Radical Shift In Sentiment

But the glorious days for common stocks did not last. The crash pushed the image of stocks as safe and fundamentally sound investments into the doghouse and with it Smith's contention that stocks were the best long-term investments. Lawrence Chamberlain, an author and well-known investment banker, stated, Common stocks, as such, are not superior to bonds as long-term investments, because primarily they are not investments at all. They are speculations.18 The common stock theory of investment...

Other Dividend Yield Strategies

There are other high-dividend-yield strategies that have outperformed the market. A well-known one is called the Dogs of the Dow, or the Dow 10 strategy, and is chosen from high-yielding stocks in the Dow Jones Industrial Average. The Dow 10 strategy has been regarded by some as one of the simplest and most successful investment strategies of all time. James Glass-man of the Washington Post claimed that John Slatter, a Cleveland investment advisor and writer, invented the Dow 10 system in the...

The Value of Stock as Related to Dividend Policy

Management determines its dividend policy by evaluating many factors including the tax impact on shareholders the need to generate internal funds to retire debt, invest, or repurchase shares and the desire to maintain a stable dividend level in the face of fluctuating earnings. Since the price of a stock depends primarily on the present discounted value of all expected future dividends, it appears that dividend policy is crucial to determining the value of the stock. But as long as one specific...

The Significance Of Market Volatility

Despite the drama of the October 1987 market collapse, there was amazingly little lasting effect on the world economy or even the financial markets. Because the 1987 episode did not augur either a further collapse in stock prices or a decline in economic activity, it will never attain the notoriety of the crash of 1929. Yet its lesson is perhaps more important. Economic safeguards, such as prompt Federal Reserve action to provide liquidity to the economy and assure the proper functioning of the...

Pricetoearnings Pe Ratios

Another important metric of value that can be used to formulate a winning strategy is the P-E ratio, or the price of a stock relative to its earnings. The research into P-E ratios began in the late 1970s, when Sanjoy Basu, building on the work of S. F. Nicholson in 1960, discovered that stocks with low price-to-earnings ratios have significantly higher returns than stocks with high price-to-earnings ratios, even after accounting for risk.16 15 After 2003 the Dow 10 strategy lagged the Dow 30...

The Bear Market And Its Aftermath

The date March 10, 2000, marked the peak not only of the Nasdaq but also of many Internet and technology stock indexes. When capital expenditures in technology unexpectedly slowed, the bubble burst and a severe bear market began. Measured by the S amp P 500 Index, the market declined by 49.15 percent between March 10 and October 9, 2000, eclipsing the 48.2 percent decline in the 1972 to 1974 bear market and the worst since the Great Depression. There were some redeeming features to the...

Sources of Shareholder Value

For the stockholder, earnings are the source of future cash flows. Earnings, profits, and net incomes are the cash flows that remain after the costs of production are subtracted from the sales revenues of the firm. The costs of production include labor and material costs, interest on debt, corporate taxes, and allowances for depreciation. Firms can create value for shareholders by using their earnings in a number of ways. The first and historically the most important is this one Earnings that...

Financial Market Returns From 1802

This chapter analyzes the returns on stocks and bonds over long periods of time in both the United States and other countries. This two-century history is divided into three subperiods. In the first subperiod, from 1802 through 1870, the United States made a transition from an agrarian to an industrialized economy, comparable to the transition that the emerging markets of Latin America and Asia are making today.5 In the second sub-period, from 1871 through 1925, the United States became the...

The Bankruptcy of Government and Private Pension Systems

Although it is widely known that our Social Security and Medicare programs are threatened by these demographic trends, there are many who believe that they have accumulated sufficient private wealth to fund their retirement. But this may not be so. The same crisis that strikes the public pension programs can overwhelm private pensions as well. Since there will not be enough workers earning income, there will not be enough savings generated to purchase the assets the retirees must sell to...