|
Posted by Will Trice on August 13, 2008, 8:12 pm
honda.lioness@gmail.com wrote:
> To me, the only argument that might counter this is that banks are
> inherently risky. Banks' common stock P/Es historically are well below
> the P/E of the S&P. This is evidence of the risk.
The common shares of banks are obviously risky, as are all common
shares. And I think you're right that banks are riskier than the S&P in
general. But is their low historical P/E evidence of risk? Looking at
data I got from Value Line on 299 companies of various industries for
the ten year period ending with 2007, there's no correlation between the
average annual P/E ratios of companies and the annual standard deviation
of their stock price returns.
I know, I know... you don't necessarily equate 'risk' with 'standard
deviation.' But in a thread some time back about Graham's views on
diversification, you implied that P/E was positively correlated with
risk - whatever that definition of risk may be.
I would think that P/E would more likely be correlated with expected
growth rate? Or perhaps even market cap (inversely)? Others?
-Will
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
|
|
Posted by on August 14, 2008, 4:25 pm
> I think you're right that banks are riskier than the S&P in
> general. But is their low historical P/E evidence of risk? Looking at
> data I got from Value Line on 299 companies of various industries for
> the ten year period ending with 2007, there's no correlation between the
> average annual P/E ratios of companies and the annual standard deviation
> of their stock price returns.
Why do you consider banks risky? I have my reasons, per below, but I
am interested in others'.
I think we agree that the low P/Es the market normally assigns banks
is due to buyers perceiving banks as riskier. Yet using some perfectly
reasonable measures for the last ten years or so, the risk is absent.
(I have skimmed fundies on banks for awhile going back a decade, and
your finding is what I would expect.) I think the next question is:
Why do buyers perceive banks as risky?
My layperson's explanation to another layperson would suggest
consideration of things like: (1) Citigroup when its share price fell
by half from July to October of 1998; (2) the low ROA of banks?
probably all sort of implications from this arise here that might
justify lower P/Es; (3) awareness of the period c. 1991 when banks
were being taken over, cutting dividends, and seeing their share
prices declining significantly.
Let me stay away from more discussion on P/Es, since it gets into a
discussion of value and growth; large and small caps; etc., ultimately
some gray, subjective areas. For a few years now I have been seeking
an explanation of why historically the S&P 500 P/E has averaged 15.
Why is 15 "magic"? I have dug and dug and found nothing, though I do
have my own hypothesis.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
|
|
Posted by Will Trice on August 14, 2008, 6:20 pm
honda.lioness@gmail.com wrote:
> Why do you consider banks risky?
In general, I don't consider banks risky per se (present credit troubles
excepted). What I mean is that I consider common stocks to have
volatile returns in general and that I consider them more volatile than
those of lower returning securities like bonds. And judging from the
KBW Banking Index, it looks like the returns of bank common stocks are
more volatile than the S&P 500. So I agree with you that banks are
probably riskier than the S&P in general.
But...
> I think we agree that the low P/Es the market normally assigns banks
> is due to buyers perceiving banks as riskier.
I actually don't agree with this. That was the point of my post that I
obviously hid in the weeds. Somewhat counter-intuitively I actually
expected stocks with higher volatility of returns to have higher P/E
ratios. When I checked the data, I was surprised to find no correlation
between volatility (standard deviation in this case) and P/E.
> Let me stay away from more discussion on P/Es, since it gets into a
> discussion of value and growth; large and small caps; etc., ultimately
> some gray, subjective areas.
I agree, I think this is what led be to my first guess as I was equating
'growth' with 'high P/E' and 'growth' with 'more volatility', but this
isn't necessarily true I suppose.
> For a few years now I have been seeking
> an explanation of why historically the S&P 500 P/E has averaged 15.
> Why is 15 "magic"?
An excellent question. It may be no more magic than the average height
of Montana women, i.e. it might just be a numerical artifact of our need
to take averages. On the other hand, perhaps there is a discoverable
reason...
