Are You an Active Investor in the Stock Market?

[Greg Bernhardt]

Is an actuarial science degree the degree most beneficial to an investor? Or is that completely wrong?

I would absolutely think it would be helpful, that and/or a general economics degree.

btw, what a terrible day, ouch! everyone was hoping for a .50 cut on the discount

 

[chroot]

Terrible day, unless you were hedged or mostly short (as I was). One of my shorts, DRYS, made me 8.5% today. Overall, my day ended pretty much flat, but if there's a dead cat bounce tomorrow I'll be in great shape.

- Warren

 

[Greg Bernhardt]

another disgusting market day, blaaaaah

 

[chroot]

Yup, today was a pretty wretched day. I was mostly long this time (having inexplicably closed my short position on DRYS a bit too early... blah), and lost some money. On the other hand, I picked up some SSO and some AAPL cheap, so hopefully tomorrow will be a brighter day. Buy into weakness, sell into strength.

- Warren

 

[Greg Bernhardt]

How is everyone doing now? After my main pick SDTH dropped 30%, it had good earnings in in three days bounced back 15%.

 

[Astronuc]

Don't you just wish that you had bought Rohm and Haas yesterday.

It jumped ~$29/share after Dow offered to buy it for $15 billion.

Dow Chemical to buy Rohm & Haas for $15 billion


Some other news

Paulson: Rules governing financial markets are 'outdated'

Bernanke asks for new law to help close troubled brokerages, and says that Treasury dept. should lead in closing troubled brokerages.

Bernanke: Investment firms need stronger federal oversight

Fannie Mae, Freddie Mac shares continue to plunge

The stocks have been under pressure this week over fears the companies will need to raise capital due to a new accounting rule, even though analysts say that need may not materialize. Fears were further stoked after a St. Louis Fed president said Congress should recognize that the government-sponsored mortgage companies are insolvent after losses.

But a regulator said earlier this week the companies have adequate levels of capital, and the Treasury secretary reiterated that Thursday.

Shares of Fannie Mae skidded more than 13% on Wednesday while Freddie Mac shares plunged more than 23%. Over the past 12 months, shares of Fannie Mae are down about 80%. Shares of Freddie Mac have fallen close to 90% over the past year.

Analysts say the government wouldn't let the companies go under due to their central role in the mortgage market. Between them they own or guarantee about $5 trillion of mortgages, nearly half of all U.S. home-mortgage debt outstanding.

 

[Astronuc]

If you like to gamble - consider Lehman Brothers, Fannie Mae and Freddie Mac. If they don't go insolvent or get bought at a discount, their shares should rebound.

Lehman, bank shares caught in mortgage storm
Worries over health of government-sponsored mortgage giants swamp sector

Lehman was down 20% this morning, and they have recovered about 5%.

Fannie Mae is off about 22% from yesterday, and Freddie Mac abou 10%. If they survive, perhaps they'll rebound next week, or the week after, or . . . .

Apparently some options expert calls Fannie, Freddie shares 'worthless'

Do you fell lucky?



The DOW 30 industrials his a 2-yr low

"Freddie and Fannie are going under the waves and GE got us ready for what we're going to be listening to: in-line number, lackluster guidance. Other than with financials next week, where we get no guidance and have no idea where we're going," said Art Hogan, chief market strategist at Jefferies & Co.

AIG dropped about 7% in the morning and has rebounded a bit down only 4%.

The market still has time to recover today. If not, there may be some bargain hunters jumping in on Monday.

 

[sketchtrack]

My broker has me invested in Duke Energy, they are down real low, but expected to make a comeback.

 

[BWV]

Given that stockpicking is a zero sum game relative to index returns (before transaction costs - after costs it is negative sum), is it simply the cognitive bias of overconfidence the reason why you all buy individual stocks? Or is it for the entertainment value

Probably a mixture of both for me

 

[Astronuc]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

 

[BWV]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

 

[Astronuc]

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

In 2 days - essentially none. This is an example of get in and get out. Such opportunities do not happen very often.

 

[BWV]

It was only an opportunity in hindsight, much like yesterday's lottery draw

One could not have predicted the rally in the stock, nor can you still be certain that the equity is safe from a recapitalization

 

[Astronuc]

It was only an opportunity in hindsight, much like yesterday's lottery draw

One could not have predicted the rally in the stock, nor can you still be certain that the equity is safe from a recapitalization

I had a wait and see view. I expected flat or drifting a little lower, but I'm not surprised by the increase. Short-term bargain hunters who take advantage of the Fed/Treasury moves.

 

[Astronuc]

MidAmerican Energy inks deal to buy Constellation for $4.7B in cash-and-stock agreement
http://biz.yahoo.com/ap/080918/constellation_energy_buyout.html

DES MOINES, Iowa (AP) -- Natural gas and electric company MidAmerican Energy Holdings Co. said Thursday it will buy Constellation Energy Group Inc. for $4.7 billion in a cash-and-stock deal.

