Margin of Safety » Financial Media http://amarginofsafety.com "...to distill the secret of sound investment into three words..." Fri, 26 Jun 2020 18:44:00 +0000 en hourly 1 http://wordpress.org/?v=3.2 Employment-to-Pop and CAPE Updates http://amarginofsafety.com/2015/06/05/employment-to-pop-and-cape-updates/?utm_source=rss&utm_medium=rss&utm_campaign=employment-to-pop-and-cape-updates http://amarginofsafety.com/2015/06/05/employment-to-pop-and-cape-updates/#comments Fri, 05 Jun 2015 22:47:10 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1931 Continue reading →]]> Readers know there are two statistics that have caused me to worry for the past few years about the health of the economy and the market.

The first statistic is a macroeconomic indicator called the Employment-to-Population Ratio (E/Pop, to distinguish it from E/P or earnings yield). I prefer E/Pop to all other employment-health indicators because, unlike the unemployment and labor force participation rates, it takes the least amount of manipulation to calculate it.

E/Pop is simply the number of adults (16+ YO) employed in the US divided by the number of people 16+ living in the US who are not in institutions (jail, mental health facilities, etc.) or in the military. No one has to guess whether these people are “looking” for work or really “participating”. It measures the  number of people truly working relative to the number of us relying on those who are working to pay our collective bills. After all, the money that pays our bills can only come from people who produce; it is not created from thin air.

If there is a weakness in this indicator, it is that it overestimates economic strength by including in the numerator those who work part time, especially now when the proportion of part time workers is elevated.

http://www.advisorperspectives.com/dshort/updates/Full-Time-vs-Part-Time-Employment.php

Robust economic conditions are indicated by relatively high E/Pop ratios and weak conditions by relatively low E/Pop ratios.

The E/Pop has indicated that the economy is weak and that this “recovery” since 2007 could easily be labeled “stagnation”. The E/Pop plummeted in the housing crisis and despite unprecedented fiscal and monetary stimulus, it has barely gotten off the mat since. May’s reading announced today is 59.4%. The last time (before the current stagnation) that it was this low was in April 1984 when the economy was still digesting Paul Volcker’s attempt to choke off the inflation debacle of the late 1970s.

The second statistic–one that continues to worry me about the stock market–is Robert Shiller’s Cyclically Adjusted PE (CAPE) ratio. The latest reading shows that the stock market’s price equals 27.38 times its trailing ten-year earnings. The last time it was this high was July 2007, almost to the day that the housing crisis began and about one year before the stock market plummeted in response. It was higher only twice before in history, just before two of history’s most terrifying market crashes.

I write about these “macro” themes because, as Howard Marks says, it’s important for “intelligent investors” to know where the economy and market stand as they go about their business of evaluating businesses one-by-one and determining whether they can purchase those businesses at prices that deliver a Margin of Safety. Since 2011, the level of the CAPE helps explains why investors have found so few opportunities that possess a Margin of Safety. Invest appropriately.

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]]> http://amarginofsafety.com/2015/06/05/employment-to-pop-and-cape-updates/feed/ 0 Natixis Sees a Lack of Realism in Individual Investor Expectations http://amarginofsafety.com/2015/04/14/natixis-sees-a-lack-of-realism-in-individual-investor-expectations/?utm_source=rss&utm_medium=rss&utm_campaign=natixis-sees-a-lack-of-realism-in-individual-investor-expectations http://amarginofsafety.com/2015/04/14/natixis-sees-a-lack-of-realism-in-individual-investor-expectations/#comments Tue, 14 Apr 2015 18:06:15 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1883 Continue reading →]]> Natixis published its fourth Global Survey of Individual Investors today. They reached 7,000 investors in 17 countries.

http://ngam.natixis.com/docs/265/1012/2015%20Individual%20Investor%20Survey%20white%20paper_FINAL,0.pdf

Many of the findings show that individuals are unrealistic and confused. Individual investors say they need 9.7% returns above inflation to meet their goals, which is higher than last year, although 84% said they would choose safety over performance, also higher than last year.

