Chap 4, 5, 6
Help!
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| chap 4 | ALLOCATION
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| starting point | start with relatively smnall percentage of stocks
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| global stock mix | Why? foreign stocks zig when domestic zag.
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| good foreign index | EFA Index (Pacific, Japan) invest between 15-40% has a 11.89% annual return comparing to S&P 500 which is 12.87% annually
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| What is the key to the stock market? | stick with it through thick and thin, rebalance back to your desired asset ratios
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| Minimum assets | US stocks, Foreign stocks, and Bonds (short term)
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| other assets to consider | value stocks, growth stocks, small stocks
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| sectors (don't bother) once you index you will have all the sectors anyway | different stock groups by industry, like airlines, trucking, etc.
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| 2 sectors worth considering | Reits and precious metals
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| Reits (15% of stocks in portfolio) | real esstate investment trust, good investment, sheltered accounts like an IRA, invest ~ 15% of your stocks in this asset
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| Gold (2% of stocks in portfolio) | precious medal, volitile, perfectly uncorrelated, carry in sheltered IRA account, profitable with inflation
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| reits and gold | ususally move opposite the market
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| chap 5 | History of Manias
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| 1820-1850 | great technological explosion; transportation, speed, communication, telegraph, telephone age
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| how does diffusion of technology run | slow
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| capitalization of ideas | uneven, young tech companies yield low returns, JP Morgan (not invest in new ideas, except in the light bulb)
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| Himen Minski | Theory on bubbles: 1. displacement 2. availability of easy credit 3. investors need to have forgotten last speculative craze 4. rational investors become obsessed with the opportunity of wealth and abandon security evaluation
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| why do people invest in a bubble situation? | because funds are rising and attractive
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| bubble | occurs when investors start buying stock because prices are going up
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| how does bubble pop | when fuel runs out, fuel is usually borrowed cash or margin purchases
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| South Sea bubble | complex, 2 bubbles involved, 1720, first in France, then in England, behind on interest payments. John law studied Amsterdam banking and then went to France and got duke to grant him 2 franchises for his co the Mississippi Co
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| 1. first francise was the right to trade with N America 2. second was right to buy up french annuities. Mississ comp issued it's own currency, as Miss co shares rose it issed more notes and lots of cash was made. Royal developed 1st mortality tables
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| during this time and insurance was sold. English incurred much debt from Spanish sucession, South Sea company could trade their annuities for shares and the share prices were increasing so this was attractive. 1720 share values peaked on both sides
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| of the channel. The Gov was concerned about the rising share price from 100's to 1000's. Parliment proposed stopping the price gain.
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| 2 bubble companies that survived | Royal and London Assurance
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| Bubble act of 1720 | all new companies had to obtain parliamentary charters to prevent bad existing companies from operating beyond their charters.
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| Why did bubble act bring bubble pop? | Insurance co. lent money to South Sea company & they were forced to stop b/c some were other types of companies orig like sword companies and not really insurance.
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| Foreigner's quote about the bubble pop | "It looked as though all of the lunatics escaped out of the mad house at once".
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| "I can calculate the movement of heavenly bodies but not the madness of people". | Sir Isaac Newton
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| Chap 6 | Bottoms: The Agony and Opportunity
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| 1920-1929 | 20% ror and then a crass
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| 42-52 | 20% ror and no crash
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| 82-92 | 20% ror and no crash
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| increase | sometimes markets go crazy with increase and sometimes they face gloom
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| 2030 bubble | we should not get caught up in another bubble until 2030 this is when all the folks from the last bubble will be gone and the ignorant will only be left (however, babyboomers are gullible, they may still have another one, there is still plenty of time)
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| High past returns | reduced future returns
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| 1966-1983 | stocks did worse that other assets and had virtually not return (17 years!)
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| risk and return | over long haul they become the same thing
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| why do we have low bond returns? | because of unexpected inflation
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| Ben Graham | thought, "how could so many be so wrong"?, how could bubble happen, why should we invest in stocks again, came up with Security analysis manuscript
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| security analysis manuscript | what went wrong during bubble and how one should approach stocks and bond in the future.
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| how long did people shy away from stocks after great depression? | 3 decades
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| Investing | Graham definition: 1. safey of principal 2. adequate rate of return if these requirements were not met, then it was speculative
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| Graham suggested ratios of stocks | conservative: 252%
agressiver: 75% or less
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| Average S&P stock sells for over 6 timess its book value | after depression it sold for a fraction of this and even less than its book value
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| Time following bottoms | 20 years following bottoms can and do produce high yields
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| Some collapses have no or little effect | 1976-1974
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| Some have huge effect | Great Brittan Railway collapse still has an ongoing effect on disorganization till this day.
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| What can trigger a bust? | 1. loss of faith in technology 2. loss of liquidity 3. amnesia for recovery 4. investors do not miraculously regain numbers on the way down
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| How to handle the panic | 1. stay calm, don't panic 2. stand pat 3. you should already have confidence in your solid portfolio 4. rebalance, selling high and buying low.
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| Lessons from booms and busts | 1. the more things change, the more they stay the same, there is nothing new under the sun 2. markets can become irrationally exuberant or morosely depressed. 3. don't believe boom and bust are a thing of the past
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| 4. At times of great optimism, returns are low; at times of bleekness, returns are higher.
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