I know some will blast me for this but you can do better with your money than a 401K plan. But first you have to get a better understanding of the market before you go off on your own. What's wrong with a 401K plan you may ask? Well. . .primarily most of them have costly management fees associated with them that eat into your profits. In my company, for instance, there are a lot of mutual funds you can invest your 401K savings in but mutual funds often have a lot of administrative management cost with them because some investment manager is getting paid to manage that fund. Make sure you look at the amount you are paying to have your 401K investment managed! That's your earned interest paying his salary! Secondly, you never really have as much in there as you think you do because a 401K is only tax deferred. Meaning you are going to pay tax on that money when you take it out. By all means put enough money in there to get 100% of your employer match if they offer one. That's just free money you'd be a fool not to take. But for the rest of it, you can probably do better if you take a little time to learn a little about the market and finance so that you can cut out the "middle man" and make your own smart investment decisions. If you are young, start putting money into a Roth IRA account every year (I think you can put up to $4000 per year in one currently but that may be going up) and investing it wisely. In a Roth IRA, you contribute money after tax but you do not pay any further tax on any money that investment earns. It starts off small but as the years go by, if you contribute all you can every year and manage it carefully, it will grow nicely. So my advice to you is diversify the way you are saving for retirement. Get you employer match for your 401K but don't throw away any more than you have to in management fees.
I know some will blast me for this but you can do better with your money than a 401K plan. But first you have to get a better understanding of the market before you go off on your own. What's wrong with a 401K plan you may ask? Well. . .primarily most of them have costly management fees associated with them that eat into your profits. In my company, for instance, there are a lot of mutual funds you can invest your 401K savings in but mutual funds often have a lot of administrative management cost with them because some investment manager is getting paid to manage that fund. Make sure you look at the amount you are paying to have your 401K investment managed! That's your earned interest paying his salary! Secondly, you never really have as much in there as you think you do because a 401K is only tax deferred. Meaning you are going to pay tax on that money when you take it out. By all means put enough money in there to get 100% of your employer match if they offer one. That's just free money you'd be a fool not to take. But for the rest of it, you can probably do better if you take a little time to learn a little about the market and finance so that you can cut out the "middle man" and make your own smart investment decisions. If you are young, start putting money into a Roth IRA account every year (I think you can put up to $4000 per year in one currently but that may be going up) and investing it wisely. In a Roth IRA, you contribute money after tax but you do not pay any further tax on any money that investment earns. It starts off small but as the years go by, if you contribute all you can every year and manage it carefully, it will grow nicely. So my advice to you is diversify the way you are saving for retirement. Get you employer match for your 401K but don't throw away any more than you have to in management fees.
- Oct 28, 1999
- 62,480
- 8,340
- 126
I think the biggest mistake that people make with their 401k is poor allocations and not rebalancing enough(or too often).
They either carry too much cash or have too much invested into one market (all domestic) or have it all in large cap. Ect. And then they don't pay attention to things and move more to cash in really bad markets. Or continue to contribute to cash when things are really picking up.
But for most people the 401k is a very safe way of sticking away money that you can't tinker with. And that's the important part. It's pre-tax so they don't see much getting taken out and since it's pretax they can't yank out the principal without taking a big penalty.
Yeh, maybe they could eak out a bit more opening up a Vanguard account, but they can only do an individual IRA through them for $4000 a year. At least with a 401k (or a Roth 401k if offered) they can put in $15,000 a year...and still do the Roth/Traditional IRA on the side.
The management fees might be better on the $4000, but it's 1/3 less that they are able to sock away.
Personally I crank out my max 401k contribution in a diversified blend of index funds. But I have a traditional IRA (Rollover account that I can't recharacterize because of too high of an income) that I have individual stocks in.
They either carry too much cash or have too much invested into one market (all domestic) or have it all in large cap. Ect. And then they don't pay attention to things and move more to cash in really bad markets. Or continue to contribute to cash when things are really picking up.
But for most people the 401k is a very safe way of sticking away money that you can't tinker with. And that's the important part. It's pre-tax so they don't see much getting taken out and since it's pretax they can't yank out the principal without taking a big penalty.
Yeh, maybe they could eak out a bit more opening up a Vanguard account, but they can only do an individual IRA through them for $4000 a year. At least with a 401k (or a Roth 401k if offered) they can put in $15,000 a year...and still do the Roth/Traditional IRA on the side.
The management fees might be better on the $4000, but it's 1/3 less that they are able to sock away.
