Wednesday, December 12, 2012 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXCV

Corruption Throughout the World
source: 2012 Corruption Perceptions Index, Transparency International

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Monday, December 3, 2012 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXCIV

Is College/University Still Worth It?
 (source: "Not what it used to be," The Economist. December 1, 2012)

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Sunday, November 25, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXCIII


Sorry about the lack up of posts over the last few months. Life had been kind of (crazily) busy. I married recently so the wedding took a lot of time with preparations; and then took a honeymoon trip to South-East Asia (Cambodia, Laos, Vietnam), which was my first major vacation in a few years. I should be settling in to regular rhythm soon and hope to get back to focusing on investing soon :)

Painting: "The Tree of Life, Stoclet Frieze" by Gustav Klimt, 1909

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Wednesday, September 26, 2012 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXCII

Dynamic Pricing of Goods

(source: "Coming Soon: Toilet Paper Priced Like Airline Tickets," by Julia Angwin and Dana Mattioli, The Wall Street Journal. Infographic. Sept 12, 2012)

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Tuesday, September 18, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXCI

Very-Long-Term Silver Price Performance
(source: Charts R Us. Direct link to image here. Original source unknown.)

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Monday, September 3, 2012 1 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CXC

S&P 500 Sector Changes Over Two Decades

The following table and chart from Bespoke Investment Group from January of this year illustrate how the S&P 500 sectors have changed over the last 20+ years. Although the stock market isn't directly correlated with the economy, it does largely reflect the economy. The biggest increases have been in the technology, financial services, and energy sectors and one just needs to think about the number of people employed in those areas compared to what they remember from 1990; in contrast, materials, utilities, and telecom have shrunk and what used to be big employers in the 80's and 90's, such as telecoms, are now shedding jobs.

(source: "S&P 500 Historical Sector Weightings" by Bespoke Investment Group. Published Tuesday, January 17, 2012 at 10:27AM. Downloaded September 3, 2012.)

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Tuesday, August 28, 2012 5 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXX

The Longevity of Various Media

(source: "The Lifespan of Storage Media" by Downloaded August 28, 2012. Originally mentioned by Cool Infographics)

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Thursday, August 23, 2012 3 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXIX

A bit late, oh well...
The Changing Media Landscape in USA
 (source: "Wordy goods," Daily Chart, The Economist. Aug 22nd 2012, 14:07)

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Monday, August 13, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXVIII

When Humans Were a Commodity

Image of Brookes, a British slave ship:

(source: "An American Time Capsule: Three Centuries of Broadsides and Other Printed Ephemera," Stowage of the British slave ship "Brookes" under the regulated slave trade act of 1788. [n. p. n. d.]. -- Piece 1 of 1. Library of Congress. Downloaded August 13, 2012. Original mention by Fastcodesign Infographic of the Day.)

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Monday, August 6, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXVII

NASA's Curiosity Rover Lands on Mars

(source: NASA rover lands on Mars, August 6, 2012)

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Saturday, August 4, 2012 4 comments ++[ CLICK TO COMMENT ]++

Facebook Hits Attractive Valuation... If You Believe In Its Core Business

Been busy with some important personal matters but I do keep tabs on the markets. It's hard to believe how the Facebook story has played out.

When I took a deep look at Facebook and social networks, I never imagined Facebook (FB) would fall so quickly without any major economic crisis or stock market crash. IPOs are often poor investments but large initial issues tend to be more efficiently priced so it's somewhat surprising to see investors bail—even before we hit the expiry of the lock-up period for insiders.

If you believe in Facebook's business model—that's a big 'if' for some—the stock appears to be entering attractive valuations. The following summary from Yahoo! Finance, whose numbers aren't always accurate, compares Facebook to Google.

Sunday, July 29, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXVI

Olympics & its Benefits

(source: "Is Hosting The Olympics Good For A City?" Original by Information Builders. Downloaded via Visual Loop on Pinterest.)

