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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (18410)	1/12/2004 10:55:44 PM
From: Spekulatius	Read Replies (3) \| Respond to of 78728

OT - investment philosopies Paul, I am rereading Malkiels "Random Walk down Wall Street" and think more highly of this book than I did 3 years ago.I do believe in the efficient market theory to some extend so don't think there will ever be a simple system that allows an investor to outperform the market. If it were as easy as finding stocks with low P/E or high dividend yields a lot of investors will figure it out, drive the stocks up and reduce the forward returns for these types of stocks. But I also do believe that anomalies do exist and can be exploited. I think one of the main advantages of value investing is that an investor will avoid what Malkiel calls "Castle in the sky"; investment fads like the internet bubble and possibly right now the small cap or the natural gas bubble. I see this as a main virtues of value investing, and because a value investor is more likely to avoid these fads that occur due to mass frenzies, he should be able to outperform the broad market. With respect to the current market psychology I feel we have come full circle since the Mo-Mo days in 2000, especially after reading your comment regarding "betting on the jockey rather than the horse". There seems to be an abundance of stockpickers with a hot hand posting their findings on message boards and plenty of people willing to bet on the "Jockey" as is apparent from the performance of the stockpicks after they are posted.My gut feeling is that if it indeed is so easy to make money, the party is propably almost over. On another topic Malkiels has a chart in his book on P.291 which I overlooked the first time I read this book. This chart shows the forward 10 year annual return for stocks as a function of stock market P/E. The chart evidently shows that the forward annual return for stocks falls as the P/E increases. Based on that correlation the current market current market P/E of about 20 suggest that the forward annual stock market return for the next 10 years would in the order of 5%. This is not much different than Warren E Buffet's estimate of a 6% stock market return which was given when the market was some 20% lower. Now of course the real returns for the next 10 years out could be much higher or lower but this number does reasonable for me and sets my expectation. My own goal is to get 8% + annual returns without excessive risk so I guess I need to outperform the market by 3% annualy to get there. Just a rant and food for thought.