Saturday, November 14, 2020

What is "The Market"?


What is “The Market”?

Volatility has played a big part in 2020 and there’s no sense it will stop anytime soon. More people are paying attention to the ebbs and flows of the stock market – whether they want to or not – thanks in large part to the news cycle. “Dow Soars 800 points…”, “Nasdaq jumps 2%…”, “S&P Futures eases below 3,600…”

There are countless attention-grabbing headlines all seemingly referring to the same stock market, but promoting different letters and indices with varying percentages and numbers. What is the difference between the Dow Jones, the Nasdaq, and the S&P 500? And what does “The Market” actually mean?

The Dow Jones Industrial Average

One of the most widely known, and America’s original stock index, the Dow Jones is made up of 30 of the largest stocks from each major sector, excluding utilities and transportation. The value of the index is price-weighted, which means the index is only affected by changes in stock prices. A 1% price change for UnitedHealth Group ($351.70/share) has a much larger impact on the index than a 1% change in Cisco Systems (39.33/share).

Is the Dow a good measure of the stock market? There are better. While it takes into account industry leaders, there are only 30 stocks measured in a world of hundreds and hundreds of stocks. Plus, it’s only measured by price changes which can sometimes be misleading.

The Nasdaq 100 Composite Index

As the title suggests, the Nasdaq 100 is made up of 100 different stocks. The description from Nasdaq’s website explains the index as, one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization”. Unlike the Dow, the value of this index is based not on the prices, but instead on the market cap of each company.

Is the Nasdaq a good measure of the stock market? It’s better than the Dow, but still not the best. The Nasdaq is very tech-heavy and growth-focused, so it doesn’t do an adequate job of measuring the market as a whole. Additionally, it only makes up 100 stocks where there are multiple hundreds of companies.

The S&P 500

This index tracks 500 of the largest U.S. companies in the stock market. The index is market cap-weighted like the Nasdaq and therefore a 10% change in a $20 stock will affect the index in the same way as a 10% change in a $50 stock will.

Is the S&P 500 a good measure of the stock market? Yes! This index has a much broader look at the overall market and is much more encompassing compared to the Dow or Nasdaq. When referring to “the market”, this is what most people mean!

There are still downsides to using the S&P 500 as a measure of the overall stock market. To learn more, click here to see the post, “S&P 500 Dominated by Tech Mega Caps”.

Volatility, Time, and Diversification

As we continue through these uncertain times, volatility will stay heightened, stock market headlines will stay at the forefront, and emotions can run wild. It’s important to remember time in the market is more effective than trying to time the market. Over shorter periods of time, investment returns and volatility can vary widely; however, long-term investors are rewarded for their time in the market, not for trying to time the market.  Maintaining a diversified allocation that is consistent with your long-term goals, combined with periodic rebalancing, has consistently resulted in beneficial long-term financial outcomes.  We remind clients to keep their next 7-12 years of anticipated cash distribution needs in stable assets such as cash, CDs, and short-term bonds.

Monday, April 16, 2018

Economically Speaking - Part 1

There has been a lot going on lately and for the benefit of my and hopefully you, I'm going to get my thoughts down. It's like bumper cars in my brain right now and I hope to get this sh..tuff more organized. Almost daily, something new will come to the foreground command my attention. I wake and wonder what I will unintentionally focus on today. Will it be: trade wars, war wars, unemployment, interest rates, inflation, the yield curve, quantitative easing, GDP growth, cryptocurrency being get the picture.

In no particular order, here are my own opinions on the things we have been hearing. As always, from an Uninformed Investors point of view.

I've decided to make this a multi part post. It would be too long to put it all here and I did not use my time wisely and the things I wrote about earnings pertain to events today [4/16] that should be posted today. So, Part 1!

Yield Curve

The spread between the short term and the long term yields are thinning. At this point it isn't any cause for concern, more so just something I'm keeping in the back of my mind. Why is this important? Every recession has been preceded by a negative spread between the 10 year treasury and 2 year treasury yields. The average time is about 18 months, or a year an a half.

Saturday, March 24, 2018

'Reminiscences of a Stock Operator' Is A Welcomed Change

Reminiscences of a Stock Operator
Written by: Edwin Lefevre
Foreword by: Tim Price

This was an all around phenomenal book to read. Recently I have been focusing on reading non-fiction and that can get so, so boring. I actually started listening to Hamilton on tape for my drive to and from work and, though very interesting, very boring. Between the hum-drum ebb and flow of my 9-5, this was a welcomed change.

