CLARITY. INSIGHT. PARTNERSHIP.

Wednesday, May 22, 2013

Thanks Greg

In this past Sunday's New York Times, there was a great article by one of my favorite economists, Greg Mankiw (Yes, I'm not ashamed to admit that I am nerdy enough to have favorite economists).  We have referenced Professor Mankiw many times in this blog.  The aforementioned article is about what economists know about the stock market.  It is an excellent summary of Bond & Co.'s investment philosophy. Here is a brief outline of excerpts from the complete article:
  • THE MARKET PROCESSES INFORMATION QUICKLY     "If I knew anything good about a company, that news would be incorporated into the stock’s price before I had the chance to act on it. Unless you have extraordinary insight or inside information, you should presume that no stock is a better buy than any other."
  • PRICE MOVES ARE OFTEN INEXPLICABLE     "Advocates of market rationality now say that stock prices move in response to changing risk premiums, though they can’t explain why risk premiums move as they do. Others suggest that the market moves in response to irrational waves of optimism and pessimism, what John Maynard Keynes called the “animal spirits” of investors. Either approach is really just an admission of economists’ ignorance about what moves the market."
  • HOLDING STOCKS IS A GOOD BET     "The large, often inexplicable movements in stock prices might deter someone from holding stocks in the first place. Many Americans, even some with significant financial assets, avoid stocks altogether. But doing so is a mistake, because the risk of holding stocks is amply rewarded."
  • DIVERSIFICATION IS ESSENTIAL     "Every time a company experiences a catastrophic decline — consider Enron or Lehman Brothers — reports emerge about employees who held most of their wealth in company stock. These stories leave economists slapping their heads. If there is one thing we know for sure, it is that sensible financial management requires diversification."
  • SMART INVESTORS THINK GLOBALLY     "Most economists take a more global perspective. The United States represents a bit under half of the world’s stock portfolio. Because Europe, Japan and the emerging markets don’t move in lock step with the United States, it makes sense to invest abroad as well."
Thanks Professor, we couldn't have said it better ourselves.