Des Moines, Iowa-based MidAmerican will pay $26.50 per share for the Baltimore-based utility. The two companies plan to sign a definitive merger agreement by the end of business Friday.

After the deal is signed, Constellation will issue $1 billion in preferred equity to MidAmerican, the companies said.

CEG's stock was down 60% this week over concerns with liquidity. I imagine stock will recover somewhat. It will be interesting to see what MidAmerica does with the nuclear plants that CEG owns/operates.

 

[mheslep]

If one had bought Fannie Mae or Freddie Mac on Tuesday at their bottom, one would have realized a 50% gain in the last two days. Both gained about 30% yesterday and are up about 20% this morning.

Shares of Fannie Mae (FNM:Fannie Mae - Last: 11.90+2.65+28.65%, 9:52am 07/17/2008) finished at $9.20, up 30%, while Freddie's (FRE:Freddie Mac - Last: 8.33+1.50+21.96%, 9:52am 07/17/2008) shares gained 31% to close at $6.90.

An investment of $70,000 in FNM by the close of Tuesday would have netted one about $45,000 this morning. Nice little return.

But what was (and still is) the risk of the equity of either stock being wiped out or significantly diluted in a recapitalization? Both companies are insolvent, with leverage ratios of 80-1 or more

Impressively prescient and wise post BWV. FNM selling today at $0.54.

 

[CPL.Luke]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

 

[BWV]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

the data from the 20th century, using other markets beside just the US, is 4-6% real.

 

[mheslep]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

the data from the 20th century, using other markets beside just the US, is 4-6% real.

That's what I see reported, but I can't lay hands quickly on a running average calculation. Does someone have a source?

 

[russ_watters]

keep in mind that the average investor gets a 4.5% return yeaeer over year, the S&P500 gts 11% averaged over the past 30 years.

when it comes to the dot com bubble people who bought in in the midst of it lost big time, the people who bought 2 years before that did well.

I generally assume that averaged out the entire stock market should perform similarly to GDP and when it isn'tcorrelated that their might be a problem.

Keep in mind that in order to be listed in the NYSE, much less be in an index such as the S&P 500, a company has to be of a certain size and stability. There is an awful lot of failure in small businesses and those failures are never seen in the stock market - only the successful ones ever survive long enough and grow big enough to be listed. So you should expect that the stock market will perform significantly better than the GDP.

 

[BWV]

That's what I see reported, but I can't lay hands quickly on a running average calculation. Does someone have a source?

Look at Dimson's work on SSRN.com

for example:

We address the tendency of many investors to overestimate the rewards and underestimate the risks of investing in stocks over the long term - that is, investors' irrational optimism. In particular, we examine the widely held belief that stocks are a "safe" investment for the long run. The probability of experiencing a real loss on equities depends on the expected real return and standard deviation of stocks. Judgments about the future magnitude of these two parameters typically involve extrapolating from history. We use a global database of real equity returns from 16 countries during the 103-year period from 1900 through 2002 to confront the optimism of investors with the reality of history.

Since 1900, the worldwide real return on equities averaged close to 5 percent a year (before costs, fees, and taxes). This is appreciably lower than is frequently quoted from historical averages, a difference that arises because we use a longer time frame than other studies and adopt a global focus. Prior views on the long-run safety of equities have been overly influenced by the experience of the United States. Furthermore, the US evidence that, over the long haul, stocks have beaten inflation over all 20-year periods is based on relatively few nonoverlapping observations and is hence subject to large sampling error.

To counteract this dependency on projections of the US experience, we examine the histories of other countries. We find only three non-US equity markets (with a fourth on the borderline) that never experienced a shortfall in real returns over a 20-year period. The worst 20-year real returns of 11 countries were negative. Historically, in 6 of the 16 countries, investors would need to have waited more than 50 years to be assured of a positive return.

We also analyze the future shortfall risk of an equity portfolio. The base case for the projections is a worldwide historical volatility level of 20 percent and mean real return of 5 percent, and we also examine a lower return of 4 percent. The projected shortfall risk exceeds the historical risk of shortfall - partly because of the lower assumed real returns, and partly because, even though volatility was projected to be the same as in the past, the shortfall analysis focuses on the full range of possible future returns rather than a single historical outcome. By construction, historical returns converged on long-term realized performance, but the forward-looking analysis shows that there is always risk from investing in volatile securities.

Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed superior performance over the investment horizon of most investors. Furthermore, their prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981

 

[BWV]

Keep in mind that in order to be listed in the NYSE, much less be in an index such as the S&P 500, a company has to be of a certain size and stability. There is an awful lot of failure in small businesses and those failures are never seen in the stock market - only the successful ones ever survive long enough and grow big enough to be listed. So you should expect that the stock market will perform significantly better than the GDP.

