Broomer's Blog

From the category archives: Equities

Equities

The more I scream, the faster they go

Investment is a difficult discipline but there lies some very simple tenets at its heart. One of these is that the more you pay for an investment, the lower the return. As we approach the final stages of this long bull market, profits are approaching a cyclical peak and investors are paying a hefty multiple for these earnings.

It is common in late stages of bull runs for 'market darlings' to emerge. These stocks seemingly are impervious to rain or shine and behave magically as both performance drivers and havens for investors during market corrections. That is, until one day, they don't, often sounding the death knell for the bull market.

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The Beauty Parade

Keynes famously used an allegory of a beauty contest to describe how markets behave in the short term. He posed the question of how you should go about betting on the outcome of a beauty contest. To be successful, you should not bet on who you think is the most beautiful contestant but those who you think the judges will consider to be the most beautiful. His point is subtle but distinct.

James Montier at GMO recently highlighted some apparent inconsistencies in the results of the Merrill Lynch Fund Manager Survey. He points out that a significant majority of fund managers now believe the US market to be overvalued,

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Does This Bull Market Still Have Legs?

Summer is finally upon us and while the temperatures are rising, there are few signs of any improvement in this blog's prose. However, the real question is how near are global markets to the chills of winter?

The old market adage has it that bull markets don't die of old age. While there may be elements of truth to this, elderly recoveries must be more susceptible to mortality. The current 8 year run is roughly the average length seen over the last decade and surprisingly it is only just half the length of the longest on record which occurred after WWII. For the current expansion to exceed this run, it would have to pass into 2024.

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Taking the P

Arguably bond investors are more logical and technical in their approach than many equity investors. This reflects the mathematical disciplines required to analyse fixed income markets whereas the greater uncertainties prevalent in the equity space is in keeping with a slightly more artistic bent. This is reflected in the key valuation metrics used by the respective camps. 

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