Personally I crank out my max 401k contribution in a diversified blend of index funds. But I have a traditional IRA (Rollover account that I can't recharacterize because of too high of an income) that I have individual stocks in.
I agree, don't get too hung up on the amount of dividends a stock pays, particularly if you are still young. When you are young you want to think of investing for growth. You look for strong growing companies that you expect will appreciate over the years. If a company is not paying dividends, a couple reasons could be it maybe isn't currently profitable OR they are reinvesting all their profit back into the company for growth. If you are older and looking for more regular income, you want to invest in more stocks that pay regular dividends. These are typically older, bigger, more mature "blue chip" type companies. It is also a factor of risk. A company that doesn't pay a dividend could be considered a more risky investment than an old, proven, stable company. With more risk you stand to gain more but you also stand to loose more. Potential profit is a factor of risk taken and so is potential loss. The idea is that if you are young, you can afford more risk because you have a longer time to make up for any losses you might sustain.
First off, price isn't set only by demand, it is set based upon the expectation of future cashflows that will be paid to the investor. Therefore, whatever future cashflows that are retained (retained earnings), you can either A. Expect them to be released in the future or B. Expect them to generate future earnings.
Now, retained earnings increase the overall book value of a stock, leading to additional stock price appreciation. Furthermore, the market sets price points, based upon reasonable assumptions of each individual investor building their own models.
how do the models work? There are a few different ones, including the Discounted Cash Flows, Discounted Abnormal Earnings, Discounted Value-Added...etc. All of them build in growth assumptions and then discount those back.
What discount do they use? They use a reasonable assumption of risk and return. This is usually set by a model, such as CAPM. CAPM assumes that all goods are based upon three components, a base "Risk-Free" rate, such as a government bond, the Beta or a risk measurement compared to the overall asset basket, and the equity or risk premium.
The overall return basket is usually based off of a broad index, such as the S&P 500, but can also include international equity. The returns of the company are then regressed against those of the index and a Beta is found.
The equation is this: RfR * B (Market - RfR)
Say for example you have a very risky company, it's price movements are 1.5x (beta) the overall market, assume that RfR is 3% and the market returns 10%.
That means that 3% * 1.5 (7%), the stock should return at least 13.5%.
Now, the equity risk premium is a huge debate. As many mentioned, there is ample evidence to suggest that the Equity Risk Premium (Market - RfR) has now compressed, where it used to be ~5%, it is now ~3% and could even decline further.
Pricing aside, your assumption that prices are based upon supply and demand only also assumes you are looking at *INDIVIDUAL* issues. Of course, not all issues with be affected by a price/demand difference, since there is a finite amount of money chasing an almost infinite amount of issues, some have to go up and others must go down. Therefore, the overall equation must be balanced.
Take for example Intel and AMD. Previously AMD was priced very high while Intel was priced low. In relation to the earnings they generate (and assume to disburse later) or the P/E ratio, you were paying in excess of 32x earnings (it will take you 32 earnings periods to recover the cost of that stock) to purchase AMD while you were only paying 20x or less for Intel (I bougt in at 14 while shorting AMD at 30). That means that AMD was irrationally high compared to Intel.
Furthermore, Intel is a *BETTER* company, now and in the past. There are two things that could have driven the appreciation of AMD, improved analyst forecasts, or irrational market expectation and supply/demand irrationality. Now that AMD has proven it's numbers weren't going to be sky-high forever *AND* analyst expectations haven't really changed *WHILE* price has come down and P/E has lowered, you see that AMD was really overpriced.
Furthermore, Intel was underpriced due to people flocking to AMD and throwing the Supply/Demand out of whack. Therefore, if you would have *BOTH* issues, you would be evening the situation out.
So, one could only conclude that you are mixing temporal periods *AND* indivudual issues. You cannot say "Well, over 100 years the market has returned 10% but it only depends on supply/demand". Well, s/d is only a short-term situation while you are quoting a long-term number. Furthermore, S/D is largely a micro level where you are speaking of a macro number.
Essentially, you have gotten completely confused. Your confusion has lead to your questioning of a system which supports trillions of dollars per day and do not only affect the rich, but everybody in between.
It isn't a scam, it isn't a fraud or a way to cheat. It is a medium by which growth is achieved by parceling out ownership to raise capital. Since not everybody will always want to own that piece it has to be fungable. That piece represents not only current earnings through dividends, but also, assuming no further piece issuances, a larger chunk of an ever-expanding pie.
