Different investments offer different levels of potential return and market risk.

Large-cap stocks are represented by the total returns of the S&P 500 index. Midcap stocks are represented by a composite of the CRSP 3rd-5th deciles and the S&P 400 index. Small-cap stocks are represented by a composite of the CRSP 6th-10th deciles and the S&P 600 index. Foreign stocks are represented by the total returns of the MSCI EAFE index. Bonds are represented by the total returns of the Barclays U.S. Aggregate Bond index. Cash is represented by a composite of yields on 3-month Treasury bills and the Barclays 3-Month Treasury Bills index.
Based on average 12-month returns from 1980-2009. (CS000168)

Different investments offer different levels of potential return and market risk. International investors are subject to higher taxation and currency risk, as well as less liquidity, compared with domestic investors. Small-cap and midcap stocks are generally subject to greater price fluctuations than large-cap stocks. Unlike stocks and corporate bonds, government T-bills are guaranteed as to principal and interest, although funds that invest in them are not. Past performance is not a guarantee of future results.

http://fc.standardandpoors.com/srl/srl_v35/library_article.jsp?tid=0099

Typically a bull market will accelerate at the beginning and end of the cycle

Keep an Eye on The Investment Clock

Can you beat this stock picker?

Be cyclically aware and responsive.

This means 

• a) monitoring the progress of the economic cycle, using the 3-phase, 7-waypoint cyclical model I developed and have been using in my Cyclical Investingnewsletters for the past 24 years, and 
• b) allocating assets profitably in relation to the current state of the economic cycle, owning those assets supported by economic forces at the time, and avoiding those likely to be depressed by them. 

http://www.cyclical-investing.com/

World Stock Market Capitalization

The chart below, borrowed from Dr. Marc Faber's Market Commentary December 1, 2008, is devastating.  The chart shows a stunning loss of $30 trillion stock market wealth around the world.  By some estimates, combined losses in commodities, stocks, bonds, real estate are greater than $60 trillion.  This is beyond rescue.


http://www.greenfaucet.com/economy/not-your-garden-variety-depression/78457

Relating PE to Stock Price

The concept of High PE, Low PE and average PE of a stock.







http://seekingalpha.com/article/192426-potential-new-long-and-short-ideas

25 Largest Stocks in the World

http://budfox.blogspot.com/2007_10_01_archive.html

Defensive Portfolios

http://www.teensguidetomoney.com/Investing/stock-labels-mostly-unofficial-stock-classifications/

Bull Market Gains (1940 - Current)

The bull market that began on March 9, 2009 has gotten off to the strongest start of any bull market in U.S. stocks since 1940.

http://seekingalpha.com/article/160154-strong-start-for-bull-market-but-investors-are-nervously-eyeing-the-exits

Growing the worth of your Portfolio over the Long Term

This is what you should aim for as an investor over the long run.

Keep this vision in sight, always.

Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble

Watch Out: The Cyclical Stocks Are Trading At An Extreme, And This Could Portend Trouble
Eddy Elfenbein | Apr. 21, 2010, 5:31 PM

One of the quick-and-dirty metrics I like to look at is the Morgan Stanley Cyclical Index (^CYC) divided by the S&P 500 (^SPX). The Cyclical Index is composed on stocks that are closely tied to the economic cyclical. This means industries like autos, chemicals and mining.

When we divided these two indexes, we can tell if cyclicals are outperforming or underperforming. The thing about cyclicals is that they, well, move in cycles. Check out the chart below:

As you can see, there’s historically been a consistent up-and-down wave that averages a few years. This usually, but not always, corresponds with how well the economy is doing. Investors favor cyclicals during the good times, and flee them during the rough patches.

I urge you not to place too much faith in this metric, but I want to show you that the market does, in fact, move in cycles. These are powerful and once the market is locked it, the cycle can last for some time. Therefore it’s important for us to understand where we are in a cycle.

On top of that, the cycle has a double-whammy effect since the market generally does much better when cyclicals are outperforming, meaning they’re outperforming a market that’s already doing well (note the bottoms in 1982, 1990 and March 2009).

