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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Berney who wrote (20711)	6/19/1998 3:32:00 AM
From: paulmcg0	Read Replies (2) \| Respond to of 94695

<<I've come to agree with Benjamin Graham, investing and speculating should be separated in different accounts.>> The problem with Graham's work and others is that although it is based on classical economic theory, it is dated and doesn't accurately reflect the conditions in the markets at the end of the 20th century. For example, a lot of the old models for defining a stock's value, such as CAPM, rely on the dividends paid by the stock, while very few companies, even utilities, pay decent dividends any more. Somehow, investors have accepted negligible dividends because they believe in capital gains instead. Of course, they often get capital losses... Let's examine a popular myth about the stock market: Myth:Stock indexes represent how stocks in general and the average investor are doing. Reality: Stock indexes, particularly the narrow ones like the Dow Jones Industrial Average (which only measures 30 stocks) are based on the market capitalization for the shares. Periodically, the composition of these indices are changed and some companies are dropped, while others are added. Essentially, it's a popularity contest - the most popular stocks get in the index, while stocks are removed when they fall out of favor. The Dow has seen things like Woolworth and USX (formerly U.S. Steel) getting dropped while Wal-Mart and Disney have been added. (See indexes.dowjones.com if you don't believe me.) Stock indexes are not valid measures -- they are not mathematically consistent because their composition keeps changing. Of course these indexes will go up if you periodically rotate in stocks that have gone up quite a bit. The annual real return of all stocks on the New York Stock Exchange, averaged together, over the past 70 years has been 6.4%, according to an academic paper "The Equity Premium: Stock and Bond Returns Since 1802" by Jeremy Siegel. Maybe I should start a section on popular stock market myths! Paul M. (I'm out of here for a few days of camping at a music festival, instead of thinking about the virtual reality playground of Wall Street.)