Now, retained earnings increase the overall book value of a stock, leading to additional stock price appreciation. Furthermore, the market sets price points, based upon reasonable assumptions of each individual investor building their own models.
how do the models work? There are a few different ones, including the Discounted Cash Flows, Discounted Abnormal Earnings, Discounted Value-Added...etc. All of them build in growth assumptions and then discount those back.
What discount do they use? They use a reasonable assumption of risk and return. This is usually set by a model, such as CAPM. CAPM assumes that all goods are based upon three components, a base "Risk-Free" rate, such as a government bond, the Beta or a risk measurement compared to the overall asset basket, and the equity or risk premium.
The overall return basket is usually based off of a broad index, such as the S&P 500, but can also include international equity. The returns of the company are then regressed against those of the index and a Beta is found.
The equation is this: RfR * B (Market - RfR)
Say for example you have a very risky company, it's price movements are 1.5x (beta) the overall market, assume that RfR is 3% and the market returns 10%.
That means that 3% * 1.5 (7%), the stock should return at least 13.5%.
Now, the equity risk premium is a huge debate. As many mentioned, there is ample evidence to suggest that the Equity Risk Premium (Market - RfR) has now compressed, where it used to be ~5%, it is now ~3% and could even decline further.
Pricing aside, your assumption that prices are based upon supply and demand only also assumes you are looking at *INDIVIDUAL* issues. Of course, not all issues with be affected by a price/demand difference, since there is a finite amount of money chasing an almost infinite amount of issues, some have to go up and others must go down. Therefore, the overall equation must be balanced.
Take for example Intel and AMD. Previously AMD was priced very high while Intel was priced low. In relation to the earnings they generate (and assume to disburse later) or the P/E ratio, you were paying in excess of 32x earnings (it will take you 32 earnings periods to recover the cost of that stock) to purchase AMD while you were only paying 20x or less for Intel (I bougt in at 14 while shorting AMD at 30). That means that AMD was irrationally high compared to Intel.
Furthermore, Intel is a *BETTER* company, now and in the past. There are two things that could have driven the appreciation of AMD, improved analyst forecasts, or irrational market expectation and supply/demand irrationality. Now that AMD has proven it's numbers weren't going to be sky-high forever *AND* analyst expectations haven't really changed *WHILE* price has come down and P/E has lowered, you see that AMD was really overpriced.
Furthermore, Intel was underpriced due to people flocking to AMD and throwing the Supply/Demand out of whack. Therefore, if you would have *BOTH* issues, you would be evening the situation out.
So, one could only conclude that you are mixing temporal periods *AND* indivudual issues. You cannot say "Well, over 100 years the market has returned 10% but it only depends on supply/demand". Well, s/d is only a short-term situation while you are quoting a long-term number. Furthermore, S/D is largely a micro level where you are speaking of a macro number.
Essentially, you have gotten completely confused. Your confusion has lead to your questioning of a system which supports trillions of dollars per day and do not only affect the rich, but everybody in between.
It isn't a scam, it isn't a fraud or a way to cheat. It is a medium by which growth is achieved by parceling out ownership to raise capital. Since not everybody will always want to own that piece it has to be fungable. That piece represents not only current earnings through dividends, but also, assuming no further piece issuances, a larger chunk of an ever-expanding pie.
So lets say i buy 1000 shares of Google right now and get ownership of 1/100000th of the company. What benefit will i get out of that purchase other than the hope that the stock price increases?
This is funny.
You guys call BiggerRIG an idiot, then write a dozen posts basically agreeing with him.
(-) Wall street isn't much different than a casino. At least at the Casino you are guaranteed free drinks.
(-) The price of non IPO stock is based on the value of somebody wanting to buy it. The value of that stock is then based on the speculative value of somebody wanting to buy it. Unless it the company is being bought out or they are paying dividends, stocks themselves have no value, and hence what I think BiggerRIG's point is. Stocks are not legal tender as some of you have been brain washed.
(-) While the overall mean of the stock market isn't much different than the GDP, mutual funds are expected to perform much better than the GDP. This defies basic economic sense and is what we call a "bubble". If stock prices going up are good, then so is the price for gasoline.
(-) The amount of cash being dumped into Wall Street determines the over-all value of the market, not the value of the companies themselves. Anybody who thinks the price or perofrmance of an individual stock is an indicator of the company's health is a moron.
(-) The amount of cash transations in the stock market in terms of stock sales with established companies well exceeds the stock market's REAL value, which is providing capital for start-up companies or those initially going public.
