It’s Tricky Buying Stocks Using Price/Earnings Strategy

    
What follows about P/E probably will not change your mind about investing. Unless you have read what I relate about my experiences, investigations and research over the years, during which I have looked at the pros and cons of over 1,600 investment strategies.

Price/earnings is not a viable strategy for a number of reasons I’ve given in the past. Primarily, it has too much fleeting, irrational psychology involved in its use. Furthermore, price/earnings numbers are too relative to other conditions and price movements.

You cannot reasonably buy securities by historical price earnings comparisons, though Wall Street professionals get tangled in this strategy all the time. The cycles involved are too economically, politically and internationally influenced  and thus imprecise. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

What Is the Financial Media Good At-- If It's Really a Failure at Genuine Financial Reporting?

As a follow-up to previous comments on my critique of the financial media, especially with regard to its reporting on bonds and corporate management, what is the media good at?

Gossip and scandal is always up in the headlines but if you want all you will ever have to know about sports numbers and trivia, the reportage will suffice.  

Maybe that’s why the average American knows so little of how government and the economy work. That’s the reason why politicians can talk down to voters who haven’t the basic understanding of economics and government that an alert media would provide average citizens; along with politically impartial info as well. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Financial Media Flunks its Job

Just a reflection once more on why I write what I do and why I mention that I sometimes repeat lessons or tenets given in these paragraphs, with added current examples for backup.

The financial media does a poor job of explaining what it is supposed to do. I see daily examples of this shortcoming. Perhaps because of ads they take from those whose feelings and business would be hurt if the financial media comments were more accurate and independent.

But mostly, the problem is due to poor training of reporters and editors, especially in two areas:

One: There is little understanding of the corporate bond market (example: duration principles). 

Two: There’s a major lack of media’s business management experience. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Government Is an Expensive Provider

Politicians rely on government to remedy all the ills of a relatively small population, while imposing more socialistic restrictions in that effort.

While the taxpayer/consumer pays dearly for ineffective efforts.

As examples: Borrowers who use credit cards, or take out mortgages and loans, make stupid decisions. Government bureaucrats will tell you we need more regulations and financial product safety. Yet you cannot legislate or regulate against stupidity without consequences. They merely translate into more costly bureaucracy.

Larger print in consumer contracts will surely help. Along with better schools we already pay for.

What government effort actually does is make credit more scarce. And therefore more expensive for those with good and bad credit alike. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Doubtful Promises of Government Help

Far too many politicians rely on government to remedy all the ills of a relatively small percentage of the population. They never fail to use an economic sledge hammer to accomplish this goal.

To cure laments of a small set of the population, they seek remedies that hurt the majority. The result is the same: Bigger government. Greater advances to the socialist state they insist they are not really for.

Critics feel their sole political intention is merely to create that bigger government and not produce practical help. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

How An Artist Could Promote Oneself

Looking at art over the years, if I were an artist or a dealer for an artist, I confess that my experience and observation has made me quite cynical.

As I have often said, The Bigger Fool Theory is what permits otherwise smart investors to pay out millions for work whose worth is highly subjective in the eyes of a beholder with no special acumen.

Bottom line: What sells most otherwise nondescript,  run-of-the-genre art and makes for most “value” is merchandising and marketing, the more the better. The more astute that effort, the more successful its accomplishment.

Few art buyers are aware of value in the art they buy. They look at price tags and the comments of the public and hope to milk the system when it’s time to sell.

Everyone is told to buy what they want to have in their homes. How many who buy for investment really, truly, like what they have? (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Earnings From Owning Art

It’s misleading seeing reports comparing earnings possible from holding various forms of art, compared to what you get from stocks and bonds.

For three reasons:

One, the investments are not comparable. It’s like comparing proverbial apples and oranges because it’s hard to measure true art prices.

Secondly, there is a big margin between the price you buy at and and the one for selling. This makes an even sharper difference in values with shorter term transactions.

And three, there is little liquidity with art. You will not always be able to sell what you have when you need the funds. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Global Economy Is Being Run by Misfits?

For an idea of how inept world leaders are at financial matters, and how their domestic politics rules their thinking beyond their own borders, listen to the rhetoric that comes from the periodic get-togethers and conferences they have to solve global economic problems.  

