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What Goes Up Must Come Down

Top 5 of the Week of February 27

Heading up our Top 5 this week, Aswath Damodaran—Professor of Finance at the Stern School of Business at NYU—shares his musings on dividends. Mike McDonald, writing for Dealbreaker, discusses what role active management still plays in today’s investing world. And The Irrelevant Investor Michael Batnick asks what the expense of stocks will have on future returns.

Morgan Housel, a partner at Collaborative Fund, considers the multiple points of view of an investment writer and investor. And ETF.com’s Larry Swedroe reveals the implications of behavioral finance studies…


Dividend Policies Need to Adapt to Today’s Market

 

  • For many companies, paying out dividends happens with no care and attention, odd, since it is the dividend payout which completes the investing cycle
  • Beginning, by deciding in advance to pay out a fixed sum of money as a dividend is a backward approach, as the decision should surely come after based on residual cash flow
  • Being reluctant to adapt their dysfunctional dividend policy is an outdated stance for the modern company in today’s stock market to take, as it could destroy them

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Take The Right Passive and Active Approach

 

  • Research has demonstrated time and again that passively managed ETFs and index-style mutual funds outperform active management
  • Moving forward, investors will only truly succeed if they have a balance of active and passive strategies in their portfolios
  • And to make active management work for them; they must endure extensive periods of underperformance while waiting for the right moment of turbulence where their chosen stocks may outperform

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What Goes Up Must Come Down

 

  • Stocks have become more expensive, and studies show the more they cost, the average drawdown on them becomes deeper too
  • Whichever valuation metric you use to measure, results in the same thing; expensive markets are no place to make mistakes in
  • Stocks have been rising for the last 30 years, and are pushing the boundaries higher, yet inevitably, there has to be a limit in the future where they peak and come down

How much further can stocks go? Share your comments in the section below

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Two Sides of the Coin

 

  • In the various forms of financial literature out there, there is the view of the investment writer and the view of the investor
  • Investment writers can offer an objective view; recognizing and exposing forms of behavior which can impede successful investing
  • Investors aren’t able to be as detached as this, any advice that is acted on has consequences
  • Neither is more right than the other; seeking out varied and informed opinions is the responsibility of the reader

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Recognizing the Impact of Skewed Behavior

 

  • Studies show that of the many bad behavior traits investors are prone to, we have a weakness for gambling stocks; those with a small chance of massive returns
  • This tendency is linked to “prospect theory,” that we hate the idea of loss more than we enjoy the happiness of possible gain
  • Ending up in those gambling stocks becoming overvalued in the market relative to other stocks—so, avoid gambling stocks altogether

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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.