Thoughts on Investment

Thursday, April 12, 2012

Why profits won't plunge

http://finance.fortune.cnn.com/2012/04/12/no-profit-plunge

Sent from Read It Later.

Wednesday, April 11, 2012

How Wealth Reduces Compassion

http://rss.sciam.com/click.phdo?i=d335781eb41ff40595d0e0477a44dbb0

Sent from Read It Later.

Tuesday, April 10, 2012

The Dividend-Fund Dilemma - By Jason Zweig

http://feedproxy.google.com/~r/ValueInvestingWorld/~3/kPdWVhu5yVA/dividend-fund-dilemma-by-jason-zweig.html

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Sunday, April 08, 2012

Historical Real Return on Retained Earnings for the S&P500

Here's a chart using the S&P500, showing the return on retained earnings for the past 5 years at each point (the data goes back about 75 years). I use the real earnings increase from 5 years ago to now, and divide it by the sum of retained real earnings over that time.

This seems to indicate that there is usually a sustained period of positive real returns on retained earnings for a few years before it turns back. I was a bit surprised to see 35-40% as the peak, meaning that for every dollar retained over 5 years, the earnings grow by $0.35 to $0.40 on the dollar. I guess that is offset by the poor years in between where all those retained earnings are lost (and then some).

When you factor in that the payout ratio of the S&P500 has gone from ~60% at the beginning of this period to ~30% right now, this effect is likely to be a much larger part of stock price variation going forward.

Over the next 5 years, if the payout ratio stays at 30%, and the retained earnings return is 30%, you'd expect the S&P500's real earnings to be at about double what they are today... even if the PE multiple doesn't change, that chalks up to 15% return per year!

Saturday, March 31, 2012

Predicting droughts - How long can stocks stay below the last high?

The S&P 500 is close to breaking a new record in a bad way... if you take the real value of the S&P500 (divide the nominal value by CPI to account for inflation), and re-invest dividends, you can create an index that reflects the real experience of a buy-and-hold investor (ignoring tax). The graph below shows for any given month, the number of months that have gone by without breaking the last high in this value.

The last time the number of months went really high was for the 12 years between January 1973 and January 1985 - January 1985 was a new high even though the real S&P500 was 1.56 (vs. 2.77 in 1973) - that's the noticeable impact from dividend re-investment.

As of April 1, 2012, it has been 139 months without a new high in this metric. To avoid breaking the 1985 record, the real value of the S&P500 would have to jump by another 12% in the next 5 months. That level of jump is obviously not outside the question (it's about the same as the jump from January 2012 to now).

Stay tuned to see if we set a new record drought or not!