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Sunday Spectacle CLXXXV

(source: "Graphic: The richest teams in the world," by Jonathon Rivait, National Post.  Jul 21, 2012 – 2:06 AM ET | Last Updated: Jul 21, 2012 2:16 AM ET)

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Monday, July 16, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXIV

USA's Electricity Grid
(simulated view)

(source: "The art of GPS: Secret corpse flights, pizza boy delivery routes and the daily commute revealed in never-before-seen side of America" by Lee Moran. Mail Online. PUBLISHED: 10:22 GMT, 19 June 2012 | UPDATED: 20:17 GMT, 19 June 2012. Original source: America Revealed)


Sunday Spectacle CLXXXIII

Large Hedge Funds with
Good Long-Term Performance

This chart isn't very useful since it doesn't show return in percentage-terms (the bar chart shows dollar gains). Nevertheless, I thought it was worth seeing how large funds are behaving.

(source: "The Oracle of Boston," The Economist. July 7, 2012)

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Sunday Spectacle CLXXXII

How Educated is the World?
Education vs Age in the Modern World

Competitiveness of countries, and their standard of living, has historically been driven by education. This relationship may not be as strong in the future—my view is that higher education isn't as big of a distinguishing factor as it was in the past—but very-low education still prevents certain countries from competing on the world market.

The chart below from McKinsey Global Institute shows education vs age for key countries. It is obvious that the higher-educated countries are older. It's not clear to me if this is due to lower-educated populations having lower lifespans and/or having more kids. Those scoring low on the education scale are, as expected, poorer as well.

(click for larger image)

(source: "The world at work: Jobs, pay, and skills for 3.5 billion people," McKinsey Global Institute. June 2012)

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Jim Chanos' Bearish Views on Some Value Traps

I ran across the following presentation by Jim Chanos and thought you will find it insightful. Even if you aren't into short-selling—I am not—it is useful to see what sort of investments you may want to avoid. Value investors tend to ignore macro views but those who are more influenced by macro may want to pay attention to bearish views of any investments they are considering.

Back in May, Chanos gave this brief interview to Bloomberg briefly mentioning the topics covered in the presentation.

The presentation covers Chanos' bearish thoughts on what he feels are some characteristics of value traps. He goes on to list several investments that he views as value traps. Here are two summary slides from the presentation.

I share most of Jim Chanos' views and think investors should be careful with the areas he identified. For instance, I do think traditional PC manufacturers could lose big—he is bearish on HP—as tablets and mobile computing replaces PCs. Even companies like Microsoft could come under threat (he doesn't identify this).

He maintains his longer-term bearish view of some segments in the commodity complex, such as coal and iron ore miners. He is bearish on coal because natural gas, particularly from cheap shale gas, is replacing thermal coal in electricity-generating power plants. As for iron ore, it's a bearish bet stemming from a potential Chinese slowdown.

However, I'm not too sure about his short thesis for digital distribution. It could take a long time for companies like Coinstar, which owns Redbox, to materially suffer. For instance, even with digital e-books taking off, physical books are still selling reasonably well. Anyone betting on a collapse of the physical book market has been wrong so far (even though book sellers like Barnes & Noble and Borders have suffered).

The following presentation details his views:

Thanks to GuruFocus for bringing the presentation to my attention.

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Sunday, June 24, 2012 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXXI

The Exponential Growth in Photos

Oldest Photo of a Person
Boulevard du Temple by Daguerre, Paris, France (circa 1838)

(source: Scanned from The Photography Book, Phaidon Press, London, 1997. Downloaded from Wikipedia Commons on June 24, 2012)

Growth in Photos

(source: "How many photos have ever been taken?" By Jonathan Good, 1000memories blog, September 15, 2011.)

Largest Photo Libraries

(source: "How many photos have ever been taken?" By Jonathan Good, 1000memories blog, September 15, 2011.)

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Wednesday, June 20, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXX

A few days late but oh well... Great graphic by Asymco on the evolution of the computer industry...

Evolution of the Computer Industry

(source: "The evolution of the computing value chain," by Horace Deidu, Asymco. June 19 2012)

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Sunday, June 10, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXIX

Stock Buybacks & Dividends
1988 to 2010

Dividend payouts have not increased much over the 20+ years while buybacks have increased significantly. During the bubbly peak in 2007, more than $500 billion worth of shares were bought back—ironically at really high stock prices!!—whereas dividend payouts hit a little over $200 billion. Senior management and financial executives have no clue what they are doing when it comes to buying back shares (their buying is highly correlated with stock prices, which is not what you want).