You can really see how the last 18 months have dramatically impacted cyclicals. The ratio held up fairly well until September 17, 2009. Within six months, that ratio dropped from 0.7 to 0.42. The Cyclical Index dropped from 871 on September 19 to 283 by March 9. Youch, that’s a staggering loss so you can see that the non-cyclicals provided some shelter from the storm (though not as good as cash).

But once the ratio hit bottom, cyclicals put on an explosive rally. Although the Cyclical Index is still well-below its high from 2007, the ratio has surpassed its high and has gone on to make several all-time highs. That’s about the shortest cycle I’ve ever seen. In fact, it was more like a panic mini-cycle. Last Thursday (pre-Fab), the ratio made its most recent all-time high of 0.786.

Picking cycle peaks is a tricky business and I won’t attempt to do so now, but I’m on the lookout for a harsh drop off in the Cyclical Ratio. Once it gets going, it could down, down, down for a few years.


Read more: http://www.businessinsider.com/morgan-stanleys-cyclical-index-is-much-higher-than-normal-2010-4#ixzz0uHxXiKpl

Importance of Earnings Growth

Cyclicals versus Non-Cyclicals

The Value of Stock

The Value of Stock
A stock's value can change at any moment, depending on market conditions, investor perceptions, or a host of other issues.

A stock doesn't have a fixed price, or value. When investors are buying the stock, the price tends to go up. But if they think the company's outlook is poor, or if the overall market is weak, they either don't invest or sell shares they already own. Then the price of the stock tends to fall.

But price isn't only one way to measure a stock's value. Return on investment — the amount you earn by owning the stock — is another. To assess return, you add any increase or decrease in price from the time of purchase and any dividends the stock has paid over that time. Then you divide by the amount you invested to find percent return. As a final step, you can find the annualized return by dividing the return by the number of years you owned the stock.

THE BLUES AT BIGCO.
The peaks and valleys in the price of a stock dramatically illustrate how value changes. 

Year 2 Usually a stock climbs in price when the overall stock market is strong, the company's products or services are in demand, and its earnings are rising. When the three factors occur together, the increase can be rapid.

Year 4 A stock's price may change dramatically within a few days, or a pattern of gradual gains or losses may continue over a month or a year. A price is most likely to drop when the market is weak, a competitor introduces a new product, or earnings slow or decline.

Year 5 Nothing ultimately dictates the highest price a stock can sell for. As long as people are willing to pay more for it, it will climb in value. But when investors unload shares or the market falls, prices can drop rapidly.

Years 7 to 10 Following a price collapse, a stock can recoup its value or continue to decline, depending on its internal strength and what the markets are doing. In this example, the price moved up and down for several years at about $100, the level it had reached several years before.

Year 12 If a company is out of favor with its shareholders, has serious management problems, or is losing ground to competitors, its value can collapse quickly even if the rest of the market is highly valued. That's what happened here.

Year 14 However, strong companies can cope with dramatic loss of value and can rebound if internal changes and external conditions create the right environment and investors respond with renewed interest.

CYCLICAL STOCKS 
All stocks don't act alike. One difference is how closely a company's business is tied to the condition of the economy. Cyclical stocks are shares of companies that respond predictably to the economy's ups and downs. When things slow down, their earnings typically fall, and so does their stock price. But when the economy recovers, earnings rise and the stock price goes up. Airline and hotel stocks are typically cyclical: People tend to cut back on travel when the economy is slow. In contrast, stock prices for companies that provide necessary services and staples, such as food and utilities, tend to stay fairly stable.

