Rory Gillen's free book: "A guide to sound investing"

Discussion in 'Investments' started by Brendan Burgess, Nov 21, 2016.

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  1. dub_nerd

    dub_nerd Frequent Poster

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    Unless I'm very confused the original premise is bunk! o_O

    S&P500 close on 30/12/1994 was 459.27, and on 31/12/2014 it was 2058.90.

    That would grow $10k to $44,830. Even if you cherrypicked the worst day of 1995 and the best of 2014 you barely get over $45k. Your storyteller must have been doing some duckin' and divin' in the market themselves! :D

    Sounds like I should check out that "best 10 days" claim too!
     
  2. Gordon Gekko

    Gordon Gekko Frequent Poster

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    The source is JP Morgan, AKA The Safest Bank in the World:
     

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  3. dub_nerd

    dub_nerd Frequent Poster

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    Last edited: Dec 21, 2016
    They seem to be having a little trouble with their maths!
    Here's the S&P500 for Jan 3rd 1994. And here it is for Dec 31st 2014. The multiple is under 4.5. The annualised return is 7.8%, not 9.85%.
    it occurs to me ... is it possible I'm ignoring reinvested dividends? Any idea how I'd get those numbers?

    EDIT: from a bit of rummaging around, it does indeed look like dividend yield is a couple to several percent per year. Need to think about that one. Dividend timing is predictable, unlike index growth.
     
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  4. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Yes, it's Total Return
     
  5. Rory T Gillen

    Rory T Gillen Registered User

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    Last edited: Dec 21, 2016
    Good post, in my view. The long-term returns from equities are mostly determined by the initial dividend yield and the subsequent growth in that dividend income stream. Share prices will follow the growth in earnings (and dividend) so that an investor's total return is the dividend income plus the capital appreciation as determined by the earnings (and dividend) growth. The tables on page 6 & 7 of the Booklet prove this point over a period long enough to iron out short-term anomalies. Of course, in the short-term, we know that markets rarely reflect this long-term truth, which makes it tricky to predict what returns are likely to be over shorter intervals. For example, a market can be valued at 10x earnings in one period and 20x in the next, boosting returns for a period. As 1999 was used in examples above as a starting point, investors in the US index were investing at a time when the US equity market was trading on a multiple of earnings at least double the long-term average, and quite possibly more. So, to an investor in 1999, future returns were compromised. While earnings in the US continued to grow thereafter, the multiple investors were prepared to pay quite rightly reverted to more normal levels leaving an index like, say, the S&P 500 flat from 1999 to about 2013 (not sure of exact dates). On page 36 of the booklet, this danger that we might describe as 'valuation risk' is highlighted in the Coca-Cola chart. As they say, a chart can paint a thousand words.

    As we stand, the FTSE World Index currently offers a starting dividend yield of circa 2.5% and this together with the future growth in dividend income will determine the returns to investors over, say, a 10-15 year period. If you assume global economic growth of 3% per annum from here - which might underpin earnings and dividend growth of, say, 4% per annum then one could argue for annual returns of 6.5% per annum (before costs). And an investor can capture those returns by investing in a global equity fund - a passively managed ETF or an actively managed fund. Not particularly appealing returns, perhaps, when we see that returns over the past century from equities have been in the order of 9% per annum in the developed world, but it is what it is. Of course, if long-term interest rates were to rise globally, a not unrealistic expectation over, say, a 5-year view, given that long-term interest rates in the developed world are at generational lows (even in the US) then the dividend yield on the FTSE World Index might adjust higher to compete, and that means a once-off adjustment downwards in global equity prices. I think what this says is that future returns are likely to be lower than the historical returns, and that the risks to those returns are probably above average. Using the Ben Graham phrase, there's not much of a 'margin of safety'. Then, again, compared to bank deposit rates of near zero, can one complain?

