You know it's time to sell when. . . you are getting stock tips from CFC!

[Harv]

Here is my best understanding about how bubbles work:

1. Money is borrowed against an S&P500 Index Fund to buy more shares.
2. The price of the S&P500 Index Fund goes up, allowing you to buy more shares.
3. Back to 1.

So the price keeps going up because demand is driven by more and more borrowed money. The cycle feeds on itself until the stock prices stop going up. When they stop going up and start going down, then the cycle works in reverse:

1. S&P500 Index Fund shares are sold to pay off money borrowed against the same S&P500 Index Fund shares.
2. The price of the S&P500 Index Fund shares goes down, reducing the value of the collateral and forcing more selling.
3. Back to 1.

The down cycle is faster than the up cycle because the selling is forced and the buying is mostly volunatary.

With that being said - I do not believe the existance of S&P500 Index Funds would cause a bubble on their own because demand is driven by popularity and not necessarily borrowing. The effect of the popularity of S&P500 Index funds would then be to increase the popularity of S&P500 stocks. Therefore, stocks inside the S&P500 will (theoretically) trade at a premium to stocks outside the S&P500. So what happens to a stock's price when it is added to the S&P 500 and the index funds have to buy it?

 

[Antilogic]

Could you explain the logic of (1) and (2) a bit more clearly?

I would agree with the statement that indexed funds (and mutual funds more generally) facilitate investment in the stock market, which could lead to a bubble.

 

[Hygro]

The more people follow the market rather than lead it, the less efficient the market becomes (less crowd insight, more herding). It certainly creates more arbitrage opportunity and adds money to the system.

 

[Whomp]

I was a bit unclear on what you meant by high conviction, but I think I see how you are picking them now. Have you come across good ones that keep their management fees below the 2-2.5% range?



I don't think it works that way; the index fund is a computer-controlled system that aggregates the contributions of individual mutual fund holders and purchases shares the 500 stocks on the index (plus it has a couple extra line items for short-term holdings to make the mechanics work--I just checked the website and it has 503 listed holdings). So any additional purchases of an indexed fund should distribute the money to the companies listed on the index and not cause a bubble in the index fund itself.

I can't help you on the second, but it does sound like an interesting investment opportunity.

SAGYX 0.87% and only 0.23% given up to taxes (per annum over last five years) which for me is more important. Ie 22.93%/year over last five years net of fees and tax vs. 17.38% for SPY through 5/31/14. Both very respectable returns and my manager has minimal overlap with S&P 500. 10 companies make up 50% of the fund.

Equity flows are not even half of bond flows since 2007 so I don't think investors are too excited about equities yet....yet.

 

[civvver]

There have been threads here about money and about economics, but not about investing and speculating in equities or other investments. I thought about starting such a thread at times and have finally gotten around to it!

As I write this, the US equity markets seem to be making new highs nearly every day. The Dow Jones Industrial Average (which really is what I follow) is around 16750 and should cross 17000 into new territory. The economy it represents does not seem to feel like it is entering new territory and I find that disturbing.

Selling everything and going to cash does not seem like a viable option because short-term interest rates are basically zero. The next question is what to buy instead - and it is very difficult to come up with options. I do not consider gold to be one of those options because it is really not an investment - It produces nothing. (It is a hedge.)

So if you are replying to this post, how do you describe your investing or trading style? I like to think I invest like an person. I try to see things from a long term perspective - Where is this company going to be in thirty years? I like to see low price to earnings multiples. 14 seems to be a reasonable number (in the USA) because that represents a 7% earnings yield that should also keep up with inflation. So the theory then is the (reinvested) value after 30 years should be about 8 times after inflation. I also like to see good (3% or 4%) dividends that increase every year.

Today I got to see Intel (INTC) pop up in price. Now that it is near $30 a share everybody wants it, but nobody wanted it when it was at $20 a share. I think the time to buy it was when Jim Cramer said:



-Jim Cramer October 1, 2012

Intel's closing price was 22.76 that day. Everybody's story about Intel was about how they missed on the smartphone revolution.

I hope I did not lose everybody when I mentioned that name! He is very entertaining - but - I also see him as a personification of Mr. Market. He has the same bipolar personality as the market does. When the market is feeling energetic, he is feeling energetic. When the market is feeling depressed, he is feeling depressed. It has been a while since I watched his show, however.

