Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
Here’s the next installment of Bottom Line/Personal’s interview with Ben Stein. In the previous post, we learned that Stein thinks that people should be saving/investing more, and that his non-retirement investments primarily involve variable annuities.
What mistakes have you made?
The mistakes I have made as an investor have come from ignoring my own advice. I bought Berkshire Hathaway when it was cheap — $900 a share — but I didn’t buy with conviction and should have scooped up a lot more. It’s now worth $82,800 a share. I also got caught up a bit in the quest for Internet stock riches, even though my indicators told me that the market was overvalued.
You detailed those indicators in your book, Yes, You Can Time the Market. How do you use this strategy for retirement investing?
My definition of market timing bears no resemblance to that of most financial gurus. No one can consistently predict what will happen in the stock market within the next year or the next five, but you can identify when stocks are cheaper by historical standards. If you buy stocks in those periods, your likelihood of making money over 20 years or longer is far better than if you dollar cost average into stock investments year after year, as many advisers recommend.
Tell us more about your research.
I sifted through 100 years of stock market data and found four simple measurements, or “metrics,” that indicate with uncanny consistency when the S&P 500 was over- or undervalued. They include the current
inflation-adjusted average price of stocks in the index… the index’s average price-to-earnings ratio based on the trailing 12 months… average dividend yield… and average price-to-book value. You can find current figures, along with historical returns, on my book’s web site.
Next, I compared each of these metrics to their own 15-year moving averages. The optimal time to buy is at market lows — when the dividend yield is above its moving average and the rest of the metrics are well below theirs. You avoid stocks when the situation reverses itself.
Following this strategy, you would have bought stocks in 15 out of 15 of the best years to invest since 1926 and would have avoided the worst 15 years.
What do you do during overpriced stock market cycles?
Stay invested in the stocks I own, but I use new money to buy bonds (or bond funds), REITs (or REIT funds) and shares in a money market fund.
What do your charts say now?
The broad stock market is moderately underpriced — add to equities.
My thoughts: I’ve never been one for timing the market, no matter how you define it. That being said, I haven’t read Stein’s new book. Perhaps it’ll change the way I think. But in the mean time, I’ll stick with my boring strategy of steadily investing in a mix of low-cost Vanguard index funds.
See also: An Interview with Ben Stein, Part 1
[Source: Bottom Line/Personal]
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (536)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (329)
- How Much Should You Pay a Babysitter? (288)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)