Note that the figures are in millions i.e. In 1988, dividends of $100 billion were paid out while $50 billion worth of shares were bought back.

(I wrote a post on dividend payouts back in 2009 and some of you may be interested in that post as well.)

(click on image for larger one; quality isn't great)

(source: "Value Investing: Investing for Grown Ups?" by Aswath Damodaran, Stern School of Business, New York University. April 2012.
Electronic copy available at:

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Sunday Spectacle CLXXVIII

A Look at
Unemployment in America
by Sector

You can get a feel for employment patterns in various industries in the following infographic. As always, keep in mind that some sectors, like manufacturing, are very large, so a 1% change has a bigger impact on GDP than, say, leisure and hospitality.

Some key points that stick out for me include:
  • Manufacturing was underperforming even before the recession (250,000+ job losses in 2004 and 2005, which were boom years. We are basically witnessing a secular decline in manufacturing in USA (and Canada too).)
  • Construction got hit hard during the recession (obviously driven by the real estate bust)
  • Government sector is starting to post job losses during the recovery over the last couple of years (this is likely due to government spending cuts)
(click on image for larger pic)

(source: "Rising UNemployment," Glassman Infographic. Design by Elefint. Downloaded from Fast Company, post dated May 23 2012.)

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Sunday Spectacle CLXXVII

The Modern Theory
Stock Market Investing

(source: Dilbert, illustrated by Scott Adams. Image downloaded from Monevator.)

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Sunday Spectacle CLXXVI

Barron's Top Hedge Funds in America

Thought I would post the tables listing the top hedge funds in America from an excellent pice on Ray Dalio (Macro-oriented investors should check out the article). Hedge funds are in a parallel universe from me (for the most part) but it's interesting to see what type of strategies have done well in the recent past.

A lot of the hedge funds posting good 3-year returns likely fell off a cliff 3 years ago so it's not clear how good they really are. It looks like the Barron's Top 100 hedge fund index has returned a spectacular 25.55% per year over the last 3 years vs BarclayHedge Fund Index of 9.05% S&P 500's 14.11%. There is likely huge suvivorship bias in the Barron's Top 100 Hedge Fund index.

(source: "Ray Dalio's World," Sandra Ward, Barron's. May 19, 2012. Data sources: BarclayHedge, Morningstar)

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Sunday Spectacle CLXXV

Technology Adoption in America

It's not easy to measure how quickly technology is adopted. One can come up with numerous methods, and the result can differ depending on how you count the starting point. Sometimes it is also hard to distinguish between devices. For instance, one of the sources below seems to count 'tablets' as something starting with the iPad, when a stricter view may place the starting point back in the late 90's or early 2000's (there were some tablets running Microsoft OS back then). Similarly, some people separate 'smartphones' from mobile 'feature phones' whereas others do not. In any case, the following graphs provide some insight into adoption rates.

As to be expected, technologies that required building out huge physical infrastructure (like the electricity grid or the telephone network) took a very long time. Based on the results quoted by The Atlantic, it looks like the 'boom box' had the fastest adoption after 7 years for an electronic device.

(source: "Guess What's the Fastest-Adopted Gadget of the Last 50 Years," Alexis Madrigal, The Atlantic. March 23, 2012. Original data from "Diffusion and experience curve pricing of new products in theconsumer electronics industry," Tarique M. Hossain, Journal of Management and Marketing Research, Volume Six - January, 2011.)

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Sunday Spectacle CLXXIV

Macro-economic Drivers of Corporate Profits

(source: "What Goes Up, Must Come Down! - March 2012," Exhibit 5, James Montier, GMO, March 2012)

One of the reason people like me are bearish, and don't trust the trailing and forward P/Es, is because corporate profit margins are quite high. Most of this, as can be seen above, is driven by government "savings" (i.e. deficit spending).