Actually the stocks in the S&P should grow at a slower rate than GDP, because the faster growth comes from smaller startups and it is impossible for them to grow at a higher rate than GDP over the long run. However stocks are a present value of future earnings, not just the growth. A company that had 0% real earnings growth could in theory still deliver 10% returns to shareholders depending on how the market priced the stock

 

[CRGreathouse]

Actually the stocks in the S&P should grow at a slower rate than GDP, because the faster growth comes from smaller startups and it is impossible for them to grow at a higher rate than GDP over the long run. However stocks are a present value of future earnings, not just the growth. A company that had 0% real earnings growth could in theory still deliver 10% returns to shareholders depending on how the market priced the stock

Surviving small companies have high returns, but many small companies don't survive. The historical averages I've seen support the idea that return on small companies (surviving and otherwise) is similar to that at large companies, within a percentage point or so. Admittedly, the last 20 years have seen excellent performance for small-cap stocks, but in the long run that seems the exception.

 

[BWV]

Surviving small companies have high returns, but many small companies don't survive. The historical averages I've seen support the idea that return on small companies (surviving and otherwise) is similar to that at large companies, within a percentage point or so. Admittedly, the last 20 years have seen excellent performance for small-cap stocks, but in the long run that seems the exception.

You cannot directly comparison between GDP growth and stock price returns. GDP is equivalent to revenue and there is no valuation mechanism at play. There is value in companies with stagnant or declining earnings or revenue growth, and depending on how they are priced, a stock with declining earnings can outperform a stock with 30% annual earnings growth. The point here is that small companies - not neccessarily public ones - account for the bulk of GDP growth and that the revenue growth rates of larger companies will converge to nominal GDP. Something like over 50% of current GDP comes from small businesses. That many fail does not alter the fact that they account for most of the marginal GDP growth. A startup that goes from $1 to $10 million in sales over a couple of years & then fails makes a positive contribution to GDP growth.

On the separate issue of small-cap publicly traded stocks, a wide array of literature in financial economics has documented the fact that they have delivered abnormally high returns (above that which could be simply accounted for by their higher volatility) - to the point where it is referred to as an "anomaly". The main competing theories on this are A) that it is a mispricing that has now been discovered and therefore less likely to hold going forward or B) there are other risk factors not accounted for in a simple CAPM beta calculation.

 

[mheslep]

You cannot directly comparison between GDP growth and stock price returns. GDP is equivalent to revenue and there is no valuation mechanism at play. ...

Eh? Econ 101, GDP : The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. In the case of a companies revenue stream, that certainly reflects valuation in the price the consumers are willing the pay.

 

[BWV]

Eh? Econ 101, GDP : The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. In the case of a companies revenue stream, that certainly reflects valuation in the price the consumers are willing the pay.

By valuation I mean the discounting mechanism in stock prices. The value of a stock at time t is what the market thinks is the present value of its future cash flows at some discount rate. The price change to t+1 involves some change in expectations of future cash flows and/or the discount rate. GDP is analogous to the company's revenue on its annual income statement, not the change in stock price.

 

[OmCheeto]

Today was the very first time I have ever invested in the stock market.

I lost $7

But my broker says it's a long term deal. Be patient, he said.

I'm not one to dwell on finances, so could someone give me a poke in about 8 years so I'll remember to check my account balance?

Thanks!

 

[Office_Shredder]

I lost $7

Go to cash

This is not intended to be sound advice. I just like saying 'go to cash'

 

[russ_watters]

Today was the very first time I have ever invested in the stock market.

I lost $7

Does that include brokerage fees?

But my broker says it's a long term deal. Be patient, he said.

You have a broker?? You do know why they call them "brokers", right? Do yourself a favor and do your buying and selling yourself.

 

[OmCheeto]

Does that include brokerage fees?

It's an introductory offer. There are no brokerage fees for the first couple of months.

You have a broker??

Actually, he's a commodities broker that overheard me discussing the market one day.
He knows I have little money to invest so he pointed me to a company that can get me invested for less than I spend on beer in week.

You do know why they call them "brokers", right?

Do yourself a favor and do your buying and selling yourself.

The company does that for me. They steal $100 from my checking account on the first Tuesday of each month. They have 3 or 4 categories for people like me to invest in. High risk, medium risk, low risk, and too old to invest.

Since it's just play money for me, I went for high risk.

I've only 8 years till I retire, and my retirement package should be safe, so I'm just feeding the machine for fun.

The most I can lose is $100/mo*12mo/yr*8yr = $9600.

About 2 years worth of bar tabs for me.