    The appeal of bank deposits in a period such as this is that your capital is not a risk as interest rates rise while your income rises. But waiting for bank deposit rates to rise can mean missing out on returns elsewhere for a prolonged period. There's little doubt in my mind that we are in a very tricky period for investors. When non-risk assets (like bank deposits and government bonds) offer no return, it's tricky.
     
    Last edited: Dec 21, 2016
  6. fauxblade

    fauxblade New Member

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    I have just finished the book myself. I am a novice when it comes to investing and have spent the last few months researching the topics similar to what is covered in the book. For such a short book it really covers a lot of material. In my experience of books in this area they take a small part of the topic and spin it out to be a book three or four times longer. For example, I think you summed up the richest man in Babylon sufficiently in just four pages.
    I think this is a valuable document for someone at my level of understanding, and seasoned pro's wont get much out of it that they don't already know. But then again the booklet says its aim is to provide the reader with a good understanding of what sound investing is all about and I think you achieve that.
    The only chapter I didn't enjoy was chapter one as it comes across a bit blasé with the risks involved, and that you can only make money. But this is in contrast to later chapters that outline all the risks involved.
    Chapters two and three are valuable financial lessons that everyone should be thought and is always worth reiterating.
    I thought the rest of the booklet introduced the different investment options and other concepts that are not immediately obvious to the novice investor.

    In summary, this was an absolute bargain as a free download, and at the current price you would still get value for money if you are within the target audience.
    Thanks Rory!!
     
  7. mathepac

    mathepac Frequent Poster

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    I wonder is there anything else 'faux' about fauxblade
     
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  8. Setanta12

    Setanta12 Frequent Poster

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    +1
     
  9. Fella

    Fella Frequent Poster

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    How can people give out about a free book! I read loads of books sometimes I don't like them but you might pick up one or two bits of information you didn't know.
    I read this book and it was very much as the title suggested it would be so no complaints here.
     
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  10. PMU

    PMU Frequent Poster

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    Correct. This was evidenced by Prof Shiller's 10 year cyclically adjusted P/E ratio (CAPE), which for the S&P in 1999 was 40.57 (and higher again at 43.77 in 2000). Shiller's theses is that the lower the CAPE, the higher the likely return in over the subsequent 20 years, and vice versa. The average CAPE value for the S&P is about 15.21 and this value provided an average annual return over the next 20 years of about 6.6%.

    I disagree. The current S&P CAPE ratio is 26.09, its highest since 2009 and higher than its long term average. This implies low(ish) returns. Ex-US, it's difficult to find CAPE ratios for other markets, but with a bit of rooting around I found this research by StarCapital Germany http://www.starcapital.de/research/CAPE_Stock_Market_Expectations on stock market forecasts based on the current CAPE and price/book ratios. To prevent being condemned to poor returns it might be prudent to take this research into account in making investment decisions. Ireland, for example, has a CAPE of 28.2, higher that the US.
    Not that average.
     
  11. dub_nerd

    dub_nerd Frequent Poster

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    Last edited: Dec 21, 2016
    Ok, so I ran those numbers, and you're right -- the top 10 best days gave a multiplier of 2.00. If you stayed in the market the whole time you'd have made a profit of 348% (total multiplier 4.48). If you missed the top ten days your profit would be 124% (total multiplier 2.24). (I had to ignore dividend yields as a matter of practicality, not because I don't think they matter).

    But then I also looked at the 10 worst days. They gave a divisor of 2.15. So even if you randomly skipped days you'd probably do better by missing the best days because the bad ones you'd miss would more than compensate. If you managed to miss all of the ten worst days, your profit would be a massive 864%! In fact, that's much more important than hitting the ten best days. If you leave out the ten best days and the ten worst days, you make 382%, still better than just staying in the market the whole time.

    None of this tells us how to predict market swings, but it does imply if you can find a strategy that even slightly improves your odds, the potential gains are great -- greater, in fact, that just staying in the market to make sure you benefit from the ten best days.