IANAE—I Am Not An Economist—and can't say I understand this chart very well or agree with it entirely. For instance, I always thought the fact that consumers (in USA and Canada) were living outside their means and running big deficits was accretive to corporate profits; whereas this chart implies it is a drag. If consumers start increasing their savings (i.e. positive savings), does this mean corporate profits would be even higher? I don't get that — can anyone explain that to me?

In any case, this chart does provide a rough view of what may be driving corporate profits. The original document is well worth reading in full, if you are a macro-oriented investor.

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Wednesday, May 9, 2012 4 comments ++[ CLICK TO COMMENT ]++

John Hussman on the unsustainability of high-growth and Apple

John Hussman isn't a stock picker—he's more of a macro guy—but he did comment in his April 30th Weekly Market Comment on how high sales growth declines as market share increases, and commented on Apple (AAPL). Kind of obvious but investors, particularly growth investors, often tend to ignore this, often to their peril. [as usual, bold highlights by me]

Consider a very large, untapped market for some product. We can model the growth process in terms of how quickly that product is adopted by new users, whether there are any "network" effects where new buyers are attracted to the product because other people already use it, how frequently existing users replace their products, whether late-adopters come in more slowly than early-adopters because of budget constraints, how quickly the untapped market grows, and a variety of other factors.

Whether you do this sort of modeling with a spreadsheet or with differential equations, you'll get essentially the same results. Specifically, growth rates are always a declining function of market penetration. Most strikingly, the growth rates begin to come down hard even at the point that a company hits 20-30% market penetration. Network effects accelerate the early growth, but also cause growth to hit the wall more abruptly. Replacement helps to accelerate the early growth rates too, but ultimately has much more effect on the sustainable level of sales than it has on long-term growth. In fact, if the replacement rate (the percentage of existing users that replace their product each year) is less than the adoption rate (the percentage of untapped prospects that are converted to new users), it's very hard to keep the growth rate of sales from falling below the rate of economic growth.
The key point is that growth rate falls off a cliff as market share (penetration) increases. This is essentially the cycle of business, whereby companies start with nothing and capture ever greater market share, while their growth rate slows. To illustrate his point, Hussman generated the following scatterplot of several high-growth companies from the 90's (Microsoft, Cisco, Intel, Oracle, IBM, Dell and Wal-Mart):

(source: Hussman Funds Weekly Market Comment, April 30, 2012)

A nicely declining (possibly exponential) curve; the data almost fits the curve perfectly.

If I'm not mistaken, the revenue growth will approach nominal GDP growth rate if the industry was large and representative of the economy. In the long run, US nominal GDP growth is around 6% (basically 3% real + 3% inflation) so sales growth should approach that (someone correct me if I'm mistaken on this). However, this is influenced by numerous factors and many mature companies can barely grow beyond inflation (many very-old industries like agriculture, railroads, and utilities grow very close to inflation).

One of the superstar growth stocks right now is Apple and John Hussman suggests that investors may end up being dissapointed: order to maintain even a constant level of sales, every unit sold in a given year has to be matched by a replacement the next year - year-after-year - or it has to be matched by a new adoption, and adopters of used products don't count. Simply put, even zero growth demands that every dollar existing users spent on Apple products last year has to be spent again this year, or matched by some new user this year, and then again next year, and again the year after that, ad infinitum. Of course, it's reasonable to expect that late-adopters (e.g. those who have to save in order to afford the product) will have lower replacement rates, which will need to be offset by even greater adoption. Yes, there are billions of people in developing countries without an iPhone. Unfortunately, most of these people are also without running water.

We've seen very rapid adoption rates, very high replacement, and very strong network effects in Apple's products. All of this is an extraordinary achievement that reflects Steve Jobs' genius. I suspect, however, that investors observe the rapid adoption and very high recent replacement rate of three very popular but semi-durable products, and don't recognize how improbable it is to maintain these dynamics indefinitely. Despite great near-term prospects, within a small number of years, Apple will have to maintain an extraordinarily high rate of new adoption if replacement rates wane, simply to avoid becoming a no-growth company. That's not a criticism of Apple, it's just a standard feature of growth companies as their market share expands. It's something that Cisco and Microsoft and every growth juggernaut encounters. Apple is now valued at 4% of U.S. GDP, but then, Cisco and Microsoft were each valued at 6% of GDP at the 2000 bubble peak. Not that things worked out well for investors who paid those valuations. There's always the hope that this time it's different.