Stocks that pay dividends regularly are known as INCOME STOCKS,  while those that pay little or no dividend while reinvesting their profit are known as  GROWTH STOCKS

GETTING THE TIMING RIGHT 
The trick to making money, of course, is to buy a stock before others want it and sell before they decide to unload. Getting the timing right means you have to pay attention to:

• The rate at which the company's earnings are growing
• Competitiveness of its products or services
• The availability of new markets
• Management strengths and weaknesses
• The overall economic environment in which the company operates

BETTING WITH THE ODDS 
Investing may be a bit of a gamble, but it's not like betting on horses. A long shot can always win the race even if everyone bets the favorite. In the stock market, the betting itself influences the outcome. If lots of investors bet on Atlas stock, Atlas's price will go up. The stock becomes more valuable because investors want it. The reverse is also true: If investors sell Zenon stock, it will fall in value. The more it falls, the more investors will sell. 

If you're buying stocks for the quarterly income, you can figure out the dividend yield — the percentage of purchase price you get back through dividends each year. For example, if you buy stock for $100 a share and receive $2 per share, the stock has a dividend yield of 2%. But if you get $2 per share on stock you buy for $50 a share, your yield would be 4% ($2 ÷ $50 = 0.04, or 4%).
Purchase Price	Annual Dividend	Yield
$100	$2	2%
$ 50	$2	4%

MAKING MONEY WITH STOCKS You may make money with stocks by selling your shares for more than you paid for them or by collecting dividends on the stocks — or both.
The profit you make on the sale of stock is known as a capital gain. Of course, it doesn't all go into your pocket. You owe taxes on the gain as well as a commission on the sale, but if you've owned the stock for more than a year, it's a long-term gain. That means you pay the tax at a lower rate — sometimes substantially lower — than you pay on your earned income or on interest income.
Dividends are the portion of the company's profit paid out to its shareholders. A company's board of directors decides how large a dividend the company will pay, or whether it will pay one at all. Typically, large, mature companies pay dividends, while smaller ones tend to reinvest their profits to fund growth. From your perspective, one of the advantages of dividend income is that through 2010 qualified dividends are taxed at your long-term capital gains rate — 15% if your marginal tax rate is 25% or higher and 0% if it's 10% or 15%.

Most dividends paid by US corporations are qualified, as are dividends paid by a number of international firms. So is most dividend income that mutual funds pass along to you. But dividends from real estate investment trusts (REITs) and mutual savings banks are not qualified. You should check the year-end 1099 statements you receive from financial institutions and discuss which income qualifies for the lower rate with your tax adviser.

https://online.citibank.com/US/JRS/pandt/article.do?ID=LBP8

Life Cycle of a Growth Stock

A comeback for value investing

Though growth stocks have made the most of the bull market momentum, value stocks did much better in containing falls during the inevitable reversal. The result: a better long-term record.

http://www.thehindubusinessline.com/iw/2009/04/26/stories/2009042650500700.htm

Growth vs. value: annualized range of returns for the two strategies

Sales Growth. We seek to grow sales organically by building market share

Sales Growth. We seek to grow sales organically by building market share

World Economies GDP per Capita

Core Value Equity - Security Selection Process

Protected, Secure, Balanced and Growth Funds.

Tabulating the Gain/Loss in Your Portfolio

Income Statement Format with EBIT and EBITDA

What to Invest?

Valuation Measures

http://rcrawford.wordpress.com/biovail-valuation-bvf/

Economic Cycle versus Stock Market Cycle

Cumulative Profit from Trading

How to Get Rich Trading Penny Stocks

An example of Asset Allocation of a Portfolio

Value Investing: Reward / Risk Ratio

Is it cheap enough? Is its balance sheet strong enough?

Reversion Beyond the Mean: 20 Years Trailing P/Es for S&P 500

Valuation Relative to Bond Market

Equities in general and value spreads in particular remain attractive, and history would suggest that we are in the early innings of the value cycle. The next leg up is likely to be driven by earnings increases in the context of a modest economic recovery.

EQUITIES STILL UNDERVALUED; VALUATION SPREADS ATTRACTIVE

Broadly speaking, equities continue to appear undervalued globally, although certainly not at the generation-low levels we reached back in March. Our dividend discount model for the U.S. equity market - Figure 3 - indicates that we are still at a 29% discount to fair value. This model is sensitive to the current interest rate on treasuries. Interest rates would have to rise by over 200 basis points to 5.75% (a level not seen since 2000) for our model to indicate equities are fairly valued.

