Top 5 of the Week of December 12
In the Top 5 this week, Meb Faber kicks off with a look at the capability of the CAPE ratio on his website’s blog. The Irrelevant Investor Michael Batnick compares the classic 60/40 portfolio with William Bernstein’s “Permanent Portfolio” as defined in his book, “Deep Risk.” And author of The Investor’s Field Guide, Patrick O’Shaughnessy argues why we should bring more creativity into our investing strategies.
Todd Millay writes about the attractive investing prospect of water for Forbes. And Morgan Housel, a partner at the Collaborative Fund discusses the problem of fewer companies are going public…
How the CAPE Ratio Can Have Value
- The CAPE (cyclically adjusted price-to-earnings) ratio is a PE that uses the average of ten years of inflation-adjusted earnings
- Imagine in gambling if you were dealt a 19 in blackjack, will you win more often by sticking with the cards in your hand or twisting for another one?
- By using the CAPE ratio, an investor can identify if a market is becoming overvalued and switch—an effective timing metric
Do you use the CAPE ratio as a valuation tool? Is it effective or not? Share your comments in the section below
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An Alternative to the Classic 60/40 Portfolio
- William Bernstein’s “Permanent Portfolio” (PP) combines a quarter each of U.S. stocks, cash, long-term bonds, and gold
- In the last 35 years, the PP, could in theory, have gained you returns of 2,600%, compounding at 8.4%
- Though it doesn’t compare to the returns of a 60/40 portfolio at 5,050%, the 35-year ride was a lot smoother for the PP with much shallower drawdowns
- Waiting out underperformance periods may be hard, but the PP is a much lower risk option for some investors
Creativity and Investing
- You’re most creative when you don’t adhere to strict rules and conventions—the most significant inventions have usually been a result of “tinkering and play”
- Perhaps only by rebelling against market concepts can we, as investors, find true alpha
- If you travel the same path as everyone else you’ll never be able to strike free and be different—strike away from conditioning and aim for a more unconventional approach
Why Invest in Water?
- More investors are seeking investment prospects that actually gain from certain demographic trends or the growing impacts of global warming
- As the world’s population continues to grow, water scarcity is also rising—with an expected 40% gap between demand and supply levels in just the next 15 years
- Prime investment options, for investors thinking long-term, are companies that are concentrating on creating solutions for this ongoing supply and demand imbalance
Number of Public Companies on the Decline
- In 1996, the number of listed public companies hit an all time high at 7,322, but over the last 20 years that number has declined by 21%
- Running a public company is a heavy burden for any CEO, especially as they are tasked with concentrating on short-term actions to satisfy the market and shareholders
- Without significant innovations to the system or a more inclusive IPO process, things are unlikely to change soon
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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