The products Apple sells are almost-necessary and is valued by customers so I think companies like Apple can get customers to replace their products. So, it's not as bad as it seems. However, the growth rate will definitely decline. As Hussman points out, Microsoft and Cisco's market cap were 6% of GDP in 2000, and Apple is 4% of GDP right now.

I've been somewhat bearish on Apple for years and been completely wrong. But then again, contrarians like me always get the growth stocks wrong. However, people like me tend to be right on any trip down the hill. People investing in companies like Apple better be confident of Apple's moat and its ability to maintain profit margins.

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Sunday Spectacle CLXXIII

Marketing Innovations

(source: "Eloqua x JESS3: Disruptive Innovations Infographic" by Eloqua and JESS3.

Sunday, April 29, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXII

20-Year Real Return vs 10-Year P/E Ratio

Note that returns are real returns and one should add an inflation (say 3%) to get nominal. I think I've beaten the 10-year p/e to death but this chart is more visually obvious than some other data I have posted in the past.

(source: "File:Price-Earnings Ratios as a Predictor of Twenty-Year Returns (Shiller Data).png," Downloaded on Apr 29 2012. Original data from Robert Shiller)

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Sunday, April 22, 2012 6 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXXI

The Ever-Rising Executive Compensation

I've been thinking about writing about the controversy over the rising executive compensation in North America. Here are some graphics that frame the current situation (chart data up to mid-decade).

I actually don't think rising executive compensation is as big of an issue as it seems. The rising discrepancy in wealth is caused by society starting to reward talent—not just in business but also in sports, media, and so forth. As you'll note in one of the charts below, a lot of the increase in compensation is from bonuses and equity-linked compensation. Base salaries of executives haven't gone up much; the issue, thus, is whether the "bonus" is deserved. So far, shareholders and owners seem to be satisfied with management performance and are willing to award large discretionary bonuses.

Structure of Executive Compensation
(source: "Executive Compensation: A New Solution to an Old Problem," FTI Journal, Issue 2 - April 2010.)

Executive Compensation
Average Worker Compensation
(source: "In the money," The Economist. January 18, 2007)

The Cynics Might Say...

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Thursday, April 19, 2012 4 comments ++[ CLICK TO COMMENT ]++

Peter Thiel on What Makes A Great Technology Company & Other Thoughts

(Image source: Vator News)

Some of you may have heard of Peter Thiel; most probably have not.

Peter Thiel is a successful Silicon Valley entrepreneur and venture capitalist, who is famous for being a founder of PayPal and being the first outside investor in Facebook. He is somewhat controversial in that he is a libertarian and is influenced by Austrian Economics and has some extreme views (I actually share a lot of the libertarian views but I'm more of a liberal-libertarian and think that pure-libertarians sometimes forget that humans have a heart). If you find him interesting, you may want read this excellent New Yorker profile by George Packer from November of last year. I don't use this word on too many people but he is a brilliant man who seems quite innovative in his thinking.

Blake Masters has been writing up the notes from a Computer Science course on entrepreneurship being taught by Peter Thiel. The notes were taken by him (@bgmasters) along with some notes by @erikpavia and @danrthompson. Anyone interested in history of technology, entrepreneurship, business, or technology investing, will find it worthwhile to read the lectures (so far four of them and accessible here.)

Like anyone tackling complex topics, not everyone will agree with Peter Thiel—either because of his econopolitical stance or his attempt to simplify complex issues. For instance, Thiel has suggested (in other speeches) that the benefits from the development of the Internet, not to mention tools like Twitter, are over-rated but I disagree with that. Nevertheless, even if one doesn't agree with someone, they can gain great insight from contrary views.

I think Peter Thiel's comments on what makes great technology companies quite insightful to investors and other readers of this blog. I thought I would highlight those comments (from lecture 3). Note that the quoted text is transcribed comments and it may not reflect actual comments by Peter Thiel. Also, do note that Thiel's comments about what makes a company great are from the perspective of an owner or an entrepreneur, and this may or may not be the same as what makes a company great for employees, government, or society.

