PE Expansion—big deal! Lots of talk about it recently among “our kind of investors.” More than I think it warrants.

The price/earnings ratio or PE is a unit cost—much like the cost of a pound of coffee or a gallon of gas—which allows one to assess a price by comparing it with a typical, historical unit cost. You can certainly tell if a pound of coffee or gallon of gas is higher or lower than normal.

In this case, it’s the cost of one dollar’s-worth of that company’s earnings. And PE expansion is an increase in that cost—and a very good way to illustrate the difference between the intelligent investor and the herd.

The intelligent investor knows what his share of stock is worth because he’s aware of its “normal” PE. We actually quantify this multiple as the mid-point of PEs over a significant historical period. Assuming the company continues to operate satisfactorily and grow its earnings as expected, prices (and therefore PEs) should fluctuate comfortably above and below this midpoint.

When we buy shares in a company, we’re concerned mostly with buying our shares at a reasonable price—at or below that “normal” PE—so our investment will grow as earnings grow going forward. If, however, we find that the shares are selling at a lower-than-normal multiple, we can happily add the benefit of PE expansion to our estimated return and consider it a bonus or a discount!

Want to chat about this? Join me on Take Stock with Ellis Traub, Thursday evening at      7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen.
Dial “1″ to join the conversation.

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Asset allocation is a device used by investors and financial planners to populate a portfolio with an appropriate mix of investment vehicles selected from a smorgasbord of stocks, bonds, and occasionally other investments, each deemed to carry with it a uniquely predictable degree of risk.

Its goal is to optimize the return on the portfolio while taking into account  that investor’s tolerance for risk. And, risk aversion is analyzed using such factors as the point the client has reached in her life cycle, her current and future responsibilities, her earning capacity—as well as the nuances of his or her character and personality.

The assumption is that there is an inverse relationship between risk and return; and, the more aggressive the portfolio—one invested primarily in common stocks—the more risky it is.

Few amateur investors have the experience or know-how to apply asset allocation without the help of a professional. And, considering the view that most amateurs have of “investing,” the expense of such a professional might easily be justified. But….

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Well, it finally happened! Now, every kid in  the U S of A is virtually guaranteed the ability to retire a millionaire!

Do the math!

A kid who starts earning the minimum wage ($7.25) on her fifteenth birthday, does so for 40 hours a week ($290), and puts aside only the normal deduction for Social Security and Medicare (7.65%, or $22.19) each week, for the next 45 years, can be a millionaire at age 60.

Leaving it to compound, it would take an average return of less than 10%—that of the S&P 500—for that investment to produce a million bucks by the time that child reaches age 60!

Because investing our way consistently beats the S&P 500, this means, without ever saving any more than what’s taken from every working person’s paycheck for Social Security and Medicare, a kid who invests as we propose can realize the American Dream and then some, with no risk, and without ever doing anything but flip hamburgers!

And, of course, Congress will handle (read "contribute to") inflation by increasing the minimum wage to compensate for it. What a fantastic country we live in!

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First of all, let me make it clear that I absolutely love the herd!

They are those wonderful gamblers who provide us with most of the bargains we come across when we actually invest. So, while I’ve chosen to dedicate myself to trying to convert as many herd-members as possible to become solid and successful investors, I would hate to think of what this investing arena would be like without them!

Before I say anything, you’ve got to know that I was once very much the herd-member. So I can speak with some authority.

That said, here are ten ways you can tell if someone runs with the herd:

Reminder: Join me on Take Stock with Ellis Traub, Thursday evenings at 7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen. Dial "1" to chat. This week we’re going to talk about "risk," and why there should be none.

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Two of my favorite organizations have just jointly announced a wonderful program to offer investment clubs an opportunity to move up to the next level of convenience and efficiency in executing their trades, and to do so without paying any commissions. For clubs, which frequently trade in small, odd lots, this can substantially cut down the cost of each transaction and increase the return on their shares. And there are other benefits as well.

FolioFN, recently renamed “FolioInvesting,” is a folio brokerage, which means that they have the technical capability to not only execute trades conventionally on the various exchanges, they also can execute window trades, an exciting new means of permitting their clients the benefit of inexpensively trading on a dollar basis rather than a per-share basis.

Read more…

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Today, I think I’ll post something about investing for a change. You’ve been pretty patient about my indulging myself and mouthing off about current events. So I owe you one!

Some years ago, I accepted an invitation by the American Association of Individual Investors (AAII) to participate in their regular feature: “Pro Pix,” a contest that, until I came along, was restricted to professionals who were willing to vie with each other to produce the best performing portfolio over a six-month period. I accepted the challenge with the condition that I be permitted to use the required bi-weekly commentary to tout the virtues of long-term investing and make it clear that a six-month time horizon was not a reasonable basis on which to judge success.

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Yesterday was a big day on Wall Street, wasn’t it! The Dow plummeted more than 186 points (about 2%) and the other indices were hit about as hard.

It’s days like yesterday that make me grateful that I don’t really care what the market does. The newspapers chalked the stampede up to concerns that the consumer-driven economy is not recovering as fast as everyone—read “the herd”—thought it was because people aren’t buying stuff as fast as they need to, to revive the economy!

Read more…

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Did you ever go to a casino with the idea that you’re going to quit when you’re ahead (or when you’ve lost a certain amount, whichever comes first)? So, you set a figure for each limit and you usually hit the loss limit first. Of course, when you hit the win limit, you rationalize: “My luck has been so good, it would be silly to quit now!” Or, “I’m playing with the house’s money, why not keep on rollin’?”

This is precisely the mindset of most who play the stock market. They set a limit on the high price: “I’ll sell it when it reaches $X.” Or, “The price has gone down to $X, I’d better get out before it goes down any more.” And the results usually are the same. The house, not you, is always the winner.?

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Last week’s survey revealed a couple of things. The first of which was that the most popular day and time to roll out a talk show would be on a Thursday, in the early evening. So that’s when it will be. This Thursday evening, the 30th, at 7:30PM. 

Click on Take Stock with Ellis Traub to get you there. If you want to join in the conversation, be sure to listen carefully to the instructions you receive when you call in. The number to call in will be (347) 857-3608. And you don’t even have to be sitting in front of a computer to hear the show or participate. Just call that number any time during the show and listen.

Listen carefully to the instructions you receive when you do call in. You will be given a one or two digit number to dial if you want to join the conversation and you will need that number to participate.

I haven’t settled on a topic yet; but, judging by the chatter out there, it would seem we could start with a discussion of the merits of Technical Analysis, just to keep it non-controversial and sedate.

What would you like to talk about? Let me know what you think.

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The rational price of a stock is the price investors would pay if they were thinking clearly. You can learn all you need to know, and more, in my earlier post that deals with “Rational Value.” So I won’t take the time for that now.

This value is very useful when dealing with good quality companies whose operations have been consistently healthy and whose value has grown predictably. With it, you can tell when the stock of that company is selling at, above, or below a reasonable price. Needless to say, the ability to place a specific and absolute value on a share of stock makes the whole process of long-term investing less of a gamble and more of a business—which is precisely what it ought to be. Read more…

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