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Don’t Be an Ostrich Investor

Top 5 of the Week of May 15

Meb Faber, the author of his self-named blog, heads up our Top 5 this week with his perspective on high market expectations. Michael Batnick, writing for Enterprising Investor for a change, examines investing in Europe. And Noah Smith of Bloomberg reveals the trouble with spotting bubbles.

The Intelligent Investor Jason Zweig looks at investors’ beliefs. And Reformed Broker, Joshua M. Brown, guides us on our current choices in today’s market…


Be Realistic about the Stock Market

 

  • According to John Bogle’s valuation model—10 year annualized stock returns = dividend yield + earnings growth + change in P/E ratio—investors should set their stock return expectations at an average of 6.7% going forward
  • But research shows that investors’ return predictions are currently fixed at a rather unrealistic 10.5%
  • This bar is set way higher than is feasible, so be prudent and lower your market expectations—that way any additional returns you gain are a pleasant bonus!

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Retreat or Advance on European Equities?

 

  • European stocks are currently ‘seen’ as stagnating and experienced a crazy 66% drawdown
  • If U.S investors consider only long-term performance it is easy to see why not to invest
  • But over the last few years, from 1970 to 2009 and all thanks to the power of compounding, the S&P 500 compounded at 9.87%, and MSCI Europe at 9.88%
  • So, while investing in Europe was no doubt seen before as “reward-free risk,” it might be worth reconsidering and allocating a small portion of your portfolio outside of the U.S.

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Plenty of Bubble Alarm Bells, but No Pop

 

  • It is very hard to get the timing of bubbles right, though if it were simple to make these predictions, investors wouldn’t buy stocks at inflated prices
  • And the payoff for correctly predicting these events can be quite lucrative, gaining you notoriety and a reputation for being wise, which far outweighs any penalty for being wrong
  • So, while we may need bubble-callers, there needs to be a balance, don’t cry bubble-wolf unless you can back it up with data and insight

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Don’t Be an Ostrich Investor

 

  • Recent surveys show that among investors’ expectations are a long-run average of 8.5%, and projected returns of more than 20% in venture capital
  • This optimism and almost magical expectation of returns can be linked to information avoidance or ‘intentional ignorance’ as it’s known
  • Rather than reading available but unwanted information, investors bury their heads in the sand; so to be successful “worry more about being wrong than right”

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Your Choices in a Market Selling at Record High Valuation

 

  • On the downside, we have a stock market of high valuations, but on the plus side the global economy is recovering, and the Fed delaying normalizing rates mean we have a few choices available
  • Run with the classic buy and hold strategy (despite the negatives), build a cash ark like Warren Buffett or diversify away from overvalued U.S. stocks to other asset classes
  • Other choices include betting against the market, hedging with short positions or assuming a tactical asset allocation approach

Which choice would you pick? Share your comments in the section below

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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.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.