    Your anecdote is still interesting, it has to be said. It's instructive to see just what a large difference a vanishingly small number of outliers makes (extended up to 2016 in the following graph):

    [​IMG]


    Does that imply, then, that you need to time your market entry right? And if so, why can't you use the same approach to skip in and out subsequently?

    So again, same question, are you saying that you should time your market entry? And if you've committed the (apparently) cardinal sin of market timing once, why not more than once?
     
    Last edited: Dec 21, 2016
  12. Rory T Gillen

    Rory T Gillen Registered User

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    Last edited: Dec 23, 2016
    As I'm struggling to use the 'Quote & Reply Facility', this reply is to Dub_Nerd above:

    I made no direct reference to 'timing the market', but by inference if a market is overvalued relative to history it is at least a yellow flag. But as the booklet highlights, overvaluation is not so much a danger to the 'Regular Investor' as it is to the 'Lump-sum' investor. The latter doesn't get to go again, so valuation is extremely important at the point of commitment. The Regular Investor and Lump-sum Investor have different issues to deal with. In 1999, it was not particularly important to the Regular Investor that the S&P 500 - or markets in general - were overvalued then, as he/she was not committing all their monies at that time, but investing over time.

    However, if history is to be a guide in terms of valuation then there's more to it than has been argued above. For example, in 1999, the US stock market was trading at a very high multiple of earnings relative to history. If we take it that the S&P 500 was trading at 30 times earnings in late 1999 (I don't have the exact multiple), then that's the same as an earnings yield of 3.3% (100/30 expressed as a percentage). It's easier to use the earnings yield as it can be compared to bank deposits, rental yields on property or the yield to redemption on government or corporate bonds. At the time in late 1999, that 3.3% earnings yield could be compared to the risk-free 10-year US government bond yield of circa 6.3%. So, not only had you overvaluation in US equities when compared to history, but you were being offered much better value in the risk-free alternative.

    So, yes, in this context you might choose to 'time the market' by investing where the value was better. It may be market timing, but it is so on the basis of values. In other words, value can be a market timer for an investor. And market timing this way is not speculating, it is the very essence of sound investing, which should be on the basis of value. If the Irish had any understanding about 'value' they would not have been buying Irish property post 2002, if not before. But not only were we piling in, but we were doing so with debt. It did not take a genius to work out that it made little investment sense. Hence, my opening para in the booklet 'learning how to save and invest is not a luxury in life; it is a crucial part of our lives and we need to be more informed'.

    Today, in my view, it's not so clear cut that the key US equity market is significantly overvalued. Yes, we have the S&P 500 trading on circa 21 times earnings for an earnings yield of 4.7%. Yes, this earnings yield is well below the long-term average, which is a yellow flag, but perhaps not a red flag. Today, unlike 1999, the yield from a risk-free 10-year US government bond is 2.55% (when I last checked), which is well below (not above) the S&P 500 earnings yield. Today, it's tricky. It's not always necessary to have a definitive view. I don't have one at present. I neither feel the key US equity market is overvalued nor undervalued. I appears fairly valued relative to the alternatives. After all, how do you price an asset when interest rates are so low. If you believe long-term interest rates are going to be this low for several years then it is right equities are valued higher than was the case historically. In 1999, the bubble was in equities. In the mid-2000s the bubble was in property, and no more so than Irish property. We Irish do go to extremes! Today, I'd venture, the bubble is in developed world government bonds unless you believe in deflation. The 35-year old bond bull market in the developed world, that started as long ago as 1981, most likely ended last July. As they say, long bull markets rarely end softly!

    These principles are all outlined in the booklet. I believe the more one reads the booklet, the more you will get from it. I am on my third read of 'Money, the Unauthorised Biography'. A superb piece of work by Felix Martin in the UK on the history of money. But if you follow my lead and buy this book, be forwarned that's it demands good initial insight to get the value.

    I, like others, can see the remarks on this thread. I'm encouraged to see some saner voices making an appearance of late. In the booklet, there's 30 years' experience in 56 pages written in easy-to-follow language. Lord John Lee, columnist with the Financial Times, recognised that and hence the 'Foreword'.

