Picking stocks in a bull market is so easy the GEICO caveman could do it. After all, when the broader market indices, like the S&P 500, trade at average price-to-earnings (P/E) and price-to-sales ratios (P/S) of 24.4 and 2.2, respectively, just about every stock in the index is rising. #-ad_banner-#Of course, buying a market with such high multiples is fraught with danger. Both ratios are at extreme levels. In fact, the sales-to-price ratio is at its all-time high. What’s An Investor To Do? Investors really have two options to deal with an overpriced and volatile market. First is to… Read More

Picking stocks in a bull market is so easy the GEICO caveman could do it. After all, when the broader market indices, like the S&P 500, trade at average price-to-earnings (P/E) and price-to-sales ratios (P/S) of 24.4 and 2.2, respectively, just about every stock in the index is rising. #-ad_banner-#Of course, buying a market with such high multiples is fraught with danger. Both ratios are at extreme levels. In fact, the sales-to-price ratio is at its all-time high. What’s An Investor To Do? Investors really have two options to deal with an overpriced and volatile market. First is to sell their positions and move to interest-bearing securities. And while this may have worked in the past, moving money into bonds and preferred stock is actually more dangerous than the stock market right now. You see, the Fed intends to raise interest rates at least two more times — possibly three — in 2018. And because bond prices are inverse to interest rates, when interest rates go up, bond prices go down. It’s the opposite of what happened in 1983 when interest rates started falling. It fueled a bond rally that lasted more than three decades. But that rally created… Read More

Recent market volatility has made finding actionable stocks harder than at any other time since the Great Recession. And with the CBOE Volatility Index (VIX) hovering around 20, there isn’t any reason to suggest that market volatility will decrease markedly anytime soon. Which begs the question… #-ad_banner-#Should investors with risk capital to deploy stay on the sidelines until the VIX returns to a more comfortable level? Or can investors deploy their capital in safe and effective investments? The answers to these questions are easier than you might think. You see, despite market volatility, corporate profits are expected to have risen… Read More

Recent market volatility has made finding actionable stocks harder than at any other time since the Great Recession. And with the CBOE Volatility Index (VIX) hovering around 20, there isn’t any reason to suggest that market volatility will decrease markedly anytime soon. Which begs the question… #-ad_banner-#Should investors with risk capital to deploy stay on the sidelines until the VIX returns to a more comfortable level? Or can investors deploy their capital in safe and effective investments? The answers to these questions are easier than you might think. You see, despite market volatility, corporate profits are expected to have risen 17% since the first of the year. That bodes well for the market as a whole. But it doesn’t mean investors should just pile into the same stocks they’ve been pushing higher for the better part of a decade. Because, believe it or not, there are some economic sectors that haven’t been pushed to the limit of prudent valuations. One such segment is regional banks. With the recently enacted tax cuts, rising interest rates, and the tailwinds of robust economic growth, regional banks are finally in the economic sweet spot. At present, analysts’ expectations for financial earnings have risen to… Read More

Of all the basic tenets of modern financial theory, the Efficient Market Hypothesis (EMH) is one of the most controversial and disputed theories. For the uninitiated, the EMH posits that stock prices reflect all relevant price information, which means stocks always trade at fair value. But if EMH were always true, investors would be wasting their time searching for undervalued stocks or stocks with potential to benefit from some market trend. It would also mean that no investor could outperform the market consistently. Sure, an investor might beat the market occasionally, but never on a consistent basis. #-ad_banner-#Unfortunately, EMH fails… Read More

Of all the basic tenets of modern financial theory, the Efficient Market Hypothesis (EMH) is one of the most controversial and disputed theories. For the uninitiated, the EMH posits that stock prices reflect all relevant price information, which means stocks always trade at fair value. But if EMH were always true, investors would be wasting their time searching for undervalued stocks or stocks with potential to benefit from some market trend. It would also mean that no investor could outperform the market consistently. Sure, an investor might beat the market occasionally, but never on a consistent basis. #-ad_banner-#Unfortunately, EMH fails on this point. You see, Warren Buffet has beaten the market consistently over long periods. And Buffet isn’t the only investor achieving these “impossible” results. There is a long list of investors who outperform market benchmarks consistently. So while the hypothesis may not hold water, that doesn’t mean investors can’t benefit from EMH in a different way. You see, if a stock’s current price is based on all available known information, an investor could profit from front running future information about a company. In other words, identifying some future piece of information that isn’t currently priced into the stock. And… Read More

A diversified portfolio is essential to long-term investment success. That’s because a well-thought-out strategy helps investors earn consistent returns. And it reduces overall portfolio risk. But there’s more to diversification than adding different asset classes to a portfolio. Investors need a balanced approach to diversification. And this need goes well beyond simply placing income-producing securities into an equity portfolio. #-ad_banner-#That’s because a properly diversified portfolio doesn’t just expose an investor to different asset classes. It offers geographic diversification through exposure to emerging market (EM) economies as well. This mitigates an investor’s exposure to the type of risk where some macroeconomic… Read More