Are there any bargains out there?

Which way do you think we are heading? Where do we finish the year and the decade at?

What do the markets look like outside of the USA?

Who wants to talk about stocks?

I bought intel stock at 22, bought calls on it around 20, made a huge percentage (not a ton of money though, only invested a few grand), just sold all my stock right as it hit 30

Ok now I gotta go read the rest of the thread but I just had to reply to that hilarity.


Alright back, basically I don't think you need to worry about another economic collapse like 2008. Why? Companies are relatively cheap still. PE ratio for s&p is like 19 and for the dow is like 16 I think. That is certainly not high. It's basically neutral. So while the economy might seem kind of bad and household income is still way down, companies are still raking it in. Also the indexes seem to follow the GDP pretty closely and US GDP is going up albeit kind of slow.

Fed bond buying is just about done. But the stock market didn't really react yet. It may not. Because interest rates are still going to be low for a while. Low interest rates really kill bond investment imo because they make bonds return hardly anything and bond funds are even worse cus as soon as rates go up a tiny bit your bond fund is going down cus the bonds they own now earn way below market value.

These articles might be a tad bit old but here's general idea.

http://online.wsj.com/mdc/public/page/2_3021-peyield.html
http://www.investorsfriend.com/djia_valuation.htm

Now here's the thing, why on earth would any young person put money in a bank at 0.00000001% interest when historically the markets ALWAYS beat inflation? Even if you bought the s&p right at the peak in 2007 you'd still today be up like ~25 percent which is over 3% annually. That just kills any interest rate you could've gotten at a bank during that period and beats inflation by quite a bit.

That said individual speculation can kill you. The huge majority of my money is in 401k in mutual funds but all stocks, no bond of commodities crap. It's done great, made like 35% last year, only around 7% this year, but it's chugging along plus it's all tax free right now.

However in the past I have lost a lot of bets buying the wrong call and short options at the wrong times, buying other stocks are the wrong times. For example, I missed ford at $1, bought it around $18 in 2011 and it ended up dropping back to $10. I've since made that money back but it just shows how badly you can miss on a single stock even a blue chipper. Thing is, their underlying numbers were still fine. Still growing, still a good pe ratio but they weren't growing as fast as people wanted.

Same thing happened with apple when it dropped from 700 down to under 500 a couple years ago (since it's split so those prices don't apply now). The company didn't change, people were just used to them beating every single earnings report by a ton. They finally came back down to like normal, impressive growth and earnings, not the ungodly ones people were used to.

On the flip side, netflix, OH MY GOD NETFLIX! This company makes barely any money has a sky high pe ratio and stock keeps going up. Why? People think it's exciting, the technology is cool, it's a great brand. So sometimes investing just defies logic. I was fortunate enough to get on the netflix train for like one stop. I think I bought it circa 2010 around $100 and I remember selling it around $150 within a year. Nice return. Since it's hit over 300, dropped all the way back down to 80 and now it's 440 again lol. Crazy one.

So what advice do I have? None really except mutual funds and indexes are your friend and if you want to speculate don't overthink it. Find a good brand momentum stock and ride it but it's much better to take a small gain than a big loss. Set a target and a loss target and stick to them.

Also covered calls. I have a few stocks I picked and wanted to sell for 10-20% gains. By additionally selling calls against them since I was going to offload the stock anyway I pushed those gains up another 4-5%.

 

[Harv]

Could you explain the logic of (1) and (2) a bit more clearly?

I would agree with the statement that indexed funds (and mutual funds more generally) facilitate investment in the stock market, which could lead to a bubble.

In a normal market, an increasing price increases supply and reduces demand and the price is (in theory) where supply and demand meet. In the situation I was describing, the increase in price is driving the increase in demand when the bubble is expanding, and the decrease in price is driving the increase in supply when the bubble is bursting.

The situation I was trying to describe about the popularity of index funds is that stocks inside the index will command a premium over stocks that are outside the index.

From civver:

That said individual speculation can kill you.

My position on that is if you have to speculate, then set aside a budget for speculation.

Also covered calls.

So picking on JPM again, I can buy the stock at about 55.50 and write the (August 16 55) call options at approximately 1.60. So if JPM closes August 15 over 55.00, then I net a profit of 1.10, or about 2%. If JPM closes August 15 under 55.00, then on Monday, August 18, I am the proud owner of JPM stock that I essentialy paid 53.90.

