Investing 201: Conventional Investing

Let’s look at what looks like a bubble in equities first.

Federal Funds Rate (Gray vertical bars represent recessions) — Source: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

This is not to say that you can’t make money off the bubble.

Be fearful when others are greedy, and greedy when others are fearful. — Warren Buffet

OK, I know how to make money “off” the bubble, but how do I make money “in” the bubble (or not).

It is all too complicated, and I do not have time to the analyses.

  • Historically they tend to under-perform passively managed, low cost funds, and therefore do not justify the management costs.
  • Open-ended mutual funds fall victims to the herd mentality — when investors are scared, they tend to sell their holdings, thus making it very difficult for the managers to take advantage of low valuations.
  • Look for stocks that issue dividends — ideally 3% or greater. Of course, most growth stocks offer no dividends.
  • Look for companies that have a Debt/Equity ratio below 0.50
  • Current ratio should be above 1.0
  • When P/BV is 1.5 or less and P/E is 15 or less for example, you’ll get the following result: 1.5 * 15 = 22.5. Look for P/BV * P/E < 22.5.
  • Look for ROE > 5%.
Source: Betterment article, and S&P 500 index data from Yahoo Finance
Source: Betterment article, and S&P 500 index data from Yahoo Finance

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store