A diversified portfolio is essential to long-term investment success. That’s because a well-thought-out strategy helps investors earn consistent returns. And it reduces overall portfolio risk. But there’s more to diversification than adding different asset classes to a portfolio. Investors need a balanced approach to diversification. And this need goes well beyond simply placing income-producing securities into an equity portfolio. #-ad_banner-#That’s because a properly diversified portfolio doesn’t just expose an investor to different asset classes. It offers geographic diversification through exposure to emerging market (EM) economies as well. This mitigates an investor’s exposure to the type of risk where some macroeconomic event affects all asset classes at the same time. But not everyone agrees. Some investment advisers decry the need for exposure to emerging markets. They believe that EMs depend too heavily on developed economies. This dependence means that emerging market economies mirror the volatility of the developed nations. But they do so with weaker political and social contracts. This makes them less suitable for conservative investors.  A New Era But these advisers are missing an important point. What was true in the past isn’t true anymore. You see, emerging market economies have entered a new era. They are now… Read More

Contrarian investors like to buy stocks other investors despise. This is how value investors find stocks with the potential to produce outsized returns. And it works, too. After all, Warren Buffet and Seth Klarman have made good livings finding and investing in value stocks. And if it works for them, it will work for investors with a lot less money to invest. But the problem is that U.S. stock markets sit near record levels, meaning even marginal companies have seen stock prices rise for no good reason. This is the result of several years of interventionist Federal Reserve policies. #-ad_banner-#This… Read More

Contrarian investors like to buy stocks other investors despise. This is how value investors find stocks with the potential to produce outsized returns. And it works, too. After all, Warren Buffet and Seth Klarman have made good livings finding and investing in value stocks. And if it works for them, it will work for investors with a lot less money to invest. But the problem is that U.S. stock markets sit near record levels, meaning even marginal companies have seen stock prices rise for no good reason. This is the result of several years of interventionist Federal Reserve policies. #-ad_banner-#This explains the nosebleed levels where many financial metrics reside. For example, the S&P 500’s price-to-earnings ratio (P/E) is 26.7 — a 70% premium to its average. A better predictor of valuation is the cyclically adjusted price-to-earnings ratio (CAPE). Presently, the CAPE ratio sits at 34.59 — more than 105% above its mean. Even the price-to-book ratio, at 3.58, is 30% higher than its long-term average. So what’s an investor to do? Value investors have little choice but to seek value plays outside of the United States. And that’s the reason I’m looking for value in an unusual place — Russia. Read More

A recent report by Accenture highlights an amazing statistic. Its research shows that just 15 public, digital-ecosystem companies have a market capitalization totaling nearly $3 trillion. That’s an average size of roughly $200 billion each.  Even more amazing is the idea that the industry is expected to grow at a compound annual growth rate (CAGR) of more than 18% between now and 2026. That makes this a trend every investor should get behind.  So, what is a digital ecosystem? Gartner Research defines a digital ecosystem as “an interdependent group of enterprises… that… Read More

A recent report by Accenture highlights an amazing statistic. Its research shows that just 15 public, digital-ecosystem companies have a market capitalization totaling nearly $3 trillion. That’s an average size of roughly $200 billion each.  Even more amazing is the idea that the industry is expected to grow at a compound annual growth rate (CAGR) of more than 18% between now and 2026. That makes this a trend every investor should get behind.  So, what is a digital ecosystem? Gartner Research defines a digital ecosystem as “an interdependent group of enterprises… that share standardized digital platforms for a mutually beneficial purpose.” In English, it means some companies have built digital platforms that customers don’t want to leave. And the longer a person stays on a particular ecosystem, the more revenue that platform generates. #-ad_banner-#That’s how companies like Alphabet (Nasdaq: GOOG), Amazon (Nasdaq: AMZN), Tencent (OTC: TCEHY), and Facebook (Nasdaq: FB) have grown so big. More importantly, it’s the reason Yahoo! died and Twitter (NYSE: TWTR) is running out of time.  You see, Yahoo failed to learn the lessons of Facebook and Google. The company proved unable to create an ecosystem that would… Read More

When a business changes its name, it’s usually a big deal.  You see, it can cost millions for a company to rebrand itself under a different name. It has to change its signage, advertising copy, and a million other things. It’s a task not to be taken lightly. For example, when Kentucky Fried Chicken changed its name to KFC (NYSE: YUM), it did so to get the word “fried” out of its advertising in an age of health-conscious customers. Cigarette maker Phillip Morris did the same when they rebranded to Altria (NYSE: MO) in 2003. The political pressures associated with… Read More