The leaders perform a comedy of errors, in a maze of contradictions that make no economic sense. From one year to the next, each leader, each expert they put on the world stage, will propose conflicting points that no one is supposed to bring to  attention. 

But the extravagant, gourmet grand dinners for the VIPs served at such occasions make up for the inanities. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

How Smart Are The Really BIG Investors?

How smart are the really big investors, the ones with hundreds of millions and even billions to invest. I’m referring to the pension funds and giant foundations; the supposedly real pros.

They often use outside hedge fund and similar big-time management funds.

Those who follow my writing, know I frequently explain the huge bottom line cost to an investor who pays a “mere” 1½% or so of his or her assets as a management fee. But “smart” professional BIG investors pay much more. They fork over 2% and more to their advisers PLUS as much as 20% or more of earnings. That adds to the ridiculous cost!

Do the hedge funds now earn any more than an ordinary, well-disciplined, average John Doe can? The answer over recent-year experience has been a decided no, (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Often Best Investing Psychology--Sit On Your Hands

It’s amusing to note how psychologists, who are not acquainted with the fundamentals of investing, give psychological advice to impetuous investors who go in and out of the market and are never happy with their decisions.

I have learned a basic fundamental from loads of Wall Street experience. Find a strategy and be disciplined about it. You sell a security when the purpose of the purchase no longer holds. Buy bonds on duration principles. And stop listening to the constant financial media chatter and noise that makes a living for them, but will hurt your wallet, and your nerves. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Stress Tests Assure Banking Problems?

It's risky for periodic use of so-called Stress Tests in evaluation of banks’ strength:

Firstly, publicizing the results as in the past is dangerous to the economy. The term itself is a no-no because of its psychological implications with regard to the economy and the stock market.

Secondly, little of the public, and only a few in the financial community, fully know what each test is supposed to reflect.

Furthermore, in an emergency, the amount of capital a bank has can be wiped out because of mark-to-market accounting principles that may be applied.

In the past. these actions caused the very financial emergencies they supposedly were meant to avoid. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Expensive Securities Advisers Are Adding More Fees

It’s nothing new. I have been writing for years about the real cost of investment advisers when you calculate their fees against the actual returns you get from your investments. 

We’re talking 25% or more of your income every year for information you can gather for yourself at no cost.

Many advisers are on to more ways to cut into your income. They are coming up with a “portfolio” of ETFs (not necessary at all) to which they may add a fee as high as 2% of assets managed.

By the time these advisers are done with managing clients’ investments, they have taken about half the earnings of those accounts for themselves, each year.
(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Pricing Stock on Expectations, Not Current Earnings

Leave it to Wall Street pundits to move the goalposts and the sidelines when times get iffy and there are doubts about current earnings.

There’s talk, always, when price earnings fugures are not in line with what they ought to be, when the experts take on another tack. They then bank on expected earnings sometime in the distant future. 

When reported numbers can be suspect, how can you rely on future predictions in a changing world economy?  Yet the action crops up periodically. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Worrying About Voting Your Stock Proxies?

Voting your stock proxy is important, but perhaps not for the initial thought that may come to your mind as a stockholder.

The truth is, it’s not easy for the average investor, of even Wall Street professionals to evaluate management. So it’s not an easy task to know or differentiate good management from bad. 

On Wall Street, the pros tell you that good management makes money and bad management doesn’t, which is simplistic, as I have explained in detail before.

But proxy votes are important for yet another reason. They’re being used by certain groups as political weapons which have little to do with pure investment options. They have become a means of foisting on management social efforts that ought to have little place in the corporate sphere, but are purely governmental problems, to be considered by government and not private corporations. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Life Insurance is Generally Not an Investment

Life insurance is available as whole coverage, consisting as protection and savings, and as solely protection or term insurance.

The difference in premiums, therefore, are much higher for whole life. And statistics show that that difference, if put into a low-cost mutual fund, will return more to the insured than the whole life policy itself.

The purpose of the whole life policy is to make that savings portion mandatory but it’s an expensive savings option. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

So-Called Conflicts of Interest on Wall Street

You often hear claims of conflict of interest on Wall Street, that the investment firms’ interests usually take positions opposite their customers.

