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Markets
This Week |
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Investment
Idea
Quiz
Our Results
Market Highlights
Behavioral Finance Indicators
Answer to the Quiz
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Question: Should I buy good companies or companies that are good investments? Is there a difference?
Yes there is a great difference! Good companies are not necessarily good investments (many people confuse the two, though). For instance, let us consider Google (symbol GOOG) (Chart 1).
Chart 1.
Google’s Price Per Share (1 Year)
Chart courtesy of StockCharts.com
We agree that Google is an excellent company with a high growth potential but it may not be a good investment given that it is currently trading at $370 and its P/E (Price/Earnings) ratio of 65 is already pricing in the high future growth. On the other hand, if the share prices of Google were to decline to $100 with a P/E ratio of 18, we could conclude that Google is not only a good company but at this price it also becomes a good investment.
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(Cumulative %)
Chart 2.
Last week, our InvestWELL Picks declined by 3.98%, which was more than the general market. The InvestWELL Picks holds only two positions, which exposes InvestWELL Picks to greater volatility.
Since the inception on Nov. 1, 2006, the conservative 60/40 portfolio has achieved a higher return and lower volatility than the S&P 500, again proving the value of diversification and good risk management practice.
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May 14 - 20, 2006
- In the last week, the US equity markets continued to decline and attempted to find a new support level. Given that the market is currently quite oversold, we are expecting a rebound in the upcoming weeks. Please see the Behavioral Finance Section for more information.
 
Charts courtesy of StockCharts.com
- The Canadian markets declined more steeply than their American counterparts (Charts 5 & 6). The tide has likely turned for commodities.
 
Charts courtesy of StockCharts.com
- During the last week, gold prices declined steeply from $725 to $657 per ounce. This is a significant drop happening in the background of weakness in equity price. Usually, as investors flee from equities they look for safe havens such as bonds, gold, etc. We find that if a stock/commodity reacts negatively to what is believed to be positive news, it often signals underlying weakness.
- Morgan Stanley Chief Economist Stephen Roach (a.k.a. the Perpetual Bear) believes that there's a speculative bubble in commodities, and it's not a matter of if it will burst, but when. Mr. Roach pointed out that the jump in prices of materials in the past few months is reminiscent of charts of dot-com stocks in late 1999 and 2000. InvestWELL Financial also believes that easy money in commodities has already been made.
- Oil prices declined to $68.53 on indications that OPEC will not cut the output. Perhaps we will see lower gas prices during the summer of 2006.
- The Indian mutual fund industry has grown multifold from a single mutual fund in 1964 to 29 Asset Management Companies in 2005. However, Assets Under Management (AUM) as a percentage of GDP are still only 8% while the typical ratio in developing countries is 30 – 50%. India’s financial markets clearly have room to grow as the middle class continues to improve its standard of living and foreign investors pile in.
- The housing market is deflating while the price increases of new homes are actually below the inflation rate (Chart 7).
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(see
explanation)
Equities had another bad week with declines across the board. We believe the stock markets will likely rebound in the upcoming weeks. However, the upward thrust will likely not be as strong as the recent downward adjustment.
Our opinion regarding the upcoming rebound is based on the behavioral indicators below (Charts 8 – 10).
Please consider the following factors:
- Chart 8– the divergence between prices (black line) and the advancing/declining line (red line) is narrowing.
- Chart 9– a low confidence of small investors (as represented by AAII, i.e., the ratio of bulls/bears). Small investors are usually a contrary indicator.
- Chart 10– the rising put/call equity ratio indicates that small investors are losing their confidence that the market will advance (red line).
Charts 8 - 10: Advancing/Declining Line, AAII and Equity Put/Call Ratio
Charts courtesy of StockCharts.com
and DecisionPoint.com
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D is correct.
Companies with a low P/E ratio are the most likely candidates for being good investments given that the P (Price) component is relatively low. Please remember not to confuse good companies with good investments.
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The contents of this publication are the property of InvestWELL Financial and may not be summarized, reproduced, or rebroadcast in any fashion without our written permission.
InvestWELL Financial’s first priority, as a provider of independent and unbiased financial information, is to educate our clients. Not only do we provide practical information about securities, but we also coach our clients to become successful independent investors. As such, InvestWELL Financial does not assume any responsibility whatsoever for the use of any information from the website or related publications. Although all sources of information are vetted and the information is believed to be reliable, it is not provided as investment advice. Past performance is not an indicator of future performance in securities. Each portfolio must be balanced and based on personal circumstances. High-risk investment decisions should be made in consultation with an investment professional.
InvestWELL receives no commission or benefit of any kind from the companies whose securities InvestWELL Financial showcases. We do not necessarily own shares in the showcased securities, but if we do, these shares would only form a very small part of widely-held and publicly distributed companies. There is no intention whatsoever of profiting in a manner where the price-impact of trading or holding of a security might arise. The website and related publications of InvestWELL Financial are intended to only be used for educational purposes.
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This Week.
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