In addition, value spreads continue to be attractive. Figure 4 shows the spread between the valuation of the market's cheapest quintile and the market average for the U.S. Figure 5 shows that the price-to-book of the MSCI EAFE cheapest quintile is also attractive. The combination of broad market undervaluation and attractive value spreads give us reason to believe that there is still a significant opportunity for value to continue its run of outperformance.

http://www.pzena.com/3q-investment-analysis

Is Value Investing Dead? Not on Your Life!

Is Value Investing Dead? Not on Your Life!

“The Death of Buy and Hold” flashes on the screen on CNBC…

Normally, seeing editorialized headlines touting the end for value investors on financial TV wouldn’t be a shock – but that latest television segment is just the last nail in the coffin for an investing strategy that’s been taking a lot of heat in the past year.

“I just don’t think that [buy and hold] is a wealth building strategy any longer,” says a major financial blogger. “These days, value as an investing strategy is dead,” says another.

Clearly buy and hold bashing is the cool thing to do in 2009. But is it true? Are buy and hold and value investors dinosaurs who’ll be relegated to losses this year? Not a chance.

The anti-value crowd’s favorite argument is that value investing poster boys like Bill Miller and Warren Buffett had horrendous returns in 2008, so their strategies clearly can’t work that well.

And just look at the S&P 500 – if you invested money in the market 12 years ago, you’d be sitting on 0% returns right now. So much for long-term investing meaning gains.

But thankfully for investors, the value naysayers are dead wrong when it comes to the virtues of value investing. Before they run a buy and hold obituary, there are some things that we should clear up.

Where Were the Value Investors in 2007?

To say that value didn’t work for investors in 2008 means that investors had to take a value approach in the first place in 2007 and before. Just how valuable were stocks before the bottom fell out of the market? Here’s a look at historical P/Es of the S&P 500 every quarter since 1936:

The consensus is generally that the average P/E of the S&P 500 is around 10; it’s not. Since 1936, the S&P 500 has averaged 15.8.

But in late 2008 the S&P’s price to earnings ratio had risen to the mid 20s. In fact, they hadn’t touched that 15.8 average in 13 years. For the first two quarters of 2008 before stocks went into freefall, the S&P’s P/E ratio averaged just over 23… 45.5% higher than the historic average.

Now, there are a lot of reasons why the market should have a higher P/E than it has in the past – constituent companies have changed pretty dramatically in the last 73 years, for starters – but that still doesn’t explain why companies delivered investors with 39% less earnings bang for their buck between 2005 and 2008.

True, earnings aren’t everything, but companies weren’t offering more in terms of assets either. Price-to-book ratios for the S&P 500 more or less grew along with P/Es over this period (as explained in this article by Todd Sullivan), and outpaced their historic average by almost 30% at the outset of 2008.

The analysis may be quick and dirty, but the data suggests that the market was overvalued coming into last year.

Patience is a Virtue

Simply put, a buy and hold strategy consists of two parts: buy, and hold; it’s that second part that some people just don’t seem to get right now.

Investing for the long-term involves holding onto stocks for a while, and while the past 12 months have been painful for all investors, buy and hold as a strategy is going to take longer than a year to dispel.

The irony is that it’s the people who don’t have the patience to ride this storm out that are sounding the death knell for buy and hold investing.

That stocks haven’t made any money from a decade ago is a potentially damning fact for buy and hold investors, but that’s really not the case. Taking for granted that the S&P was overvalued for the majority of the past 10 years, and since large caps are part of the S&P 500, one place where value still might exist is the small-cap space.

And indeed, according to Morningstar, the average small-cap value fund produced annualized returns of more than 5% over the last 10 years. But that doesn’t prove that long-term value works in and of itself.

What’s more compelling is Warren Buffett’s Berkshire Hathaway (BRK.A). If there was ever a living example of value investing at work, the Oracle of Omaha is it. While shorter-term returns are almost as bad as the rest of the market, long-term investors have won out with the company’s stock – it has returned an average of 11% annually since 1996.