It’s normal to hear this from ignorant politicians who have a political axe to sharpen, but it’s disturbing to hear the financial media and pundits sometimes get into the act.

A fact of life: Wall Street firms are obligated to take market positions to do their business. As a result, they must hedge their positions. That means you will often find them on both sides of a position, buying and selling. That doesn’t mean they are contradicting themselves when they sell a customer a security they may have to be selling for themselves as a hedge. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Useless Bank Stress Tests

Stress tests for banks, suggested by regulators, are poorly designed because they’re composed of too many arbitrary factors; each may have weightings with only indirect relativity to each other.

Of the several factors, not one by itself is of predominant importance in reflecting bank safety. The ratio of doubtful residential mortgages to capital, for example, or commercial mortgages to capital, or types of capital, or what constitutes tier 1, or loan defaults, or effects of potential general unemployment, all add up to figures which become too vague,

Experts ought to seek decisive answers on which to base banking decisions. Financial officials and boards must now make subjective decisions to act upon such stress tests. And they can be wrong, as they have been in the past, in dealing with financial meltdowns. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.)

Financial Advisers Offering The Best Interests For Investors?

Are financial advisers truly working on behalf of their investors?

It appears that they are doing what they have always done in the past; perhaps satisfactory only within certain standards and reasoning.

Some are still resorting to alternative investments, which are being designed to offset weakness in stocks and bonds. These investments are suggested for clients in the form of currency trading, commodity futures and private partnerships.

However, not only are these type securities volatile, they are expensive; though fine for the advisers.

Larger accounts are getting the use of math models, which don’t always work, and so-called structured products, which gets back to the potential 2008-2009 financial meltdown problems.

When big fees are involved, many financial advisers employ business as usual. (See the Earl J. Weinreb NewsHole® comments and @BusinessNewshole tweets.))

Buying Dividends in Down Markets

Advisers tell you to buy stocks that pay dividends as a defensive measure in down markets. That makes sense because you get substance that helps keep such stocks afloat when the light-weights are dropping like lead balloons.

The unmentioned problems occur when the dividends disappear or aren’t consistent. That happens when down-markets result from bad economies.

Another positive factor with dividends: When they’re reinvested periodically, as part of a low-cost fund, the investor gets the positive effect of the duration principle that’s available also with high-return bonds. My comments on duration will explain this. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Buying Volatile Stocks For More Gain?

Investors have been told by advisers that the more volatile the market, and particularly the more volatile the stock, the better the ability to make money in the markets, This has become an axiom of sorts.

In fact, there is a technical terms used by professionals called “beta” which attempts to measure stock risk, a form of volatility to be expected.The higher the beta measurement, the more volatility and risk.

But the question is whether this strategy for investment works. It’s only one of over 1,600 strategies I’ve studied and I find the usual pros and cons. The upshot? No reason for higher risk to be an overwhelming factor for investors to follow. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Tendency Toward Avoiding All Investment Risks

The financial media goes to its usual extremes when describing investment risks, so much so, that some investors may deem it wiser to keep funds in a mattress; why brave the wilds of the marketplace being described to them by pundits?

This is especially the case with junk bond risk, as described by the financial media, a topic I often discuss.

Junk bonds do have credit risks but the latter can be wisely handled with an eye on industry default rates to an extent. To a much greater degree, the risk can be managed with the use of duration principles and low-cost mutual fund means of diversification. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

There Are Junk Bonds and Then There’re Really Junk Bonds

The media periodically gets nervous about the use of junk bonds, those that have less than prime quality. But then you can buy a bond that’s not so prime, among the top B ratings, and the much more risky types among the C or lower ratings. There is a difference that the media headlines usually never differentiate.

Moreover, the media, in their frenzy, will hardly ever explain that the risk in terms of potential default is usually built into the higher yields you get. Furthermore, the purchase you make can be diversified in low-cost mutual funds with an eye on duration principles.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Law Says SEC Regulations Must Not Stifle the Economy

It will surprise most of the public to know that a law was passed and signed by then President Bill Clinton, in 1996, that SEC regulatory law consider effects on “efficiency, competition and capital formation.”

