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3 Things 9-2-24

Thing One



Investing 101



The following is "from the vault" of the writings of a good friend and very successful investor. From time to time I'll share some distilled nuggets of his wisdom. I hope you find them useful.




"...In comparing investment opportunities, we need to consider the relationship between interest rate levels and stock prices, since stocks and bonds are competing investment choices.


As an example, if the price of a stock is $90, its per-share earnings are $6 and the then-current 30-year treasury bond interest rate is 4.5% (some use the ten-year bond rate and others use the corporate bond yield, but we'll use the 30-year treasury yield), we have enough facts to render a reasonable opinion regarding whether stocks are a good investment choice. Here's how we look at it in simple terms.


If the company's stock price is $90 and the company's earnings per share are $6, the P/E (price to earnings) ratio is 15, which is calculated as follows: 90 divided by 6 = 15. The reciprocal of the P/E ratio is known as the earnings yield: 6 divided by 90 = 6.67%.



When the earnings yield is less than the bond yield (in this example 4.5%), stocks are usually overvalued. When the earnings yield is greater than the interest rate on bonds, stocks are usually undervalued. Since the earnings yield on the stock is now 6.67% and the bond yield is 4.5%, we get substantially more current "earnings" by owning stocks."



Again, that was written several years ago. As a point of comparison, today's S&P (forward) earnings yield is roughly 4.5% while the 30-year Treasury yield is 4.2% (and falling). The argument for stocks still stands.



Thing Two



What's Your Motivation?



The author of the WSJ Best Selling book, Ultralearning, Scott Young, wrote a thought-provoking article called "The Paradox of Effort". It's a brief but fascinating look at motivation and shortcomings. The last few paragraphs are key and have been excerpted below:



"You have the ability to put in far more effort into things than you normally do. The reason you don’t is that, most of the time, a full effort isn’t necessary.



We think that a full effort will be draining, that we ought to save our energy for when we really need it. Yet, more often than not, the opposite is the case. When we really use our full effort toward a central concern that matters deeply to us, we feel more energized — not less.


The paradox is that life is often easiest when it is hardest. When you’re working on a pursuit that may fail if you don’t take it seriously, you find the energy to take it seriously. And, in doing so, you find the other nagging things in life that needed effort weren’t so hard either.



The key is to find the one thing that will necessitate all the rest."





Thing Three



Just A Thought



"Go as far as you can see. From there you can see farther." - J.P. Morgan

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