On 2008-11-06, dapperdobbs <GeorgeCFL[at]hotmail.com> wrote:
- quote -

Absolutely. It also has some disadvantages. Some disadvantages are

1) Cost of trading
2) Cost of time spent researching
3) It is not at all easy to pick up "winning stocks", as stocks of
companies with great prospects are usually not cheap.

- quote -

Stock options are now expensed, per GAAP.

- quote -

Good question. I think that for the S&P as a whole, it trades at about
1.6 times book value. This gives about 16% return on equity. Since
there is some debt held by S&P companies, return on assets is lower, I
do not know what it is, but assuming it is 10%, additional retained
capital would return about same 10%.

- quote -

Do bonds return 10% per annum?

- quote -

I agree, but now the financial stocks are traded with all that
information priced in.


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On Nov 4, 6:47*pm, Igor Chudov <ichu...[at]algebra.com> wrote:
- quote -

Selecting individual stocks has many advantages over buying indexes
and funds. So, not trying to make you wrong, but asking logically -

- stock buybacks are often a cover for options expenses?
- how does 33% of EPS translate into 3% of capital?
- if earnings do not increase, why not buy bonds?

I can see 10% increases, but I'm not sure I see your numbers producing
that. As others here point out, ROE and the earnings part of PE are
very material.

Nice article. Bogle does make some pertinent comments about funds
falling asleep buying banks, but the blame there should also go to
materially immaterial SEC filings. It is critical to have exactly
accurate financial reporting. Referring back to an earlier topic about
deregulation, I think the FASB site covers the deregulation that
allowed this mess - I have yet to brace myself to try to read FAS 140,
but that may be the reg (actually it's not a regulation, technically)
that facilitated off-balance-sheet items. I was surprised at how easy
it is - if the bank has no direct management of a business, it is
allowed to put it into a trust, and a trust qualifies for "off-balance-
sheet" treatment.

Still, it is amazing that one well-known and highly regarded stock
fund had over 16% of its total assets in financial stocks (over
$8,000,000,000)(eight billion dollars). Wouldn't you think that for
that amount of money, they could afford to hire a cracker-jack
accountant, and give him a phone line to the financial companies they
put that money into? And that he would think to call to ask where the
excess returns were coming from? That's just basic Buffett. < If you
don't understand it, you shouldn't put money into it.
My opinion is the "smart guys" rely on making us think they are very
very smart ... but how smart is it for a nearly trillion dollar bank
to write off tens of billions of dollars in losses, go belly up, and
sell itself for pennies on the dollar? Time for those jerks to "lawyer
up." A lot of people are really very angry about this 'stuff'.

John Bogle, founder of Vanguard, seems to agree with me, up to the
numbers.

http://www.reuters.com/article/ousiv...4A37NK20081104


U.S. market has "improved radically": Bogle
Tue Nov 4, 2008 5:37pm EST

By Jason Szep

BOSTON (Reuters) - The fundamentals of the U.S. stock market have
"improved radically" and declines in valuations to five-year lows are
overblown, legendary investor and Vanguard Group founder John Bogle
said on Tuesday.

Bogle's comments, coming as U.S. stocks rose in their biggest Election
Day rally, underlines an emerging streak of optimism on Wall Street
over corporate earnings and the prospect of more measures to prevent
the financial crisis from turning into a global recession.

"It seems to me that people have lost sight of the fact that the
fundamentals have improved radically," said Bogle, who launched the
colossal $97 billion Vanguard 500 Index VFINX.O in the mid-1970s as a
low-cost investment strategy.

The hard-charging, 79-year-old founder of the nation's second-largest
largest mutual fund company said he expected the earnings of companies
in the Standard & Poor's 500 Index .SPX to grow at a rate of about 7
percent annually over the next decade.

That should pave the way for returns on U.S. stocks of around 10
percent, according to his calculations that combine a projected
earnings growth rate with a three percent dividend yield generated by
stocks in the S&P-500 Index.

"The value of the U.S. stock market was $18 trillion a year ago. And
now it's about $9.5 trillion or let's call it $10 trillion with
today's rally. Anyone who believes that American business is worth $8
trillion less than it was a year ago I think is a fool," he told
Reuters in a telephone interview.

"Will it be worth a lot less than that and the market is anticipating
it is a reasonable question," he added. "Was it somewhat overvalued at
the start is an even more reasonable question, one which I would
answer in the affirmative.

'HOT AIR IN THE SYSTEM'

"So there was some water in the system, some hot air in the system,
and we blew it out, but I think we have overblown it," he said.

Bogle left the Vanguard helm after a 1996 heart transplant, and now
often castigates the mutual fund industry as a marketing vehicle run
not so much by investment professionals on behalf of investors as by
short-term minded entrepreneurs.

"Institutional money managers, including the managers at mutual funds,
have a lot to answer for," he said.

"If they were professional security analysts, where were they when
they looked at the balance sheets of those banks?" he said in
reference to banks that took huge write-downs for their exposure to
losses in subprime mortgages that snowballed into the worst financial
crisis since the 1930s.

"They joined the speculative frenzy, turning over stocks 100 percent a
year. It has nothing to do with investing. It's a great big marketing
business," he said.