Among respondents, 57% said they had NO financial goals, 67% have NO financial plans, and 77% rely on gut instincts to make investment decisions. Despite this admitted lack of planning, 66% of respondents claimed strong knowledge of the income they would need in retirement: namely, 63% of pre-retirement income, which is less than the 75% to 80% that many advisers recommend.

Friends, if you would have answered the same way on any of these questions, call or email me. We can help you plan for the future. If costs are an issue, these findings show that the only thing more expensive than a financial adviser is the lack of a financial adviser.

It is no wonder that Natixis draws one clear conclusion from the survey:

One thing is clear: Now is the time to help investors set clear goals and plans, while also enhancing their knowledge and understanding of markets, investments and strategies to help them meet their goals.

ray@parwealth.com

PAR Wealth Management employs goals-based planning and asset allocation to help you define and reach your goals. PAR Wealth Management offers you access to Money Guide Pro, the top goals-based planning software for advisers and their clients, and Yodlee, a leading account aggregation tool, so that you can see all of your assets and real-time progress toward your goals with one login (marketable securities are updated real time across all accounts no matter where the assets are held).

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]]> http://amarginofsafety.com/2015/04/14/natixis-sees-a-lack-of-realism-in-individual-investor-expectations/feed/ 0 Profoundly Unpopular: Finding Bargains Among the Unloved or Unknown http://amarginofsafety.com/2015/02/13/profoundly-unpopular-finding-bargains-among-the-unloved-or-unknown/?utm_source=rss&utm_medium=rss&utm_campaign=profoundly-unpopular-finding-bargains-among-the-unloved-or-unknown http://amarginofsafety.com/2015/02/13/profoundly-unpopular-finding-bargains-among-the-unloved-or-unknown/#comments Fri, 13 Feb 2015 20:22:54 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1850 Continue reading →]]> Jason Zweig has produced another excellent column exposing truths that hide in plain sight. If you want to buy a dollar of free cash flow for less than one dollar, you are probably not going to find it among the companies that everyone wants to own. Instead, you will need to hold your nose and pick among the “profoundly unpopular” and hold on (or buy more) when they become even more unpopular. In the long run, it works. It works largely because most people cannot do it.

Among my clients’ ten corporate exposures is a gambling-related company (and it’s also a spinoff) and a defense-related company (a spinoff)–the “bets and bombs” components of the “butts, booze, bets and bombs”. PAR previously invested in the butts (UVV) and booze (TAP) and other bomb (NOC) components. It is much easier to find a Margin of Safety in these areas. Enjoy:

http://blogs.wsj.com/moneybeat/2015/02/13/sin-vestors-can-reap-smoking-hot-returns/?mod=djintinvestor_t

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]]> http://amarginofsafety.com/2015/02/13/profoundly-unpopular-finding-bargains-among-the-unloved-or-unknown/feed/ 1 “Continued Signs of Financial Market Excess” http://amarginofsafety.com/2014/09/17/continued-signs-of-financial-market-excess/?utm_source=rss&utm_medium=rss&utm_campaign=continued-signs-of-financial-market-excess http://amarginofsafety.com/2014/09/17/continued-signs-of-financial-market-excess/#comments Wed, 17 Sep 2014 18:20:47 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1801 Continue reading →]]> From a report on CNBC.com (http://www.cnbc.com/id/102009066):

“There was one additional dissenter for the September statement. Philadelphia Fed President Charles Plosser voted against the position in July, and he was joined this month by Dallas Fed President Richard Fisher.

‘President Fisher believed that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess (my emphasis), will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee’s stated forward guidance,’ the statement said.”

