Wednesday, December 31, 2008

Stock Market Spreadsheets Navigation Guide

Some people are apparently having trouble navigating the site to find the information they are looking for. This is partly because, for some queries, Google does not rank my posts in the most useful sequence. So, my most relevant post may be the second or even third post returned. This post will help you understand what data is in each spreadsheet, and give you a SAMPLE of the posts that reference that data. A complete list of all stock market posts is included in the Stock Market Subject Index in the sidebar on the left.

Dow Data

Key Data contained:
Yearly closing prices from 1901-2009; Earnings from 1929-2009; Normalized earnings.

Posts that reference this spreadsheet:
100 Years of Stock Market History (log graph)
Stock Market Earnings History and a Worst Case Scenario

Stock Market Analysis Model

Key Data contained:
Yearly closing prices from 1897-2009; Earnings from 1929-2009; Normalized earnings; Normalized price/earnings ratio; Dividends from 1929-2009; Dividend yield; Annual total return; Annual return by major component (earnings, dividends, change in price/earnings ratio).

SAMPLE of posts based upon this spreadsheet:
Analyzing and Understanding 100 Years of Stock Market History
The Extraordinary Impact of Price/Earnings Ratios
Major Bull and Bear Markets Since 1900
Dow Price/Earnings Ratio History Since 1900 - A Summary
Worst-Case Scenarios Based on 100 Years of Dow Price/Earnings History
Dow Price/Earnings Ratio History since 19xx - Yearly Graph
Dow at 25-Year Moving Average
Stock Market Average Annual Return since 19xx
Stock Market Yearly Returns since 1929
The Best & Worst 10 Years in Stock Market History
The Best & Worst Stock Market Returns for 1-10 Years, in Dollars
The Best & Worst 20 Years in Stock Market History
The Best & Worst 5 (and 50) Year Returns in Stock Market History
Range of Stock Market Returns for 1-100 Year Holding Periods
Stock Market Rolling Returns vs. Price to Earnings (P/E) Ratio Graphs
Stock Market Normalized Earnings and Returns
Earnings, Dividends Determine Long-Term Returns
Dow Price/Dividend Ratio & Dividend Yield History Graph

Last update 8/28/2010

Saturday, December 20, 2008

Analyzing & Understanding 100 Years of Stock Market History

Note: Many readers find it useful to read 100 Years of Stock Market History (log graph) for the perspective it provides before reading this post.

Understanding the Stock Market

The attention my 100 Years of Stock Market History post has received has made it clear to me that, because of the current volatility in the stock market, there is great interest in trying to get a broader perspective on the stock market. I think people are trying to understand the stock market (I know I am). To really understand the stock market, just looking at a graph of 100 years of Dow Jones history is not sufficient; we need to analyze it; we need to figure out “what makes the stock market tick.”

The objective of my Stock Market Analysis Model is to gain a better understanding of the performance of the Dow Jones and S&P 500 stock market indexes over time. The presumption is that earnings, dividends, and price/earnings ratios are the primary levers that drive performance. The model allows us to approximate the contribution of each of those components for any given period in the past.

Ten Questions the Stock Market Analysis Model Will Help You Answer

Here are some of the many questions this model can help us answer:
1. What was the DJIA’s (Dow Jones Industrial Average) average return between 1929 and 2002 (or for any other period)?
2. How much do dividends matter?
3. How can I tell if the stock market is undervalued (cheap) or overvalued (expensive)? What is the impact of stock market valuation (e.g., price/earnings ratio)?
4. What was the relative contribution of earnings, dividends and price/earnings ratio increase/decrease to the stock market’s performance between 1994 and 1999 (or for any other period)?
5. What is the long-term average performance (annual return) of the stock market?
6. What is the Dow’s earnings history? What's the average long-term earnings growth rate?
7. What were the best/worst 10 or 20 years in stock market history?
8. What is the cheapest the market has ever been? Where would the Dow be now if it were valued that cheaply?
9. Does it matter when I buy? If so, when is a good time to buy, and when is not so good?
10. After a market peak, what is the longest it has taken to regain that level? (I call these long flat periods “periods of disinterest.”)

Al's Stock Market Analysis Model (click to enlarge)

Model breaks out 1990's bull market returns into earnings, dividends, p/e change
Stock Market Analysis Model

Analyzing the Bull Market From 1994 to 1999

The screenshot above (click to enlarge) shows that

Friday, December 19, 2008

My Favorite Personal Finance Books

Every once in a while someone asks me to recommend some good books on personal finance. Here are some of my favorites.

General Personal Finance Books

These books cover the waterfront: budgeting, insurance, buying a house, investing, retirement planning, wills -- you name it.
Making the Most of your Money Now, by Jane Bryant Quinn.  This book covers everything; that's why it's over 1000 pages.  A great reference, best used to investigate specific topics as they become priorities.
Wealth Odyssey, by Larry Frank. A short (about 100 pages), but effective, overview. A good introduction that's especially good for those with limited financal backgrounds.

Basic Books About Investing

The Four Pillars of Investing: "This down-to-earth book lays out in easy-to-understand prose the four essential topics that every investor must master--the relationship of risk and reward, the history of the market, the psychology of the investor and the market, and the folly of taking financial advice from investment salespeople." Barnes & Noble review. That about says it. A really good

Friday, December 12, 2008

What's a Model?


I recently updated my blog description and the “About This Site” post to include the word “models.” What, you may ask, is a model?

From Dictionary.Com:
a simplified representation of a system or phenomenon, as in the sciences or economics, with any hypotheses required to describe the system or explain the phenomenon, often mathematically.

Got it? For example, I think of physics as a model of certain physical phenomena. Some decades ago, I often described a model as something used instead of something else, which replicates the important aspects of that “something else” for your purposes. Point being, that whether “A” is a good model of “B” depends on your objectives. One of my favorite examples was mannequins. For a tailor, a mannequin is a very good model of a young lady. In some ways, mannequins might even be better than the real thing – they don’t get tired, it doesn't hurt when you stick them with a pin, etc. However, as a thirty-something year old man, I found them a totally inadequate substitute for my purposes.

Often, mathematical models allow you to analyze the behavior of whatever you are modeling in ways that would be impractical in real life. For instance, with the proper model, you could model how a plane would behave in a crash and save yourself the expense of actually crashing planes. Closer to home, a budget is a model of your finances. So, you could examine how buying that Porsche you saw the other day would affect your finances without actually spending the money. Better to find out on paper that buying it is a bad idea than having to learn the hard way.

Models are very useful tools for analysis and planning, two things that I enjoy doing, and building them is an exercise in design (which I enjoy as well). Modeling ties three of my passions together.

Anyway, this is just a heads up that I will be posting models from time to time. For a very simple example, see the stock market spreadsheet referenced in one of my earlier posts.

p.s. For those readers who have been wondering why I haven’t posted in over three weeks, it’s because I’ve been hard at work developing a model that I will be posting soon.