Bogle, who maintains an office in the same building as Vanguard's
executive suite on the company's sprawling suburban campus near
Philadelphia, said he had no plans to reduce his busy workload as a
vocal critic of industry excesses even as he approaches his 80th
birthday in May.

His latest book, "Enough: The True Measures of Money, Business, and
Life", hits store shelves next week. He maintains a hectic schedule of
delivering speeches and appearances on national media. And he runs the
Bogle Financial Markets Research Center, which consists of him and
three assistants.

"I live life one day at a time," he said. "When my mind gets bad, I
hope that somebody, my wife maybe or somebody here, will say 'you are
not the man you used to be'."

"And, of course, I'm not in terms of physical strength and endurance
and all that. But I think in terms of moral strength, writing
strength, intellectual strength, I am as good as I am going to get,"
he added.

(Editing by Leslie Gevirtz)

On 2008-11-03, BreadWithSpam[at]fractious.net <BreadWithSpam[at]fractious.net> wrote:
- quote -

I think that a number that is more objective than what the analysts and
strategists are discussing, would be past earnings. Perhaps companies
would make less next year, but assuming that the economy recovers,
earnings would be more or less at the level that they were.
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Igor Chudov <ichudov[at]algebra.com> writes:

- quote -

You might like to read this:

http://online.barrons.com/article/SB...687489919.html

It talks about the divergence between bottom-up company
analysts estimates (many of which are as yet not updated
to reflect the current economic situation) versus the
top-down projections of some economists regarding future
earnings.

- quote -

Talk about out of touch: Analysts currently estimate that earnings
for the companies in the S&P 500 will rise 29% in the fourth
quarter, and keep climbing, by 15% in 2009, to a record $91.41 a
share, according to Thomson Reuters.

To get a better fix on what lies ahead, forget the analysts and pay
attention to Wall Street strategists, who spend their time looking at
the overall market, not individual companies. The strategists tend to
place greater importance on economic growth and employment patterns in
formulating their earnings predictions. Five prominent strategists we
polled last week expect earnings for the S&P 500 to fall 15% this year
and 3% next year, to roughly $70 a share.

If you believe them - $70/sh earnings next year, with the S&P
at about 960, you're looking at 13.7 p/e ratio.

Which is pretty much right around the average long-term
ratio against *expected* earnings over the last 30 years.

Read into it what you like...


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On 2008-11-01, JoeTaxpayer <JoeTaxpayer[at]comcast.net> wrote:
- quote -

Joe, I think tat what you said is very insightful when applied to
individual stocks. But when we talk about the P/E ration of the
aggregate of stocks, things become very different. For example, it
would be a stretch to think that expectations of their long term
earnings, taken in aggregate, would wildly change with various short
term economic events.
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On Nov 1, 9:23*am, Igor Chudov <ichu...[at]algebra.com> wrote:

- quote -

Probably not even that long.

P/E ratios reflect price and that can be misleading.

Return on equity is the basic measure of how well companies are doing
and how fast they can grow. If a company pays out high dividends or
buys back stock, they will not be able to grow as quickly.

- quote -

Good idea.

--
Ron

Igor Chudov wrote:
- quote -

P/E is a tricky thing. They change as much due to earnings not keeping
up with price as they do due to earnings just going south. A low P/E
implies there are risks which are pushing the price down (think Philip
Morris some years back) or pushing the price up to reflect a higher P/E
(as some tech companies which actually have a product and real growth).
Ken Fisher's "The Only Three Questions That Count" dispels the myth that
one can succeed simply by focusing on low P/E stocks.

Joe
www.blog.joetaxpayer.com

On 2008-11-01, Igor Chudov <ichudov[at]algebra.com> wrote:
- quote -

I meant 2.8%


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We see a lot of talk whether the market will go lower, higher,
etc. Let's abstract from this and try to take a view of an accountant
and think about earnings that accrue to an investor, as opposed to
stock prices as such.

Let's say that you invest money in a stock index, made up of various
businesses, that sells for a P/E of 10.

For every 10 dollars that you invest, the companies would make 1
dollar (you can call it look through earnings). Assume that they would
pay you one third, or 33 cents dividends. That means that you could
own 3.33% more shares just by reinvesting dividends (somewhat less due
to taxes, more like 1.8% or some such). Then, let's say that the
businesses repurchase their own shares using 33.3 cents out of that
dollar. That means that each share now would earn 3.33% more. No
dividend tax accrues from that. And let's say that they invest
remaining 33.3 cents to grow, so next year they have 3.33% more
capital.

So after one such year, your earnings that accrue to the companies you
own, would grow by 10 cents or 10 percent. And next year. So what you
have is a volatile money making machine that, over time, could earn
you 10 percent a year without any upward adjustment to P/E.

If such an adjustment occurs, as it happens, you would be looking at
major gains.

This math, by the way, changes dramatically for the worse as the P/E
ratios go higher. At P/E of 20, your look through earnings can grow by
only 5% per year, and that is not nearly as much upside.

At P/E of 25, the stocks are outright not worth owning.

But as of now, there is relatively little risk of owning stocks if you
can hold on to them for 10 years or more.

As of last wednesday or so, I moved my, my wife's 401k into stocks and
did same with my 7 year old UTMA account at Vanguard. My wife was 100%
in cash prior, I was 80% in cash prior, and so was the kid.
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