuming more housing, than we need. Any expenditure on housing is
easier to justify if the 'multiplier' is high-- ie if next year, it
will make the property worth $10k more. That isn't the case in a flat
or bear market.

My general take for a US investor is:

- buying a first home is (almost) a no brainer. Owning a principle
residence is highly tax subsidised, and zoning in most places is only
getting tighter. But beware market cycles
(and when we are on the downside, as the US is now, remember that
commentators will call the bottom too early, many times-- just as they
have a vested interest in boosting it on the way up, so too they do on
the way down, the real estate industry pays their freight. My own
view is the US has quite a bit more pain to take (Your Mileage May
Vary) and one should pay a careful eye to blogs like Calculated Risk
(the gurus of the housing bubble):

- moving house a lot is going to kill your returns: 5-6% transactions
costs (at least) on each move
- paying off your home over 20 or 25 years is a good idea, with a
*disciplined* investment of the extra cash in a mix of investment
vehicles (IRA, 401k, straight holdings)
- going into residential property investment is a major decision, with
significant impacts on your life. Conversely it is one of the few
ways that 'ordinary Joes' can build very significant personal wealth.

On Apr 20, 10:58 am, darknes...[at]yahoo.com wrote:

- quote -

Margin lending is not the only way to invest in stocks with borrowed
funds .If you want to borrow and invest this money in stocks, you can
always ask for a second mortgage on your house (or even a first
mortgage, if you have a home and are debt free) and use the money to
invest in stocks. It's not as crazy as it sounds: if you buy a
diversified porfolio and you have enough cash flow to pay for the
service the mortgage, in the long run you profit from the rate of
return differential: the interest rate on mortgage debt is about 6.5%
in the US (4.5% in Europe) while the long-term rate of return of
stocks is about 10-11 percent.

On Apr 20, 12:57 am, "Don" <dwz...[at]telus.net> wrote:

- quote -

As I suggested elsewhere, owning your own home, even in Canada, is
something of a no brainer, assuming you are in a major city with a
long term record of price appreciation:


- it's capital gains tax free (in the US, the interest deduction makes
it even more of a no brainer)
- housing prices have tended to rise faster than inflation
- 'other people's money' - if you rent, you pay your money to live in
a place. If you own, you still pay your money, but at the end of the
day you have an asset

However:
- owning residential property as an investment is a more complex
calculation-- I think you can make money, but you have to treat it as
a 'small business' to which you devote considerable personal time and
effort
- owning 'too much' of a personal home (ie too big a mortgage) is
increasing your investment in an asset class that doesn't do as well,
long run, as stocks
- housing prices don't always go up: Toronto 1989-1995 fell 40%,
Calgary in the early 80s fell at least as much, Vancouver has had its
ups and downs. This situation may be pervading the US now.
- most non-homeowners underestimate the repairs, maintenance and
future property taxes of owning your own home (new condos in
particular tend to have lots of amenities, and unrealistically low
condo fees which go shooting up. Those amenities *cost*)

On Apr 19, 8:10 pm, Jose Bailen <jose.bai...[at]gmail.com> wrote:
- quote -

In the *long run*. Not on a daily basis


In that case, you
- quote -

But if the value of a house goes down, and you are renting it out, you
are not forced to repay. Whereas in stocks, you are forced to sell on
the day-- liquidation into a falling market.

This is a crucial difference between investing in rental real estate
and investing in stocks.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:46276EFF.9060701[at]paragondynamics.com...

- quote -

Quite so, and you would have to add up everything to find the truth. I have
heard many apparently informed and intelligent people claim that in the long
run investment in mutual funds is wiser than investment in real estate. I
would like to know how many of the people so advising own their own homes.
That would be an interesting statistic. My guess is that most of them do.

On Apr 19, 4:00 am, Jose Bailen <jose.bai...[at]gmail.com> wrote:

- quote -

You've heard about margin requirements and margin calls?

You can't use such a high leverage ratio when buying stocks on margin.
You are also subject to margin calls in a volatile market while a real
estate owner can "ride out" in bad times.

On Apr 19, 7:58 pm, darknes...[at]yahoo.com wrote:
- quote -

He is talking about the case in which prices go up. In that case, you
are not forced to sell to repay the loan because the collateral -
equity- is always higher than the loan. In that case, you can have a
nice return for your initial investment (similar to the down payment
of a house, when the house value goes up).

On Apr 19, 10:00 am, Jose Bailen <jose.bai...[at]gmail.com> wrote:
- quote -

No. You are 'marked to market' in margin lending.

So you can't ride the volatility of stock markets, but you can in
housing. A downturn will lead to a margin call, forcing you to
liquidate at the bottom.

The only way the individual investor can really gear a stock position
is to invest in leveraged vehicles, eg closed end funds with
borrowings.

(you might be able to do something in option markets *but* you are
again marked to market, and you can only do this on large, liquid
indices like the SP500).