Reminiscences of a Stock Operator is a fictional representation of the life of Jesse Lauriston Livermore, a stock trader in the early 1900's. Using the pseudonym Jesse Livingston, author Lefevre dives into the experiences had by Livermore himself. It begins in a bucket shop in New England and ends up on Wall Street. What really pulls readers in (me) are the gains and losses. Growing the few dollars he started with into over $10 thousand, losing it all. Making a few million, then soon finding himself in massive debt. Figuring out what he'd done wrong and making that million back - and more.

That part is true.

Monday, March 12, 2018

The February Budget

Having a budget is one of the most important aspects of personal finance. Whether a natural born spender, saver, or anywhere in between, knowing where your money is going is of almighty importance.

I took the time to catalog and write down everything I spent money on in the month of February. I would consider myself a natural born saver, so some may find this boring. I bring a lunch to work from home essentially every day. Dinner is home cooked almost every day. I also 23 and don't have to pay for health insurance yet. Shout out ma and pa.

My girlfriend has been reading what are called, "Money Diaries" from Refinery 29 and I am amazed at the lack of saving or general knowledge of basic personal finance. I understand being young and being free and traveling and doing what you want, but at some point ya gotta think about your future. If you are turning 30 and have saved nothing, or put nothing towards retirement, you are far behind.

Math Example!

Wednesday, February 28, 2018

Japanese Candlestick Charting Techniques, Brought to you by Steve Nison

Japanese Candlestick Charting Techniques:
A Contemporary Guide to the Ancient Investment Techniques of the Far East
Written by: Steve Nison
Published in 1991

Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East

This book reads like a textbook.

If there was one thing I would have wanted to know before getting this book, it would be that. It reads very much like a textbook as opposed to a typical "book". Is that a bad thing? That's up for the reader to decide on their own. The last book I reviewed, "The Most Important Thing," read more like a book. Reading it in the morning before work or at night before bed was ideal. This book was very different for me.

Now that I write it, that point seems very obvious. A book explaining technical analysis is inherently going to be more in depth and 'technical', for lack of a better word, than a book targeted towards developing an investment philosophy about value investing.

Does that mean I didn't like this book?   Absolutely not.
Does that mean this book wasn't helpful in it's own right? Abso-freaking-lutely not.

Japanese Candlestick Charting Techniques has been one of the most educational and helpful books I have read about investing. Clearly this will only pique the interest of the technical, chart reading investor. Very much the opposite of someone who likens Buffett to a god, or claims Graham wrote the bible of value investing. Nothing against either of those men. Their success and genius is something to admire and strive for, but I think their view on this book, and these types of books, is going to be poor.

Monday, February 12, 2018

Howard Marks is Going to Live In Your Brain After Reading 'The Most Important Thing'

Earlier this week I started - and finished - 'The Most Important Thing: Uncommon Sense for the Thoughtful Investor' by Howard Marks

For the second time.

I have been living in the realm of investments lately and this piece of non-fiction lands in the center ring. Based strictly on the title, it reads like it would be one of those, "do this to get rich," or "how to get rich, quick." This book is as far from that category as you can imagine. The opening even states it is not meant to be a "guide" or a "hand-book" of sorts.

It is a composition and expansion on his memo's to investors. Second only the Buffett, the memo's, all of which are archived on the Oaktree website, are pure gold.

For those of you who don't know who Howard Marks is, you should. In 1995, Marks and 5 other partners founded Oaktree Capital Management where he remains the co-chairman. The focus of Oaktree (traded on the New York Stock Exchange under OAK) is on private equity, distressed debt, and high-yield bonds, among others. The public listing IPO'd for $43 dollars raised about $380 million for the firm. Though the stock today is trading at approximately the same level, it bolsters a strong, consistent dividend. 2017 returned roughly 7.00% alone just from dividends. But I digress.

Howard Marks specializes and firmly believes in value investing. (He has appeared many times on television, often talking about the current state of the markets. Typically seen on Bloomberg). It seems his investment philosophy is built around just that. Buffett himself heralded the book saying, "This is a rarity, a useful book." The book itself is created from the same guiding principals encompassing value investing, but goes in a different direction than most. There are no formula's. There is no math. There is no instruction on finding intrinsic value. There is only thoughtfulness.