You wouldn’t believe this is a law provision when you look at what the SEC has been up to these past years. No wonder the federal courts have negated some of the SEC’a more flagrant actions. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Odds For Investment Success

Here is a simple way to improve your investment odds, based on my experience on studies of about 1,600 strategies, along with their pros and cons, and most importantly, the discipline of usage.

To sum up a simple lesson that takes little effort:

Once you learn the basics, turn off the constant noise and chatter that you get from the financial media.

All that mostly repetitive nonsense, does more harm than any possible good.  (See the Earl J. Weinreb NewsHole® comments.)

Professional Traders Success?

Big market traders earn good money in up and down markets. Can their method be copied by Main Street as well as others on Wall Street?

Giant investment bank/trading groups have been specializing in high-frequency trading, and now account for a huge segment of all computer-generated trading. Their mathematical model/code has worked for them. These math models generally do well, until you hear of an eventual foul-up.

Mathematical formulas are not for everyone, not even for many on Wall Street.

Always remember those who failed with collateralized debt in 2008-09, and years earlier. (See the Earl J. Weinreb NewsHole® comments.)

Why Be A Small Landlord?

Many smaller would-be landlords are considering buying rental properties as a means of making better returns from investments.

Diversified corporate bond funds of lower credit ratings, but without outlandish credit risks, still offer decent yields, as do REIT mutual funds, which invest in real estate equity trusts.

Still, individuals who are familiar with small properties may find bargain real estate that will offer a decent return and capital enhancement.

But there is a danger in holding real estate on a small scale. It may derive from local regulations which you should know intimately. And you must be prepared to do most of your own small repairs, which can be costly when assigned to outside mechanics. (See the Earl J. Weinreb NewsHole® comments.)

The Connections of Your Investment Portfolio Holdings

For decades financial experts have advised that investors hold securities that will balance or correlate to each other in their market actions. 

In the classic example: You hold common stock and corporate bonds. When stocks are hit for some reason, you can assume the market for the bonds will be strong, to countervail any damage. And the reverse markets can occur; when bonds get hit, the stocks will rise.

But there are other measures of correlation as well. For example, domestic and foreign stock markets or emerging markets.

However, so-called correlation doesn’t work that way in real life. Oftentimes, stocks and bonds move in unison. as do the movements of international and domestic securities. (See the Earl J. Weinreb NewsHole® comments.)

What to Look For in an ETF

 
Exchange traded funds or ETFs are a very low cost way to participate in un-managed mutual funds which aim to follow an particular investment index, However, not all ETFs  are alike, apart from their low cost, which may vary from fund to fund.

The size of ETF will be important, as the larger the fund, the more efficient it can be, not only in low cost. There is also the ability to follow the particular index they track. How far off the mark is the ETF if accomplishing hitting that mark; the term is usually called tracking error  or tracking volatility.

Then you have the spread or amount of difference between the bid and asked price, or what the ETF can be bought and sold at. Moreover, there may be wide differences between the market price the funds will trade at and the net asset value of its holdings. The better the ETF, the smaller such discrepancies. (See the Earl J. Weinreb NewsHole® comments.)

The FINRA Securities Regulations

 

FINRA, or the independent Financial Industry Regulatory Authority, operates from Washington, DC, and New York City, with fifteen District Offices.

It’s involved with registering and educating the industry.  It examines securities firms; along with writing and enforcing securities rules. FINRA also informs and educates the investing public, and provides trade reporting and other industry services. The Authority administers the dispute resolution forum for investors and registered firms.

The organization performs market regulation under contract for the NASDAQ Stock Market, the American Stock Exchange, the International Securities Exchange and Chicago Climate Exchange.

However, they are of help only to those who constantly are aware of investment principles. (See the Earl J. Weinreb NewsHole® comments.)

Don’t Try to Predict Securities Markets

Securities analysts tend to get overconfident about where the markets are going, once they have done extensive analysis. They simply get too much data.

But there are simply far many factors that influence those markets; within a company; domestic and international events; and political machinations.

The only predictability is that the future will be unpredictable. (See the Earl J. Weinreb NewsHole® comments.)