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...

Figure

Small Stocks and S& P 500 Returns, 1926 through December 2006 (Including and Excluding 1975-1983) 1983 is eliminated, the total accumulation in large stocks over the entire period from 1926 through 2006 is virtually the same. After 1983, small stocks hit a long dry period that lasted 17 years as they underperformed large stocks, especially in the late 1990s as the technology boom gained momentum. But when the technology bubble burst, small stocks strongly outperformed once again. From the...

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...

The World Wars

The market was far more volatile during World War I than during World War II. The market rose nearly 100 percent during the early stages of World War I, then fell 40 percent when the United States became involved in the hostilities, and finally rallied when the Great War ended. In contrast, during the six years of World War II, the market never deviated more than 32 percent from its prewar level. The outbreak of World War I precipitated a panic, as European investors scrambled to get out of...

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...

Stock Fluctuations In The Short

The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 251 Exchange-Traded Funds 252 Stock Index Futures 253 Basics of the Futures Markets 255 Predicting the New York Open with Globex Trading 258 Where to Put Your Indexed Investments ETFs, Futures, or Index Mutual Funds 262 Index Options 264 Buying Index Options 266 Selling Index Options 267 The Importance of Indexed Products 267 The Stock Market Crash of October 1987 271 The Causes of the October 1987 Crash 273 Exchange-Rate...

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...

Earnings Quality

Going beyond Standard amp Poor's core earnings, another way to measure the quality of earnings is by examining a firm's accruals, which is defined as accounting earnings minus cash flows. A firm with high accruals may be manipulating its earnings, and this could be a warning of problems in the future. Alternatively, low accruals may be a good sign that earnings are being conservatively estimated by the firm. There is strong evidence that firms with low accruals have much higher stock returns...

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...

Diversification In World Markets Principles of Diversification

It might surprise investors that the principal motivation for investing in foreign stocks is not that foreign countries are growing faster and therefore will provide investors with better returns. We learned in Chapter 8 that faster growth in no way guarantees superior returns. Rather, the reason for investing internationally is to diversify your portfolio and reduce risk.5 Foreign investing provides diversification in the same way that investing in different sectors of the domestic economy...

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 Influence of Smiths Work

Smith wrote his book at the outset of one of the greatest bull markets in our history. Its conclusions caused a sensation in both academic and investing circles. The prestigious weekly The Economist stated, Every intelligent investor and stockbroker should study Mr. Smith's most interesting little book, and examine the tests individually and their very surprising results.9 Irving Fisher saw Smith's study as a confirmation of his own longheld belief that bonds were overrated as safe investments...

The Noisy Market Hypothesis

A more general theory for the outperformance of value stocks is that stock prices are constantly being impacted by buying and selling that is unrelated to the fundamental value of the firm. These buyers and sellers are called liquidity or noise traders in the academic literature. Their transactions may be motivated by taxes, fiduciary responsibilities, rebalancing of their portfolio, or other personal reasons. In order to explain the value 26 John Y. Campbell with Jens Hilscher and Jan Szilagyi...

S 1969 1972 1976 1979 1983 19b6 1990 1994 1997 2001 2004

The reason why the Fed model worked is that the market rated these two risks as approximately equal during this period. There is no question that both bonds and stocks do badly when inflation increases. Bond prices fell in the late 1960s and 1970s because rising inflation forced interest rates up to offset the depreciating value of money. Stocks fall during inflationary periods for other reasons, such as poor monetary policy, low productivity, and a tax system that is only partially...

Standard Poors Core Earnings

The dismay over the treatment of pensions and options and the ever-widening definition of operating earnings led the Standard amp Poor's corporation in 2001 to propose a uniform method of calculating earnings that they called core earnings. The objective was to define and measure earnings from a firm's principal or core businesses and to exclude from earnings revenues or expenses that are incurred for other reasons. Core earnings expenses employee stock options, recalculates pension costs, and...

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...

Stock And Bond Returns Since 1802

I know of no way of judging the future but by the past. EVERYBODY OUGHT TO BE RICH In the summer of 1929, a journalist named Samuel Crowther interviewed John J. Raskob, a senior financial executive at General Motors, about how the typical individual could build wealth by investing in stocks. In August of that year, Crowther published Raskob's ideas in a Ladies' Home Journal article with the audacious title Everybody Ought to Be Rich. In the interview, Raskob claimed that America was on the...