(-) Greespan should have been cranking interest rates to the roof in the 90's, which would have greatly softened the bubble burst.
If this makes me seem negative about the stock market, then you are right. We've seen a dramatic change in the attitude of corproate CEO's the past few decads from being concerned about the long term health of a company and keeping customers to being only focused on short term value to share holders. As I said above, the value of a stock has little relation to the actual health of a company, so CEO's are often forced to make decision to keep the price of their stock elevated -vs- run a solid business.
You guys call BiggerRIG an idiot, then write a dozen posts basically agreeing with him.
(-) Wall street isn't much different than a casino. At least at the Casino you are guaranteed free drinks.
(-) The price of non IPO stock is based on the value of somebody wanting to buy it. The value of that stock is then based on the speculative value of somebody wanting to buy it. Unless it the company is being bought out or they are paying dividends, stocks themselves have no value, and hence what I think BiggerRIG's point is. Stocks are not legal tender as some of you have been brain washed.
(-) While the overall mean of the stock market isn't much different than the GDP, mutual funds are expected to perform much better than the GDP. This defies basic economic sense and is what we call a "bubble". If stock prices going up are good, then so is the price for gasoline.
(-) The amount of cash being dumped into Wall Street determines the over-all value of the market, not the value of the companies themselves. Anybody who thinks the price or perofrmance of an individual stock is an indicator of the company's health is a moron.
(-) The amount of cash transations in the stock market in terms of stock sales with established companies well exceeds the stock market's REAL value, which is providing capital for start-up companies or those initially going public.
(-) Greespan should have been cranking interest rates to the roof in the 90's, which would have greatly softened the bubble burst.
If this makes me seem negative about the stock market, then you are right. We've seen a dramatic change in the attitude of corproate CEO's the past few decads from being concerned about the long term health of a company and keeping customers to being only focused on short term value to share holders. As I said above, the value of a stock has little relation to the actual health of a company, so CEO's are often forced to make decision to keep the price of their stock elevated -vs- run a solid business.
It's not a hope. An informed and logical investor can see that individual issues could be a bad buy, or a good one. Personally, I wouldn't buy GOOG, it isn't worth it.
Furthermore, you are *STILL* mixing you temporal and micro/macro levels. You say that the market as a whole returns ~10%, yet pick on individual issues. if the market were a scam, then why pick on one company? Just buy the market?
Yes, for GOOG you get the potential of an increasing stock price *AND* the future cashflows of the company once it starts releasing cash in dividends (once there are no projects of positive NPV).
Speculating on single issues is foolish for anybody but a trained and disciplined investor, one who can spot stocks that are out of their supply/demand worth.
Ohh, and I just found out.
WOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
I just passed CFA Level 3, 3 exams, 3 tries, 3 passes!
Miramonti
Lifer
- Aug 26, 2000
- 28,651
- 100
- 91
I side with the OP.
Profits are only one factor in the perception of the value of the pyramid scheme. The .com bubble was a perfect magnified example of this - the most important thing in pricing is not what a company is worth, but instead what one believes the next person will pay for the stock, and whether or not there will be more shares to buy or sell at the last traded price.
Most stocks right now are overvalued compared to what the actual companies value is. The current global investing equation and the flow of money makes most stocks price disingenously high because of its relative value to where the rest of the industry/market is trading (which is also artificially high due to money going to all corners of the market.)
It is ALL about supply and demand, and the *marketing* of stocks, funds, markets etc. are significant factors in keeping the pyramid scheme going. You can quote historical percentages all you want because it was the same pyramid scheme then, it is the same pyramid scheme now, and it will be the same pyramid scheme in the future.
This is stupid. Casinos don't have a track record of beating inflation + premium over 100 years. Play any game over 100 years and return 10% consistantly in a Casino and I will not call you lucky, but dang good. Furthermore, anybody that good at their job can also beat the market's 10%.
The value of a non-IPO stock is created by the MARKET who sets the price. If somebody thinks, through their analysis of the company's fundamentals, that it is overpriced, they will sell. If everybody thinks that through fundamental analysis that it is underpriced, they will buy. Each results in a lower or higher return.
This defies logic. Most mutual funds don't overperform the market or certain sector they are targeting, mainly because of fees. That's why it's better to just buy an index fund. What *YOU* call a bubble is something completely different.
The price or performance of a stock isn't only set upon the current performance of a company but also the future. Anybody who thinks otherwise is a moron.
Proof of that number?
