Monday, May 12, 2014

How to keep investors stupid....

This article starts out with the following: "A measure of stock valuations called the Rule of 20 states that the stock market is fairly valued when the sum of the average price-earnings ratio and the rate of inflation is equal to 20. Above that level, stocks begin to get expensive; below it, they’re bargains." I call BS. Why? 

First, all the elements that make up this this "rule" are things that only change once a quarter. By that measure, once stocks are deemed "overvalued" they will remain so for the next 90 days at least. Taking that to the next logical, it would say that you should not invest in any stocks because they are overvalued.  See how little sense that makes? 

Second, during this 90 day period when you're waiting to see if the stock market will have bargains again, thousands of stocks are ignoring the Rule of 20, 30, 40, 50 and 60 if it exists. They are moving up, down and sideways every day, every minute. Stocks don't follow any rules, they move with changes in supply and demand.

I cannot confirm, but I would not be surprised if this, and most stock market formulas, are the result of someone reverse engineering the results of the market, making up a formula that made sense on the third Tuesday after the Sunday the Dallas Cowboys played a home game and lost by 21 points and because it sounds good, using it to sell their mutual fund clients into investing more, because they sound like they know what they're talking about. I'm not so sure.

My rules for investing:

Rule #1: It is my understanding that financial advisors and mutual fund managers don't make their money from returns on their investments, they make their money from fees you pay.

Rule #2: If financial advisors did make their money from their investments, I doubt they wouldn't be telling you what they're investing in.