NOTE: Bolds within quotation are by me, but existing emphasis is underlined and bolded. Furthermore, I am not quoting in sequence!!

(source: "Peter Thiel’s CS183: Startup - Class 3 Notes Essay," Blake Masters blog. April 12, 2012. Content from lecture, "CS183: Startup—Notes Essay—April 9—Value Systems.")

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Sunday, April 15, 2012 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXX

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Tuesday, April 10, 2012 8 comments ++[ CLICK TO COMMENT ]++

The Changing Employment Landscape in America - Is This for the Better?

Extracted from an infographic produced by US Census Bureau is the following graphic depicting employment by industry (Canada should be somewhat similar, especially for Ontario and Quebec):

The graphic illustrates how the employment landscape has changed over 60 years. Do keep in mind that the graphic illustrates employment rather than GDP (or economic output). Manufacturing contributes more to output (and wealth) than, say, agriculture or primary resources (like mining). Taxes paid by manufacturing businesses and manufacturing workers was likely far higher than agricultural workers/industry. So, manufacturing was actually way more dominant in 1940 than the chart illustrates.

Nevertheless, if we ignore wealth contribution, employment is very important and a key facet of society. A society with high unemployment is a dysfunctional society in my opinion. So, the chart above is quite important.

Sunday, April 8, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXIX

(click on image for a larger picture)
(source: Image downloaded on Apr 8 2012 3:25 AM from "Mapping the US Housing Bubble: 2000-2010,"

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Sunday, April 1, 2012 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXVIII

(click on image for larger image)
(source: "On Wall Street today, news of lower interest rates sent the stock market …" Cartoon by Robert Mankoff for The New Yorker. Item #: 8641612. Cartoon can be purchased at the official store, The Cartoon Bank.)

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Saturday, March 31, 2012 0 comments ++[ CLICK TO COMMENT ]++

Sold: Montpelier Re (MRH)

Investing life has been quite boring for the last two years—come to think of it, so has other aspects of life :( I didn't buy anything for several years now and haven't posted much on the blog either. I've been reading quite a bit though, but haven't found any compelling ideas.

In any case, I just sold off one of my very first investments—one I made before I started this blog—for a small gain. That investment is a small reinsurance company called Montpelier Re (MRH). I bought it in February 2007 and sold it today (March 2012).

Purchase price (approx): US$ 17.96
Sale price: US$ 19.49

Simple return (excl dividends; US$): 8.4%
Total return (US$): 14.1% (2.67% annualized)

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Sunday, March 25, 2012 2 comments ++[ CLICK TO COMMENT ]++

Sunday Spectacle CLXVII

Rolling 10-Year Stock Market Return
Starting P/E Ratio

(source: "Gazing at the future: why stocks are underperforming," Crestmont Research. Downloaded March 25, 2012)

I think I posted similar, if not the same, charts, a few years ago and I thought it was a good time to revisit.

The above chart plots the rolling 10-year S&P 500 return (annualized), along with the starting P/E ratio at the beginning of the 10-year period. The starting P/E ratio—you can think of the P/E ratio as a proxy for valuation—plays a huge role in determining future returns. After all, if you buy something at a high price, your returns are likely to be lower than if you buy the same thing at a lower price. Typically, a high P/E ratio will compress and you'll post weaker returns.

The long-term stock market return is 10% per year and the average P/E ratio is around 15 (Crestmont has it pegged at 15.5). In the chart above, you'll notice that the 10 year return tends to be low when the P/E ratio is well above the long-term average, and vice versa.

The chart below clearly illustrates how bull markets tend to involve expanding P/E ratios (rising from a low value to high) and bear markets involve P/E compression (from a high value to a smaller one).

Secular Stock Market Cycles & the P/E Ratio

(source: "Secular Stock Markets Explained," Crestmont Research. Downloaded March 25, 2012)

Everyone has their own definition of secular bull and bear markets but Crestmont Research uses the P/E ratio to mark them.

The last decade has been a rough one for US stock market investors largely due to P/E compression. The P/E ratio of the S&P 500 has been falling from a peak set back in 2000, and this has had a strong negative impact on total return.

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