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]]> http://amarginofsafety.com/2014/09/17/continued-signs-of-financial-market-excess/feed/ 0 There was No “De-Leveraging” http://amarginofsafety.com/2014/08/17/there-was-no-de-leveraging/?utm_source=rss&utm_medium=rss&utm_campaign=there-was-no-de-leveraging http://amarginofsafety.com/2014/08/17/there-was-no-de-leveraging/#comments Sun, 17 Aug 2014 18:59:04 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1794 Continue reading →]]> Ray Dalio of Bridgewater is fond of calling our government bailout a “beautiful deleveraging” (http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings–ray-dalio-bridgewater.pdf) probably because he bet correctly that the flood of liquidity would lift all boats in the short run. But, I have been arguing the point in the attached blogpost from BlackRock since the crisis began. The growth in total debt is a major long-term problem that few have sufficiently considered. It will be much harder to get bailed out in the next crisis, and the next crisis will come sooner than most expect (they always do).

http://www.blackrockblog.com/2014/08/07/great-deleveraging-happened-debt-problem/

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]]> http://amarginofsafety.com/2014/08/17/there-was-no-de-leveraging/feed/ 0 How Safe are the Assets that You Trusted to Your Custodian? Jason Zweig http://amarginofsafety.com/2013/03/18/how-safe-are-the-assets-that-you-trusted-to-your-custodian-jason-zweig/?utm_source=rss&utm_medium=rss&utm_campaign=how-safe-are-the-assets-that-you-trusted-to-your-custodian-jason-zweig http://amarginofsafety.com/2013/03/18/how-safe-are-the-assets-that-you-trusted-to-your-custodian-jason-zweig/#comments Mon, 18 Mar 2013 15:09:01 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1528 Continue reading →]]> I am a risk manager and credit analyst by training (actually, I think I was born that way), so when I created my hedge fund over three years ago, one of the first questions I asked the partner of (large, well-respected hedge fund) law firm who drafted my fund’s foundational documents was: “What happens if (very large, well-respected, money center bank) goes under? What assurances do I have that my investors will be able to get their money back?”

I cannot say that it was the first time that this law partner heard that question, but I know his answer was not a canned speech; he thought about it for some time, but his conclusion was that in most cases the law is on account holders’ side. Honestly, I expected him to point me to a specific and unambiguous statute that protected the account holders’ assets, so I was a little surprised by his answer. However, he did walk me through the recent instance when investors were not protected: Lehman Brothers’ British account holders.

Jason Zweig asks the same question in this week’s Intelligent Investor column and learns that it has not been a problem in over 400 bank failures.

http://online.wsj.com/article/SB10001424127887324392804578362391140337804.html?KEYWORDS=Intelligent+Investor

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]]> http://amarginofsafety.com/2013/03/18/how-safe-are-the-assets-that-you-trusted-to-your-custodian-jason-zweig/feed/ 0 The Equity Market Annual Return Histogram Updated for 2012 http://amarginofsafety.com/2013/03/01/the-equity-market-annual-return-histogram-updated-for-2012/?utm_source=rss&utm_medium=rss&utm_campaign=the-equity-market-annual-return-histogram-updated-for-2012 http://amarginofsafety.com/2013/03/01/the-equity-market-annual-return-histogram-updated-for-2012/#comments Fri, 01 Mar 2013 20:40:00 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1477 Continue reading →]]> Better late than never. I have updated the equity market annual return histogram for the 16.00% total return generated by the S&P 500 index in 2012.

As Michael Mauboussin says, when understanding an investment idea, we should try take an outsider’s big-picture view in addition to our own expert view of the minutiae of the idea. I first came across the equity market return histogram a few years ago and I believe it offers perspective on the feasibility of return expectations.

The ranges at the bottom are the ranges of returns for each annual period. The years highlighted in blue are the years involving the recent Great Recession and those in orange involve the Great Depression. As you can see, there were many more outliers during the Great Depression. The Great Recession looks rather normal in comparison.

My opinion of expected returns is based on data obtained in the Graham-Shiller CAPE index and from Tobin’s Q ratio (plus several other metrics), so I expect low, single-digit equity market returns over the next eight- to ten-years. The CAPE, which measures long-term Price/Earnings ratios, and the Q, which measures Price/Replacement-Cost ratios for the market, are 39.1% and  40.6% higher, respectively, than their long-term averages.

