Way back in 1934, Benjamin Graham and David Dodd published a famous financial analysis tome called Security Analysis. They argued that one-year returns are too volatile to make any informed decision on the future of a firm’s stock price. It was suggested that using data of five or even ten years to smooth the returns was a far better predictor of a security’s forward-looking price. If we then fast-forward to the 1980’s, “Stock Prices, Earnings and Expected Dividends” was published by John Campbell and Robert Shiller. They determined that “a long moving average of real earnings helps to forecast future real dividends” which are correlated with returns on equities. Shiller would eventually go on to use Graham and Dodd’s analysis as a way to value the stock market. Shiller and Campbell used market data from both estimated and actual earnings reports from the S&P index and found that the lower the CAPE (cyclically-adjusted price earnings), the higher the investors’ likely return from equities over the following 20 years.
As a client of MASECO you would have heard us talking about the equity market return premium, which states that the equity markets have outperformed the risk-free rate of return (for USD benchmarked investors: one month treasury bills) over time by a significant margin. The graph below is a nice long term illustration of this:
Every year well known industry commentator Larry Swedroe, Principal at US wealth management firm Buckingham Strategic Wealth, assesses the hits and misses of market pundits who predict the year’s “sure things”. He scores +1 for a true forecast, -1 for a wrong prediction and 0 for a draw. Below are the “sure things” that were heard from investors and stock market experts in 2017. We use the US, the world’s largest economy and stock market, as the measure of successful predictions.
For many investors it can be tempting to focus only on equity prices when thinking about the returns from their portfolios, particularly during turbulent periods such as the one we have witnessed since the start of February this year. The media often fosters this behaviour through the use of dramatic headlines that are designed to grab the attention of the viewer. Recent headlines in this vein that I have seen include, “The Stock Market is Having its Worst Second Quarter Since the Great Depression”. This sounds scary but the reality was more prosaic. As you can see here, this story was written two days into the new quarter and all because of just over 2% move in the S&P 500 index!
The recent Time’s Up and #MeToo movements have given me reason to reflect on the role of gender in the financial industry. When it comes to investing, common stereotypes plague women. For example, we’re too conservative or don’t understand enough about investments. We don’t save enough. We start too late. We lack confidence. I often (though not universally) see this in my own interactions with clients, especially married couples. Wives tend to defer to their husbands when it comes to making investment decisions and trust in the husband’s experience and decision-making. This is not a judgment, just an observation.
Recently, President Trump unilaterally decided that the US is going to institute tariffs on both steel and aluminium. Tariffs have been used in the past by previous administrations and, indeed, other countries around the world. Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product. Tariffs are one of the oldest and most pervasive forms of protection and barriers to trade.
This is a good question to ask oneself either in a sustained bull run or during a market correction. MASECO is not suggesting there is a market downturn on the horizon but this question is at the forefront of a lot of investors’ minds.
Economic Overview: Solid economic data gave markets little to be concerned about
As we reflect on the year gone by, 2017 proved to be another year of surprisingly strong investment returns across the board. The last quarter provided positive returns and equity markets are now in their ninth year of a bull market. No major risks materialised in 2017, so market volatility continued to be low throughout the year.
As with every new generation, attitudes and preferences change, and millennials are no exception to this rule. Some of this undoubtedly comes from the natural instinct for independence. However, factors such as higher university education rates and access to the wealth of information available for free online have certainly had an effect on the tech-savvy millennials who have grown up with this technology. This is especially obvious when you contrast their lives with the baby-boomers who are currently in the process of transferring their estates to them, many of whom have wholly different penchants when it comes to investing.
Following on from Tor’s article last week, Mark shares his thoughts on the topic of behavioural finance with a focus on investor characteristics and psychology.