    However, it's a decent guide, not gospel...we might leave that to Warren Buffett. So, anyone is entitled to argue with points in the booklet and make their own points. That's debate. But before you add to the debate, have the common curtesy to read it first, as I will not engage with those who see a need for argument without facts to back it up.
     
    Last edited: Dec 23, 2016
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  13. dub_nerd

    dub_nerd Frequent Poster

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    Thanks for the comments. This jumped out:

    Maybe I've been missing something all along. Is there some other version of "timing the market" than waiting for value to appear? That's certainly what I've meant by it. Indeed, I'm a bit stumped as to what else it could mean.
     
  14. Rory T Gillen

    Rory T Gillen Registered User

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    Yes, I was assuming most people refer to timing the market 'by way of the price action (also referred to technical analysis)' as opposed to 'fundamental values'.
     
  15. dub_nerd

    dub_nerd Frequent Poster

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    Ah, ok. I presume that's what these so-called "chartists" that I've been reading about are doing. That has always struck me as about as scientific as reading chicken entrails. I hadn't thought of it as "timing the market" so much as predicting movements based on supposed recurring patterns. But yeah, I guess that's the same thing. Those people should be locked up for their own safety. :D
     
  16. Dan Murray

    Dan Murray Frequent Poster

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    Dub nerd,

    My understanding is that Rory is not averse to a bit of chartism. I am sure he will qualify the extent he subscribes to such methods and how he reconciles this practice with post 22?!
     
  17. RobFer

    RobFer Registered User

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    Not at all. It can mean many other things. Value based based investing can be rule based. In contrast timing the market can mean an approach that is haphazard and not rule based. Timing the market could mean trying to harvest the trend rather than capture an undervalued stock.
     
  18. RobFer

    RobFer Registered User

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    Despite what you say there is a lot of academic evidence that value based investing has historically worked.
     
  19. Rory T Gillen

    Rory T Gillen Registered User

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    Yes, I pay attention to a number of technical indicators that I understand and find useful.

    • Dow Theory for the 21st Century - complex, but fully explained in the book of the same name written by Jack Schannep. Dow Theory, as a technical indicator, has been around since 1900 and Jack Schannep's is just one version of it.
    • The Coppock Indicator - very helpful at highlighting the move from bear to bull market, excellent track record.
    • Capitulation indicators - basically measure when the pace of decline accelerates, and usually signal a bottom or the start of a bottoming process.
    I did not include any reference to them in the booklet, as the aim was to keep the booklet as simple as possible. But the above three indicators are all outlined in detail in the other book 3 Steps to Investment Success. These indicators are also followed in the members' area of our website gillenmarkets.com.

    I don't tend to base any of my own investment decisions on them. But I do find that they are very helpful in understanding what the market is saying. Capitulation, for example, is characterised as a frenzy of selling with prices cascading downwards at speed. It's a scary time in markets. But it can be measured, and as it signifies a time in markets when everyone is selling together it is a sort of contrarian indicator.

    I don't think it is necessary to use such indicators for sound investing. I simply find them interesting, so each to their own.
     
  20. Dan Murray

    Dan Murray Frequent Poster

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    Last edited: Dec 23, 2016
    I am trying to understand your investment decision making process. I'm not at home, right now, so don't have your book or booklet to hand.

    So just to be clear - are you saying that you don't base investment decisions on technical indicators (i.e. you rely on other forms of analysis) or are you saying that after your fundamental analysis you will adjust your buy/sell decisions based on such indicators? If the latter applies, how influential are the technical indicators or put another way, are they occasionally followed, invariably followed or somewhere in between and what determines when the technical indicators are followed or otherwise? Also, how do you reconcile the two approaches (fundamental analysis v. technical indicators.)?

    The reason for asking is that I believe it is critical to understand the thought process of an investment adviser in order to be able to judge whether it's a philosophy with which one is comfortable.
     
    Last edited: Dec 23, 2016
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