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| Posted: 19 Aug 2011 02:00 AM PDT
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Friday Links originally appeared on Canadian Finance Blog on August 19, 2011.
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| Posted: 11 Aug 2011 02:00 AM PDT It’s Monday night as I write this post, and I, like many of you, have watched thousands of dollars evaporate from our investment accounts over the past couple weeks. The worst of all came on Monday, with the S&P 500 down 6.66%, causing every market pundit to make the same bad joke about the devil making the market go down. Watching market coverage is like watching a train wreck. You want to look away, but you just can’t pry your eyes away from the carnage. This is not a fun time to be an investor. As what happens every time the markets sell off, all the financial talking heads start telling about how the market is on sale. You buy steak when it’s on sale, so why wouldn’t you buy stocks when they’re on sale too? After all, the goal of every investor is to buy low and sell high, so buying during market dips would be a good thing, right? Then all there’s left to do is to hold until the stock market inevitably goes back up. If it’s so easy, why doesn’t everyone do it?
As I write this, the S&P 500 is at 1119 and change. Just two weeks ago the S&P 500 traded above 1340. A 16% percent decline in just 2 weeks is a pretty steep sell off, especially in such a short period of time. But what if the market was overvalued at 1340? How do we tell if the market is overvalued anyway? Trying to figure out the fair value of the market is incredibly complex. Various market participants have different motivations, all of which affect the valuation of the whole market. Some people invest only in dividend stocks. Others chase high growth names with little in actual earnings but loads of potential. And still others try to buy contrarian stocks with cloudy futures but strong balance sheets. Things like interest rates and general economic sentiment play an important role as well. The point of all this? Since no two investors are exactly alike, attempting to figure out a fair value for the whole stock market is just too complicated for us mere mortals. The best we can do is look at the market’s price to earnings ratio (abbreviated p/e) and compare it to historical values. From there we have a rough idea of whether the stock market is cheap or expensive, or somewhere in between. We know the market’s price (that’s 1119) and this site gives us the earnings for all the companies in the index. The most recent measure of S&P 500 earnings is 82.13. Divide the two figures and we get a current S&P 500 p/e ratio of 13.6. Does a p/e ratio of 13.6 represent a good value? Well, sort of. From a historical perspective, it’s around an average value. I tried to find more precise numbers, but my The last time the market traded at 1119 was back in… August 2010. If you were even more patient during that market sell-off, you could have bought the S&P 500 at levels comfortably below 1100. The index bottomed at around 1050 during the month. Many of the same economic headwinds plagued the economy then. S&P earnings were… about the same. How many people were clamouring about a market sale back then? If you weren’t positive a year ago, why are you positive now? I’m not saying that you shouldn’t buy stocks at these levels. There are all sorts of stocks that look compelling at these prices. The market as a whole though, just looks okay. Traders are increasingly concerned by all sorts of things. There’s an increased risk of a brand new recession. European government debts are a mess. The United States needed a real solution for their debt problem, and they failed to deliver. Unemployment in the U.S. continues to be stubbornly high. Companies are sitting on mountains of cash on their balance sheets, since they can’t find places to invest it. There’s all these headwinds, and you’re going to back up the truck to pick up equities? By the time this gets published, the market could be well on its way to recovery, and all the doom and gloom from the previous paragraph may seem unimportant. You might have missed the boat on buying this correction altogether. I seriously doubt it though. Rather than load up early into the correction, nibble a bit. Buy a little this week and a little next. Stay patient and keep buying as long as the market is going down. And please, don’t sell anything. That’s just silly. I’ll leave you with one thought about the fallacy of looking at the p/e ratio of the S&P 500. At the end of 2008 when the S&P 500 was trading at 903, guess what the p/e ratio was? The index earned 65.39, giving us a ratio of… 13.8. You’d be sitting quite well if you would have bought then, even after the recent market crash. Valuing the market is hard, that’s why you shouldn’t invest all your cash at once. Related Posts:
The Market Isn’t On Sale… Yet originally appeared on Canadian Finance Blog on August 11, 2011.
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| Posted: 10 Aug 2011 02:00 AM PDT My wife and I went on a bit of a drive. We have some friends that live in a bordering province, so when we had some time off work we decided to go and visit them. We had always hesitated because it is a bit of a drive (8-9 hours), and with fuel prices being the way they are these days, we weren’t sure if we would be able to afford to go. However, because the timing of the trip worked out so well, we decided to just go for it and see what happened. Surprisingly, the trip cost, in fuel, about half what we were expecting. See, I knew our car’s fuel economy from driving around the city that we were living in, and while I knew that I would get a little better fuel economy driving on the highway, I never expected it to be such a dramatic difference.
Our trip was to be about 850km. I knew that we were usually filling up for gas every 450km or so, so I figured two tanks would get us there, and an additional two to get us back. In actuality, it only took slightly over 1 tank of fuel to reach our destination, and because gas prices are lower where we ended up, filling up was also cheaper than expected. In the end, we averaged 7.2L/100km for our fuel efficiency, which is quite good for our vehicle, considering the hills/mountains we were climbing throughout our journey. Here’s a couple of fuel economy tips and tricks we used to maintain decent fuel economy. Use Cruise ControlWhile it depends on the type of terrain you are driving over, I found that in my scenario using cruise control saved us some money. There was a lot of long, flat stretches, and because my car is an automatic, I let the vehicle decide exactly how much fuel to use to maintain my speed. Every vehicle will get slightly better or worse fuel economy at differing speeds. There should be a “sweet spot” of speed to economy. Once you know approximately where that is, you can simply set your cruise control to that speed, and let the vehicle do the rest of the work. This way you aren’t wasting fuel speeding up and slowing down, something that can happen when driving manually. Use the Terrain to Your AdvantageIf you are driving somewhere that using cruise control isn’t as realistic (mountainous driving), then use the terrain to your advantage. Let your car speed up on the downhills (while maintaining safety, obviously), and don’t speed up the hills. My car has a tachometer, so instead of looking at the speed of my vehicle while driving up hills, I watched the tachometer. I didn’t bother trying to maintain a steady pace up the hill, and instead tried to maintain steady RPM. Keeping my engine’s RPM low (two to three thousand) meant I drove up the hill slower, but more economically. If I allowed my RPM to climb (four to five thousand) to maintain my speed, I crested the hill faster, but spent more fuel doing it. Gas BuddyThe beauty of having a smartphone with data is that you can reap the benefit of certain websites and apps. On this trip, I often employed Gas Buddy, a website that allows me to search for the cheapest gas in any given area. We ended up using it a couple of times to decide where to stop for fuel. This sometimes meant I filled up with gas when the car was only half empty, but I often saved a few cents per litre doing so. Other times, it just meant that I could find the cheapest gas in town, even though I had never been to town before. It might mean getting off the highway and going around the block, but the savings more than made up for the additional kilometre or two of driving. Do you have any other fuel economy tips that helped you save money on your fuel economy? Related Posts:
Fuel Economy Tips & Tricks originally appeared on Canadian Finance Blog on August 10, 2011.
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