Earlier I said I thought 53.30 was a good price, so I might bite.

 

[Masada]

I'm in the Antilogic camp of investing. That said, I'm looking at jumping into a more active JR sort of arrangement. After I sort out my house(s)*.

* Because this is the antipodes and we're all crazy into houses. In fairness, I need somewhere to live and purchasing is cheaper than renting (and tax effective).

 

[Harv]

I bought intel stock at 22, bought calls on it around 20, made a huge percentage (not a ton of money though, only invested a few grand), just sold all my stock right as it hit 30

INTC is at 33.50 on an upgrade. The time to buy was way back when Cramer said there is no bull case for Intel, not when the analysts are upgrading the stock. Of course, you had to wait a few years or so get paid.

The next question is if Intel is at a fair price or a rich price. If it is at a rich price and worth selling, the next question is what to buy. I should spend a weekend or so going through the DJIA 30 list or the S&P 500 list and see which ones are still cheap. I have not done this exercise in way too long.

 

[ParkCungHee]

So, here's a tip I'm interested in, and haven't been able to find a simple answer on:

What's the cheapest, simplest way for someone who's never actually bought stock before to do it? Especially in small quantities?

 

[Whomp]

So, here's a tip I'm interested in, and haven't been able to find a simple answer on:



What's the cheapest, simplest way for someone who's never actually bought stock before to do it? Especially in small quantities?

Open a online brokerage that allows free dividend reinvestment.


Sent from my iPad using Tapatalk

 

[Harv]

I forgot to respond.

Who can really say which way the market will go.

This is true. As well as I understand technical analysis, the market will keep going up until it stops going up. Then it will either go sideways or down.

Apparently the stock market is rising to fresh highs all the time because companies keep buying their own stock back.

Borrowing trillions to buy your own stock back.

"Corporations get a double tax advantage if they borrow money" seems a bit perverse in my opinion.

How much of the trade defecit do you suppose is due to corporate profits being shipped and stored overseas? They cannot bring the money home because then it is subject to corporate income tax, so they pay dividends and buy back shares with, as you say, borrowed money.

The only long-term investment question, is what stocks will you buy when all the good companies become mostly privately held again (holding record debt) with the rest owned by central banks sending dividends to Treasury?

It has been a while since I checked, but a lot of companies that have share buyback programs still have increasing share counts. Only a few have decreasing share counts. (Give me a good bit of time and I will try to research the issue.)

 

[Kaitzilla]

Not really sure how overseas profits are calculated vs. the trade deficit.

Ya, that'd be good to know



OH!

If you want to invest in Americans getting fatter, they just invented Spray-able Cake!


Link to video.



Yes, Cake from a can


Link to video.

 

[Whomp]

Most US companies deliver products through foreign affiliates instead of export.

Surprisingly, we haven't had a thread on Secretary Lew's "economic patriotism" comment whereby he feels US companies should stop using tax inversion. Tax inversion is where a US company buys a foreign company to capture that countries lower tax rate. Eaton, Medtronic and recently Abbvie are examples of this.

 

[El_Machinae]

How does that work for the shareholder? How do they get dividend payments out of those foreign profits?

 

[Whomp]

Doesn't matter if it is UK (where we see most inversions) since UK has a treaty with US not to withhold on dividends of UK companies.

The current administration is scrambling to stop this. Thing is if they don't like it then they should change the US tax law.

 

[Harv]

Hmm - I have seen withholding taxes on Canadian companies in taxable accounts. I am curious how tax withholding works if I hold a Canadian company inside a retirement account.

EDIT Disclaimer: I fully understand that this is a question for a tax accountant or attourney and anything from CFC is general information only.

 

[Whomp]

There is withholding from non treaty countries.

Companies in Switzerland have 35% withheld in US.

 

[ParkCungHee]

Open a online brokerage that allows free dividend reinvestment.

I was with you as far as "Open a online."

After that, I'm lost.

 

[Whomp]

Barrons magazine gives their best online brokers as...
Interactive brokers
Trademonster
Place trade and
TD Ameritrade as their top rated companies. Pick one.

 

[Harv]

^^I read Barron's too.