The Long Good Buy
The Long Good Buy

The Long Good Buy

Equities are on the riskier side of the investment range because equity investors have the last claim over a company's profits (after bond holders and other creditors). (LocationĀ 1198)

For investors in fixed income assets (the income is known in nominal terms at the time of purchase), the risk is one of government or corporate default; (LocationĀ 1201)

Specifically, they found that between 1889 and 1978 the average real return on stocks was approximately 7% per year (in the US), and the rate of return on government bonds was just below 1%. (LocationĀ 1214)

Reinvesting dividends is one of the most powerful and reliable ways to grow wealth over the long term. Since the early 1970s, roughly 75% of the total return of the S&P 500 can be attributed to reinvested dividends and the power of compounding. (LocationĀ 1250)

In general, we can say that equity markets perform best when economic conditions have been weak, valuations are low, but there is an improvement in the second derivative of growth (LocationĀ 1287)

that is to say, the rate of change stops deteriorating. And equity markets suffer when valuations are high and/or concerns over growth start to be priced late in the cycle when the second derivative of growth starts to deteriorate. (LocationĀ 1288)

One simple way is to use the real yield gap in the US (the difference between the dividend yield and the real bond yield) as a proxy. (LocationĀ 1405)

the end of the hope phase roughly coincides with the peak of the trailing P/E multiple (maximum positive sentiment about future growth). (LocationĀ 1477)

the best time to buy into the equity market is usually when economic conditions are weak and after the equity market has fallen, but when the first signs start to emerge that economic conditions are no longer deteriorating at a faster pace. (LocationĀ 1481)

Although earnings growth is what fuels equity market performance over the very long run, most of the earnings growth is not paid for when it occurs but rather when it is correctly anticipated by investors in the hope phase and when investors become overly optimistic about the potential for future growth during the optimism phase. (LocationĀ 1488)

There is also a link between the cycle and valuations. Using simple valuation metrics such as the P/E ratio, valuations tend to fall in the despair phase and rise sharply in the hope phase as expectations about a future profit recovery push up prices in anticipation of the recovery actually materialising. (LocationĀ 1504)

The highest annualised returns (the average return that an investor would have achieved over a specific period of time if the return were compounded at an annual rate) occur during the hope phase. In the case of the US and Europe, the return in this phase has averaged between 40% and 50% (with total price appreciation in real terms annualising at over 60% in the case of the US). (LocationĀ 1534)

whereas in both cases profits are still falling during the hope phase, when much of the return in the market is actually realised. (LocationĀ 1541)

Generally speaking, returns are higher if bond yields are falling, and this is the case in all phases of the industrial cycle. (LocationĀ 1700)