Weekend Reading 9-7-14

A month of 80 hour weeks at my real job has made posts on here non-existent. Work remains busy, but hopefully here is to getting back on track.


Lots of amazing posts and research over the past month, here are some of my top reads. Topics include: Determining how long this bull market can last, Asset Allocation and solid blogs to add to your reading list.


On the Current State of Our Bull Market

JP Morgan’s Updated Guide to the Markets 3Q 2014



I always enjoying paging through JP Morgan’s Guide to the Markets when it is available. It collects a ton of information and allows investors to take a step back and look at the markets with a 30,000 ft. view.

The Bull market is 5 years old, leading many to forecast impending doom just around the corner. After all, how could things “possibly go any higher”?


I mentioned JP Morgan’s guide is great for giving investors some views of the bigger picture.


We see that our raging bull market has led us to a market which is surprisingly….normal.

JPM market valuation




Why is the Schiller CAPE so High? – Philosophical Economics



The winner for the indicator that I am most tired of seeing has to belong to the Shiller CAPE, which is basically an averaged P/E reading of the market over the last 10 years.


Currently, the CAPE is at about 26.5, above historical averages:

schiller CAPE


And this has led to a multitude of writers calling for stocks to drop, including Schiller himself:



Mr. Livermore, who runs philosophical economics blog (which has quickly become one of my favorites) takes an in-depth look at Schiller’s CAPE indicator, and breaks down some possible explanations for its above average readings.


“Not surprisingly, the real EPS quadrupling that began in 1992, and that that has caused the Shiller CAPE to substantially increase in value relative to the TTM P/E, has primarily been driven by the profit margin upshift that started in that year and that continues to this day.  In much the same way, the zero real EPS growth that investors suffered from 1962 to 1992, and that caused the market of the 1980s and early 1990s to look cheaper on a Shiller CAPE basis than on a TTM P/E basis, was driven primarily by the profit margin downshift that took place during the period.”


I don’t highlight this post by Mr. Livermore to try and poke fun at the bears, who have been wrong for a while now. In fact, if you make it to the end of his post, he says he is moderately bearish on longer term returns for the stock market.

I highlight his work because he does amazing analysis on topics that people need to understand before using those topics to decide their financial fate. If you sell your stocks solely because CAPE hits 25, you deserve to underperform the market.



On Asset Allocation and the “Active vs Passive Debate”


I Really Want to Crush the Efficient Market Hypothesis – Prag Cap



Cullen Roche was one of the first I saw to take up this viewpoint of the active vs. passive debate, and I like it.


I am probably guilty as anyone of preaching the benefits of a low cost, passive approach to investing without take a step back to look at my assumptions of a “buy and hold” strategy.

Even buying a simple lifecycle fund and holding it for 40 years makes more decisions that you probably assume it does, and that naivety  will affect your investment results in the future.


I think Mr. Roche sums it up best in a comment he left on this post:


“It’s not “us” vs “them”. I am an advocate of low fee indexing. I just don’t think you should go into the asset allocation process by thinking that you’re being passive or not making forecasts about the future. I think you should go into the process constructing a portfolio based on a sound understanding of future probable outcomes, a sound understanding of how certain instruments apply to the capital structure and do so in a fee and tax efficient manner. All of this requires forward looking approaches and “asset picking”. We are all “asset pickers” no matter how “active” we are after the initial investment.”




Constructing the Perfect Portfolio

http://www.millennialinvest.com/blog/2014/8/4/the-perfect-portfolio then read, http://www.millennialinvest.com/blog/2014/8/6/the-putrid-portfolio


Another blog I have begun to read frequently is Mr. O’Shaughnessy’s Millennial Invest blog. His first post, “The Perfect Portfolio” looks into how the market’s top performing stocks looked the year prior. Do cheap “value” stocks outperform? Or do expensive “growth” stocks outperform? It turns out, it’s pretty random:

stock valuations year before



So what does this mean to do-it-yourself investors? Does it mean “value” investors have it wrong?


Not so fast, Mr. O’Shaughnessy looks into the issue further in his second post, where he finds results much more important. Next he looks at the market’s worst performers and see how they started out a year prior to becoming the market’s worst.


expensive stock valuations year before


Nearly one third of the markets worst performers start the year at expensive valuations (valuations based on metrics such as P/E, p/sales, ebitda to enterprise value, shareholder yield, and free cash flow to enterprise value.)


So how should investors use this information?

It turns out value investing may be good for something very important, even if it can’t find you tomorrow’s biggest winners. It can help keep you out of tomorrow’s biggest losers.

It reminds me a lot of Buffett’s strategy. Buffett gladly admits himself that by limiting himself to reasonably priced stocks he will miss some big winners. But, he also misses some big losers, which it turns out may be more important.

Buffett also says; “It is not necessary to do extraordinary things to get extraordinary results”


Want to look into this idea more? — see our post “Why a -7.5% return Was One of Buffett’s ‘Best Periods in History’”.


On What you Should be Reading

Read ‘em and Reap – Jason Zweig’s top blogs to follow



Looking to add some top quality blogs to your reading list? One of the best financial writers out there today lists his top reads.


What I’m Reading Now





Stress Test: Reflections on Financial Crises





I am about half way through this, and on pace to have it finished soon, despite its massive size.
Mr. Geithner took a lot of heat because of his role in the 2008/2009 recession, and this is his answer to all his critics. Geithner recounts the long nights as he tries to devise rescue plans for Bear Sterns, Lehman Brothers, Fannie Mae and Freddie Mac while making the case against the “moral hazard” of bailing out failed companies.

He also details his lesser roles in earlier financial crises, from Mexico to Emerging Markets and how they prepared him for the once in a lifetime crisis of 2008.

I was surprised by how much detail I didn’t know about Lehman’s and Bear’s last few days, from the billions of dollars they were losing EVERY DAY to actual phone conversations Geithner held with the CEOs of the troubled companies, all of which is detailed by Geither in this book.

Anyone who enjoys a little market history, and wants to learn much more details about how the crisis of 2008 played out should pick up this book.




That’s all for this week. What are you reading?

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