-Will
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
|
|
Posted by on August 14, 2008, 7:40 pm
> judging from the
> KBW Banking Index, it looks like the returns of bank common stocks are
> more volatile than the S&P 500. So I agree with you that banks are
> probably riskier than the S&P in general.
Well, as I tried to indicate in my last post, I thought different. My
portfolio picks have been largely based on earnings growth and
dividend stability over a decade, and banks did really well on these
counts from about 1997-2006. (My focus has also been on diversifying
for peace of mind, too, thank goodness.) Then again, with my stock
purchases, I only buy if, among other questions, I can say at the time
I will be comfortable holding the stock forever, through all sort of
price changes. I almost do not care about price volatility over a ten-
year period.
Either way, your finding above is interesting and suggests that buyers
are in fact rational, en masse, when it comes to pricing bank stocks.
> When I checked the data, I was surprised to find no correlation
> between volatility (standard deviation in this case) and P/E.
I wonder whether this is because P/E can vary so much from one stock
to another. E.g. small, new company X may have highly variable
earnings such that P/Es vary from 50 to 200, over the course of a
year, with the stock price staying the same all the while. It is stuck
with a high average P/E but no volatility over the year. Large, old
company Y may have a range of P/Es from 10 to 20, also with the stock
price staying the same. Both companies have the same volatility, but
their average P/Es are very different.
I remain somewhat curious about it all because Jeremy Siegel's _Stocks
for the Long Run_ puts much emphasis on growing one's portfolio by
buying low P/E stocks with decent, reliable dividends, said dividends
being reinvested. One could say the "old reliable stocks" offer the
best chance for portfolio growth because one can buy so much more of
them (they're cheap!) with the reinvested dividends. One gets that
compounding kicking in massively.
People talk about "growth stocks," inviting all kind of gosh-awful,
toxic, numerology-based "analyses." (The more math expertise, the
greater the chance of seduction and being duped? This ought to be a
modern rule of investing: stay away from whiz kids when seeking
financial advice.) Maybe people should talk about Siegel's perfectly
rational portfolio growth strategy instead.
My hypothesis on P/Es hovering around 15 is that those lucky few who
financed new companies through IPOs way back when were happy if the
company earnings in theory could pay them back after 15 years, which
would be something like one-quarter of a lifetime. A trend was set.
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
|
|
Posted by Douglas Johnson on August 14, 2008, 7:16 pm
honda.lioness@gmail.com wrote:
>I think we agree that the low P/Es the market normally assigns banks
>is due to buyers perceiving banks as riskier.
All a low P/E signals is that the market doesn't like the stock right now. There
could be all sorts of reasons for this. While perceived risk is one, it could
be that thinks the stock is:
1) Not sexy.
2) Not going to grow.
3) Likes something else better.
4) Doesn't understand it (I think this is a factor for banks, bank accounting is
weird.)
-- Doug
--------------------------------------
Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
|
| Similar Threads | Posted | | Fixed Income Products | June 27, 2008, 4:59 pm |
| Fixed Income investing and alternative minimum tax question | February 18, 2007, 12:38 pm |
| Re: Options for fixed payouts | September 22, 2006, 6:46 pm |
| Mortgage - fixed versus interest only | April 10, 2007, 3:24 pm |
| Mutual of America Fixed Annuity | April 13, 2007, 4:14 pm |
| credit risk of a fixed annuity | September 15, 2008, 2:21 pm |
| Re: Stock Volatility [was Re: Options for fixed payouts] | September 23, 2006, 3:48 am |
| Top Ten Highest Fixed Deposit Rate in the World | November 19, 2006, 8:37 am |
| 7ARM vs 30yr fixed, 255K loan, 0% down | March 1, 2008, 1:01 pm |
| Which is a better place for income? | April 9, 2007, 4:53 pm |
|
|
Yahoo! 
Google 
Windows Live 
del.icio.us 
digg 
Netscape 
XML Sitemap