Emerging With Gains in the “New” Stock Market

That’s right… it’s still possible to make money in this “new” market as a buy and hold/value investor.

And I’m happy to speak firsthand about it; in the first quarter of 2009 the Rhino Stock Report’s subscribers booked average gains of 24% while the market was down almost 12%.

How? Well, let’s start by investing with these 4 axioms of value investing for this new market in mind:

1. The Business Disconnect 
Right now there’s a huge disconnect between stocks and their underlying businesses. Solid companies that make money on a constant basis are trading forless than income. That’s insane.

As long as investors want to push down share prices of fundamentally good stocks we’ll happily buy them at the discount.

2. Wall Street is Reactionary
The stock market can’t help but be reactionary. Geithner does that, then the stock market does this. Job losses were this bad, so the stock market does that. It’s not the fact that the stock market is reactionary that’s bad for investors, it’s the fact that people refuse to acknowledge how predictable it is.

That predictability has been making skilled traders a mint in this market… and it’s been good to value investors who know when to suspend buy and hold in exchange for cash and carry.

3. Fundamentals Will Continue to Rule Technicals
Yes, it’s simplistic, but you can’t keep a good stock down. Fundamentals move the market, and as long as good stocks continue to do well returns will too. It doesn’t matter that the charts look ominous if a company announces stellar earnings or lifts its dividend. JCOM is a good example of that.

Remember, though, that this rule works in reverse too.

4. Selectivity is the Name of the Game
Even when the S&P’s overvalued, it doesn’t mean that each of its constituent stocks are, and it certainly doesn’t mean that good value plays don’t exist in the rest of the market. The trick is discerning which stocks should make your cut.

While that may seem like a simple suggestion, recent history suggests that it’s one that’s been overruled for a while now.

Value’s Back in a Big Way in 2009

To be clear, value isn’t the only way to make money in the stock market… far from it. There are scores of effective investment strategies out there, and there will be for as long as the financial markets exist. Still, value investing will be living strong for a long time to come.

While I’m sure that this article will elicit no shortage of dissenting opinions, the main takeaway is this: the failures of value investing aren’t to blame for the financial disaster that befell us in 2008, but the misapplication of value investing is partly responsible for the perma-bull attitude that lead up to it.

Here’s to more disciplined investing in 2009.

http://www.rhinostocks.com/2009/04/is-value-investing-dead-not-on-your-life/

Historical P/E of the S&P 500. Where Were the Value Investors in 2007?

Where Were the Value Investors in 2007?

To say that value didn’t work for investors in 2008 means that investors had to take a value approach in the first place in 2007 and before. Just how valuable were stocks before the bottom fell out of the market? Here’s a look at historical P/Es of the S&P 500 every quarter since 1936:

The consensus is generally that the average P/E of the S&P 500 is around 10; it’s not. Since 1936, the S&P 500 has averaged 15.8.

But in late 2008 the S&P’s price to earnings ratio had risen to the mid 20s. In fact, they hadn’t touched that 15.8 average in 13 years. For the first two quarters of 2008 before stocks went into freefall, the S&P’s P/E ratio averaged just over 23… 45.5% higher than the historic average.

http://www.rhinostocks.com/2009/04/is-value-investing-dead-not-on-your-life/

Value Investing is all about finding market inefficiencies.

Below is a chart depicting Best Buy's annual return on invested capital (ROIC) contrasted with its stock price:

While ROIC has been predictable and consistently range bound for the last several years, the stock price has been anything but. It seems hard to believe that the market is efficiently pricing this security when its price can fluctuate wildly in relatively short periods of time while the company itself generates predictable earnings on capital. For example, if the company is worth X amount in early 2000, how does it become worth just one quarter of this amount 3 months later, and then three times this amount six months after that?

http://www.dividendgrowthinvestor.com/2009/04/value-investing-is-all-about-finding.html

A Decade of Investing in a Stock

The Reason for Investing Long Term

The value investing style has gotten back on its feet after trailing growth.