This advice seems to contradict the data. After all, there is a positive relationship between equity valuations–whether measured against earnings or dividends–and future returns. The higher the dividend yield in one year the stronger the expected returns over the following five years.
After all, more than a century of data show this to be true. Sure, the statistical significance could be stronger, but the general tendency is clear.
And if you had bought U.S. equities when price-to-dividend ratios were below 14, you’d have generated annual total returns of more than 10% a year during the following ten years, three times higher than had you bought when the price-to-dividend ratio was above 35.
This seems a pretty good investment rule–buy when cheap; sell when dear.
Except it’s not.
The problem with this data analysis, argues Professor Dimson, is that it is done with hindsight. Using the full century and more of data, we know how things turned out during the whole of that period. We know what was cheap and what was dear.
The LBS researchers ran the same analysis, buy low sell high, over the whole of the past century, but using only data prior to the point in time they were looking at (a rolling analysis). In effect, they were looking at history as if at each point they were in the same position as contemporaneous investors, with only knowledge of past data and not what was to come.
In that case, timing the markets based on mean reversion in all cases causes investors to underperform those who merely stay in equities. Trying to time the market by selling high and buying low leads to worse returns than methods like dollar cost averaging or just buy and hold.
-from WSJ
Category: Observations
Categories
A cautionary tale
The old Wall Street adage is “Buy on Rumors, Sell on News”
Many people have lost money following this adage.
Take for example, Ramsarup Industries.In June 2010, a rumor spread that it is a takeover candidate for Arcelor Mittal.The stock shot up to around Rs.80.85.
There was no basis for that rumor.As truth came out and the dust settled, the stock drifted downwards and is now selling at Rs.4.5 !!
Categories
A sad thought
We cannot imagine an Apple without Steve Jobs.The two are so closely inter-linked that it is difficult to separate the founder from the company.
When the founder passes away, the company and hence the stock price are drastically affected. (as can be seen in Apple’s case )
There are many examples in the Indian context.The recent one being Amitabh Parekh of Parekh Aluminex.The stock has got hammered beyond shape after the unexpected demise of its charismatic founder.
If you cast an eye (not an evil one !) over your portfolio, you will find many companies which are closely interlinked with the founder.It is difficult to visualize that these companies can succeed and grow without them.
A sad but sobering thought.
5 stocks that hit their all time highs yesterday:
- Sandesh
- Thebyke
- BSLimited
- Aplapollp
- Infratel
As the cliche goes, any company’s biggest assets are its employees.So while researching a company, equity analysts try to figure out the ability, motivation levels etc of the employees. In private equity, it is fairly common to touch base with ex employees to get some color on what exactly is happening in the target company.
In this instant age, many analysts instead of actually speaking to employees (or ex employees) get their employee assessments from Glassdoor.
Glassdoor is a website where employees can write reviews about their company and even of their CEO.So these armchair analysts visit Glassdoor, if they see a couple of negative reviews, they conclude “The management sucks” and drop the opportunity.On the other hand, if their reviews are positive, they go ga ga and recommend the stock.
I believe this is a serious mistake mainly because there is no authenticity.You can go right now and write a review of any company you want.So if you want to have positive reviews for your company, you can do so.On the other hand, if you want to spread malicious rumors of a company, just go and write some garbage.
Many analysts have been led down the garden path by relying on Glassdoor reviews for their equity research.Take for example, Arshiya International.A search on Glassdoor indicates “75% of employees recommend this to a friend !”
On the other hand, if you rely on online rants of employees, you will never invest in a TCS,Infosys,Wipro,HCL Tech etc.The employees of these companies are tech savvy and use the net to vent their frustrations etc.
Take for example, TCS. If you google “TCS Sucks”, you will get 269,000 results !Does that mean TCS is a lousy company to invest in ?!!
There is only one way to assuage the employee strength of the company-that is offline.Speak to the employees themselves, they will tell you about the company’s management,sales, competition, outlook etc .
Relying on online reviews is plain lazy, foolish and unprofitable !