Subject: RE: Questions for Sam Beard:"Investor's License"
>From: Michael Jones
>>>>If you look at the market very closely, you will see that there isn't really any exuberance. Most of the gains in the index fund over the past years have occurred mostly in the top 20-25% of the stocks.
What 'top 20-25%'. Are you saying the largest, blue chip stocks? If so, then we may already be seeing the effects of Index investing, or risk aversion (staying away from the small companies that many claim are responsible for most of our growth). If you are just pointing out that some companies are growing much faster than others, how do we know that indexing will capture that? And indeed, indexing will 'reward' those companies NOT AT ALL. It will reward all in the index equally.
>>>>The market is very efficient at finding the winning
companies vs. the losing companies. Maybe at any point in time the market might be wrong. But over the long term, the market will determine the correct value for companies.
But the market only does this because 'individual' investors (including professional portfolio managers), risking their money, make educated guesses, based on the pertinent financial information about the company, their assets, their competition, their industry, etc. By your own description, Index investing makes NO DECISION. It has NO 'market efficiency' to contribute. To the extent that Indexing predominates in the market, that can't be good for market efficiency. Just like we can't all get rich merely by investing, because somebody has to do the 'hard work' of running and working at these companies, we can't have an efficient market if most of the investments are indexed.
>>>>I wouldn't call it exurberance. I would call it a supply/demand problem. Everyone wants to buy the winners. Even with a big stock like Microsoft, there are only so many shares available. Demand forces the price up. It's that simple.
You don't seem to understand the market and investing. Microsoft is not a good investment because they have a lot of name recognition, or are 'cool' or are a 'winner'. They only become a good investment based on returns. And the bottom line is that, the higher the stock price is for a given profit, the less the dividend return. Yes, the assets which help to contribute to future profits are important, but in the end, how much can an investor afford to pay for every dollar of profit? The return from increased stock prices must ultimately be constrained by the underlying earnings. Otherwise, the market would not be acting efficiently. Bond rates at some point will look more attractive.
>>>>Fortunately for the index investor, they don't have to pick the winners/losers.
My exact concern. If indexing controls most of the market, who can influence the market to reward the winners and punish the losers. Without that, you lose what makes the free markets valuable.
>>>>If you ask me, I don't put as much emphasis on P/E ratios as the so called experts do. Remember, just like other professionals the "experts" have their own rules. It doesn't mean that I have to value a company that way, because I don't need that "expert" broker to invest.
That is a unique way to look at things. Making profits (the Earnings in P/E) is unrelated to a company's stock price. I don't think you got this from Friedman, Hayek, Rand or any other free market economist or theorist. Indeed, isn't this the purpose of the stock market? To provide profits to those who invest in the profitable companies. Your philosophy would put you at home during the tulip frenzy.
>>>>If you look at how companies are valued today often times it has very little to do with traditional P/E ratios. I attribute this to the wide availability of trading accounts. The traditional investment broker will be obselete soon. If you get rid of the brokers, you will find that average investors have their own criteria for what is a good investment. As we have seen, this often times has no correlation with what these 'experts' would call a good investment.
The problem I have is that nobody can really say what objective criteria average investors may now have. This may come as a shock to you, but brokers did not come up with the concept of companies making a profit, or investors making a return on their investment. It is the essence of free market capitalism, the incentive for people to provide capital to businesses.
>>>>Ahh, but you had at least 30 years of compounding before the last 9 years of a bad market. This is the key. There is a very simple rule called the 72 rule. If you had an investment that averaged 7% return/year, divide this into 72 to get the 'doubling' period. If your averaged 7% return for the previous 30 years, the return for the initial investment was over 800%. Take it anyway you like. Nearly all your money would have earned many times your investment, even if the market went down 50% over the last 9 years before retirement.
But your initial investment is just your first week's or year's contribution (5% ?) from your wages. The maximum return (800%) is on the least amount of money. The 50% decline is on a much bigger pie. Using your figures, it is easy to see that this person will have about 1/4 of the money that somebody retiring in more favorable times would have (the 50% drop on top of the one 'lost 7 year doubling'). For a low or middle wage worker, this can wipe out everything above the 'means-tested floor'. And that fact can lead to the type of disincentives we see in the Chilean system.
>>>>On the subject hindsight, I could give you investments right now that will be worth significantly more 5 years from now than they are today. It's really not hard. There aren't that many great companies out there. Really. And there is ever increasing amounts of money put into the market each year wanting to buy them.
Are you just smarter than everbody else, or do you have truly psychic abilities? Please, share some of those hot tips with those of us who are not quite as smart and are psychically challenged.
>>>>But, you forgot about the matching and default components of the plan. There will most likely need to be at least a thousand bureacrats required to determine who is worthly to get the benefit.
>>>>Read the proposal carefully. It says:
Actually, you need to take your own advice. Beauracrats will not make any decisions, eligibility being determined by the statute defining maximum wages of participants (if it passes). With the individual deciding what type of investments they desire to invest in.