But, if we believe past is prologue, then there is a 75.5% chance that returns this year will fall outside of the range of 0% to +10%. I believe I am rationally pessimistic for the near term (but a long-term rational optimist), but historically there is only a 13.9% chance that an investor will lose more than 10% of their capital in any year in the market. This kind of outsider’s perspective helps me temper my pessimism, but the best way to temper it is to invest with a MARGIN OF SAFETY. Unfortunately, few investments offer a Margin of Safety these days.

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]]> http://amarginofsafety.com/2013/03/01/the-equity-market-annual-return-histogram-updated-for-2012/feed/ 0 Top Five Articles from June | Enterprising Investor http://amarginofsafety.com/2012/07/04/top-five-articles-from-june-enterprising-investor/?utm_source=rss&utm_medium=rss&utm_campaign=top-five-articles-from-june-enterprising-investor http://amarginofsafety.com/2012/07/04/top-five-articles-from-june-enterprising-investor/#comments Thu, 05 Jul 2012 00:15:51 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1378 Top Five Articles from June | Enterprising Investor.

Good Stuff.

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]]> http://amarginofsafety.com/2012/07/04/top-five-articles-from-june-enterprising-investor/feed/ 0 My Risk Literacy Test Results (w/ Link) http://amarginofsafety.com/2012/02/05/my-risk-literacy-test-results-w-link/?utm_source=rss&utm_medium=rss&utm_campaign=my-risk-literacy-test-results-w-link http://amarginofsafety.com/2012/02/05/my-risk-literacy-test-results-w-link/#comments Sun, 05 Feb 2012 19:37:00 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1272 Continue reading →]]> At the prompting of the Wall Street Journal’s Jason Zweig through a LinkedIn update, I decided to take a risk literacy test that he discovered. I am proud of my results because I take pride in my risk management skills as a portfolio manager. In the long run, managers who manage risk the best should deliver the greatest alpha. Still, the risk manager in me is very aware that the test was not overly challenging and that I should not get too confident; there were only three moderately difficult questions. But, as they conclude, “practice makes perfect.” My results:

Congratulations on completing your statistical and risk literacy test!

Your numeracy score is better than about 75-100% of all college educated individuals.  Roughly, this means that out of every 100 people who take the test, you will do better than about  90% (90 people) of all other people.  This is the highest score one can receive on this test.

Technically, relative to the general population, you are among the most statistically literate in the world.

Based on your score, you are not very likely to experience the extreme difficulty most people have when faced with common types of statistical thinking…

In our uncertain and complex world you are likely to find that your higher levels of risk and statistical literacy are very beneficial  and important.

Indeed,  your levels of numeracy reflect a skill level that very few people ever achieve… one that is the result of considerable practice.

As the saying goes: ” Practice makes perfect.”

And they were not even trying to sell me anything.

http://www.riskliteracy.org/dnn/Home.aspx

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]]> http://amarginofsafety.com/2012/02/05/my-risk-literacy-test-results-w-link/feed/ 0 Jason Zweig’s New Column on Facebook’s Valuation http://amarginofsafety.com/2012/02/04/jason-zweigs-new-column-on-facebooks-valuation/?utm_source=rss&utm_medium=rss&utm_campaign=jason-zweigs-new-column-on-facebooks-valuation http://amarginofsafety.com/2012/02/04/jason-zweigs-new-column-on-facebooks-valuation/#comments Sat, 04 Feb 2012 20:34:44 +0000 Ray Galkowski, CFA http://amarginofsafety.com/?p=1266 Continue reading →]]> The WSJ published today another excellent Intelligent Investor column by Jason Zweig. Today’s piece was on the lure of high-growth, publicly-traded companies (“Glamour Stocks” as Lakonishok, et al. described them) and the probable investor disappointment with Glamour Stocks’ returns. Today’s example was Facebook. I like how Jason worked in the St. Petersburg Paradox and gave an excellent example of “inverting” the analysis to see if Facebook’s rumored valuation seemed reasonable.

http://online.wsj.com/article/SB10001424052970204662204577200862677176998.html?KEYWORDS=zweig

Here Jason talks about the column:

 

 

 

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