Drastic rate increases have been proven to cause more economic turmoil than a bubble. Any learned person in finance knows this.
Yet, appreciation over the past few decades has been pretty good.
The same benefit as if you bought your favorite baseball players baseball card. . .If you want your broker will send you a stock certificate if you want something tangible you can touch and see. . .
You are missing a key point here though. . .how many baseball cards do you have? Probably a lot. Why?
iversonyin
Diamond Member
- Aug 12, 2004
- 3,303
- 0
- 76
Can you sell baseball card to anyone at the open market? There is limited liquidity in baseball card!
Someone is almost gurantee to take your stocks in the market (assume you trade like a retail investor, you can get sell and buy within few cents of market price).
Non dividend stocks are usually growth stocks, they reinvest their earnings into different projects that could yield more return. If you dont like them, play value stocks that pay dividend.
Nobody forced anybody to invest in the .coms, any logical and rational person that didn't buy into hype knew that it was BS. Look at Buffet, Birkshire Hathaway sure performed well through that period. Fools buy into hype.
First, you talk about "most stocks" then say "most stocks are overvalued against relative to the industry/market". If "most stocks" are overvalued relative to the market, then isn't the market overvalued in general? Your statement is nonsensical.
It isn't *ALL* about supply or demand, but there is a function of it in there. If you do a multi-varlable regression on the market, R2 is largely denoted by economic factors, general risk, and various other "hard" factors which explain about 60-70% of variance in stock prices, the remaining 30% is supply/demand, which can be controlled with reasonable analysis.
Basically, you guys are blissfully ignorant to the facts and only choose the point the finger rather than educate.
Hint: A successful pyramid scheme is still a pyramid scheme.
[/quote]A pyramid scheme assumes that you take all of the money from the person below to pay the person above them, perpetuating the cycle in an ever growing demand for "investors". Furthermore, the "wealth" at the top isn't invested nor used by anybody but it's owner.
Considering that the "pyramid" in this sense is also a reverting one, since the wealth is redistributed through jobs and economic growth, it is *NOT* a Ponzi or Pyramid scheme.
That analogy is used by fools who refuse to educate themselves but would rather point fingers.
I don't know where to begin on this, I think the OP just needs to really start reading a lot and learn about how things work.
How is it nonsensical? There is such a thing as a premium in a supply demand economy. If you go to buy a new car that is in hot demand, you are going to find that the dealer is going to be asking above MSRP. Is that the car's true worth? No, of course not. That's a lot more than it cost the manufacturer to make it. You are paying a premium because you WANT that car. Stocks can work exactly the same way. If a car maker is trying to move cars off the lots, they will offer rebates and incentives to lower the cost. Stocks can be like that too. If you want a hot stock because it has better expectation of earning you more money in the future than another stock, then you are going to pay a premium for it NOW because everybody else wants it too.
So, if every car, or the majority of them, are overpriced above MSRP, then does that mean that the car *you* want is overpriced relative to the rest of the "majority" of the market?
You can't have a majority of the market be overpriced relative to itself. It's a stupid way of putting what you really mean.
A.
*SOME* stocks are overpriced relative to the market, not most.
B.
Most stocks are overpriced *AND* so is the market.
I think he was saying that the whole market is way overvalued because there is way too much DEMAND for securities. Everyone is brought up with the mindset that "the stock market is the best way to make money" and "10% over the long term."
- Oct 28, 1999
- 62,480
- 8,340
- 126
I don't understand the pyramid scheme reference.
When I buy a stock through a broker, my broker gets a commission and the market maker holding it gets a bit of the spread. The SEC also gets eensy weensy bit too...
How is that different from buying something from Walmart? When I buy a pair of socks at Walmart, the store selling me the goods makes money, and the company that sells it to them makes money.
That's not a pyramid scheme, it's simple reselling.
Or are the people calling it a pyramid going a little deeper and talking about how the institutional shorters can really swing a stock price or how a guy like Cramer can get on the TV and single handidly manipulate things?
When I buy a stock through a broker, my broker gets a commission and the market maker holding it gets a bit of the spread. The SEC also gets eensy weensy bit too...
How is that different from buying something from Walmart? When I buy a pair of socks at Walmart, the store selling me the goods makes money, and the company that sells it to them makes money.
That's not a pyramid scheme, it's simple reselling.
Or are the people calling it a pyramid going a little deeper and talking about how the institutional shorters can really swing a stock price or how a guy like Cramer can get on the TV and single handidly manipulate things?
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