When a business changes its name, it’s usually a big deal.  You see, it can cost millions for a company to rebrand itself under a different name. It has to change its signage, advertising copy, and a million other things. It’s a task not to be taken lightly. For example, when Kentucky Fried Chicken changed its name to KFC (NYSE: YUM), it did so to get the word “fried” out of its advertising in an age of health-conscious customers. Cigarette maker Phillip Morris did the same when they rebranded to Altria (NYSE: MO) in 2003. The political pressures associated with “big tobacco” created a need for a less caustic moniker.  But it’s important to understand that neither KFC nor Altria changed their businesses. They still sell fried chicken and tobacco respectively. They just do it under more appealing names.  #-ad_banner-#Now, companies don’t just change their names to avoid negative connotations. Some companies try desperately to take advantage of some prevailing social trend. This was never more obvious than when companies added “.com” to their names during the tech craze in the late 1990s.  This was confirmed in a research article that indicates firms that added “.com”… Read More

It’s no secret that starting a business is a daunting task. After all, about 50% of new businesses fail within five years. And as you can see from the Bureau of Labor Statistics chart below, that number is expected to grow to more than 80% over the next two decades. Now, let’s be clear. The chart actually shows how many companies were still in business from one year to the next. But that doesn’t mean that all of them failed.  You see, some businesses merged with other companies, while others saw their owners retire… Read More

It’s no secret that starting a business is a daunting task. After all, about 50% of new businesses fail within five years. And as you can see from the Bureau of Labor Statistics chart below, that number is expected to grow to more than 80% over the next two decades. Now, let’s be clear. The chart actually shows how many companies were still in business from one year to the next. But that doesn’t mean that all of them failed.  You see, some businesses merged with other companies, while others saw their owners retire and close the doors. So the numbers are a bit skewed. Still, the odds of starting a successful business for the long term are stacked against entrepreneurs.  What may not be apparent in this BLS chart is that these stats apply equally to all companies — not just mom and pop businesses. In other words, government bureaucrats were following companies with billion dollar capitalizations as well — including the once formidable tech company, Yahoo!  #-ad_banner-#Yahoo started as a list of websites called “Jerry and David’s Guide to the World Wide Web” created by a couple of engineering students at Stanford… Read More

I’m a pilot. No, I’m not a professional pilot with thousands of hours of experience in multiple jet engines. I’m just a guy who likes to get into a single-engine Piper and take to the skies for fun. But I share a common trait with professional pilots. Before I ever strap in for a flight, I meticulously check (and re-check) the weather. Then I pre-flight my plane as if my life depended on it — because, frankly, it does! Once I’m done with my pre-flight, the weather is checked one last time. You see, most general aviation crashes involve pilot… Read More

I’m a pilot. No, I’m not a professional pilot with thousands of hours of experience in multiple jet engines. I’m just a guy who likes to get into a single-engine Piper and take to the skies for fun. But I share a common trait with professional pilots. Before I ever strap in for a flight, I meticulously check (and re-check) the weather. Then I pre-flight my plane as if my life depended on it — because, frankly, it does! Once I’m done with my pre-flight, the weather is checked one last time. You see, most general aviation crashes involve pilot error in dealing with weather. And weather can change fast. It’s not uncommon to take-off from an airport in clear skies and return an hour later to angry cumulus clouds.  #-ad_banner-#And since the majority of general aviation aircraft aren’t capable of reaching altitudes required to fly over heavy weather, avoiding it is the most prudent thing any private pilot can do. This is why many general aviation pilots consider themselves amateur meteorologists. It’s an act of self-preservation. What does this have to do with investing? In much the way I check, and re-check, the weather before flying, I constantly monitor… Read More

The Russell 2000 had a good year — all things considered. The index has gained 13.7% in 2017 compared to a 19.6% return for the broader S&P 500 index. Both indices are charted in the graph below. But something doesn’t pass the smell test. While both indices have solid gains for the year, it’s interesting to note that most of the Russell 2000’s gains occurred since August 21, 2017, when the index closed at 1356.90. That means that more than 77% of the year’s gains have occurred in just the past 120 days. This is likely a result… Read More

The Russell 2000 had a good year — all things considered. The index has gained 13.7% in 2017 compared to a 19.6% return for the broader S&P 500 index. Both indices are charted in the graph below. But something doesn’t pass the smell test. While both indices have solid gains for the year, it’s interesting to note that most of the Russell 2000’s gains occurred since August 21, 2017, when the index closed at 1356.90. That means that more than 77% of the year’s gains have occurred in just the past 120 days. This is likely a result of an influx of retail investors. While that in and of itself isn’t too troubling, there’s something ominous about the valuation of the small-cap market index of the bottom 2,000 stocks in the Russell 3000 Index. You see, at its current value of roughly 1545, the stocks of the Russell 2000 have a combined value of approximately $4.5 trillion. #-ad_banner-#What’s so ominous about that? Well, the net income from these 2000 stocks is just $42 billion, meaning the Russell 2000 is priced at more than 107 times earnings. It doesn’t matter how you look at the markets today, but any… Read More