Time in the Market’s book club – Deep Value and The Millionaire Next Door

Finance books are COOL

Finance books are on the menu!

Deep Value and The Millionaire Next Door are the first books in my book club!

Finance is the topic at hand and will likely be for the foreseeable future.

I read a good amount of books about investing. My problem is that don’t have many people who would be interested in hearing what I think of them.

There’s where you come in gang! Hopefully we can get a discussion started on some of these books.

Every now and then I’ll drop a post here about the things I’ve read. Maybe these thoughts will help you in your investing journey or aid you in finding something new to read.

I’ll try to keep these short and to the point. After all, there’s a book to be read if you want to know more.

My long term goal is to have a page that aggregates all these reviews in one area. That way readers can just go to that page for suggestions!

Note that this series of posts may include affiliate links to Amazon. For additional information, please read my disclosure policy.

As always, I suggest using your library and especially Overdrive if you’re interested in reading any of these books as free is always better than not free!

In this month’s edition, I’ll be talking about two books. Deep Value by Toby Carlisle and The Millionaire Next Door by Thomas Stanley and William Danko. Continue reading “Time in the Market’s book club – Deep Value and The Millionaire Next Door”


Portfolio Review – February 2018 – Stock market volatility makes a comeback

Stock market volatility came roaring back in a big way this week. We saw days where the stock market moved more in an hour than it moved on a weekly basis in the past year. It wasn’t wholly unexpected given the flat stock market volatility we’ve had for such a long time. As an example of these calm investing waters, my portfolio has gone up 16 straights months before this one. That’s a big testament to how good we’ve had it as investors.

The S&P hasn’t had a monthly loss of -1% or more since October 2016. That’s a crazy run of solid returns that had to end eventually. One has to look all the way back to January/February 2016 to find a month like this one. Back then the stock market fell over 5% and my own personal portfolio was down 4.5%. The good part was it rebounded in a big way the month after with my portfolio growing over 11%. Will the same happen here or are we due for a longer correction?

During times like these, it’s important to remember that the stock market is often volatile. Returns won’t always come as easily as they have since 2008. The recent week may seem horrendous but the S&P 500 is only down 4.8% since my last update. 4.8% seems like a lot but it wouldn’t even crack the top 20 of the worst S&P 500 losses in a DAY.

Losses on paper are just that if you’re a long term investor. History has proven that holding tight and buying more in times like these has rewarded investors. We’re still far from what could potentially happen as stocks have historically had a max reduction of 50%. If this month bothered you then know that it’s far from the worst that can happen if you’re fully invested in stocks. Keep that in mind going forward and maybe revisit your asset allocation if 4.8% sends you running towards the sell button.

The truth is that the Schiller PE ratio is still elevated and may give credence to further downward movement if worries about interest rates persist. The plus as I see it is that after years of stalled earnings, earnings growth is emerging again. According to factset, earnings increased 13% from 2012 to 2016. That’s not per year, that’s the total earnings growth for that time period! That’s a terrible rate any way you slice it and is one of the big reasons why the P/E 10 has expanded so much. Stock prices have soared despite earnings staying pretty flat. That changed in 2017. 2017 growth is nearly 11% and 2018 is slated to grow at nearly 19% due to the new tax law.

So why is the stock market dropping now?

Earnings growth is great news for sure but it doesn’t always mean growing stock prices. One of the reasons the stock market has returned so much over the past years are expanding P/Es. Low treasury yields and the lack of alternative investments have mean investors have flooded into the stock market sending valuations through the roof.

Now, we that we see growing earnings, we’re also seeing growing yields. Growing earnings mean a good economy and growing salaries and potentially inflation as well. On top of that, the fed is unwinding their QE program which impacts yields as well.

All that is causing yields to rise and giving investors another place to hold their cash. If yields on treasuries are suddenly more appealing then investors may not be as willing to pay such high P/E ratios for stocks anymore. I talked about this effect in a post before where I argued that low yields meant that the stock market isn’t expensive.

Now that the yield is rising, is the stock market expensive? Growing earnings SHOULD indicate high stock market returns but not if the market P/E shrinks closer to historical norms. P/E expansion has driven the stock market returns of the past few years. It’s possible that the shrinking of the P/E may mute the stock market returns of the future even as earnings grow.

As always, it’s impossible to say where the stock market goes from here. I’m not worried if they go up or down. As I recently on twitter, it may get worse, it may get better, as long as you’re sleeping fine, what’s it matter?

From the perspective of a long term investor, months like this aren’t bad. They allow me to buy securities at a better price and higher yield than I was going to buy them for last month. That’s not a bad deal.

From the perspective of someone who likes to see my portfolio growing every month, months like this aren’t great. I was $500 away from 500k last month and I’m pretty sure I’m even further away this month.

As a reminder, my portfolio was at $499,535 last month.  Continue reading “Portfolio Review – February 2018 – Stock market volatility makes a comeback”

Is this the start of the next stock market crash?

The stock market was down today and my office was awash with talk of a stock market crash.

dow jones

“There goes my retirement,” said one of my older coworkers, partially in jest but it was the younger crowd that seemed more worried. I work in a place where no one ever talks about their investments but today that changed. People know that I’m interested in investing but I rarely get any bites when it comes to investment conversations. Suddenly, I was deluged with instant messages from people asking if they should take their money out of the market.

“Is this the start of something bad?”

I didn’t really know how to answer that.

“This is the stock market,” I said, “this is how it works.”

It wasn’t a great answer but the best I could come up with. The truth is often just that simple. Sometimes and more often than not stocks go up but sometimes they go down. Sometimes they go down a lot and for extended periods.

“Is that time now?”  Continue reading “Is this the start of the next stock market crash?”

Is the stock market overvalued?

Is the stock market overvalued?

That’s the million dollar question for us investors, isn’t it, but the answer is not quite as easy as some make it seem. There’s a lot of articles touting one answer or another so I wanted to take a deeper dive into a few of the metrics that are often used to judge value and see what they tell me.

It’s easy to look at the graph below taken from here and draw conclusions.

shiller pe graph

The 32.33 CAPE(Cyclically Adjusted PE Ratio A.K.A. Shiller PE) has only been higher one time in the past decade and maxed out at 44.19 in December of 1999.

That means we still have 30%+ upside so that’s it then – case closed! Just kidding!

One of things that worries a lot of people is that S&P 500 earnings have barely grown in the recent years and the run up has been primarily driven by P/E expansion.

The S&P 500 ended 2011 with a $95.04 per share in earnings and ended 2016 with $96.60 per share in earnings. More recent results are a bit more favorable with the current 12 month GAAP EPS near $105 which finally shows a return to growth. Despite that, the CAPE has expanded as prices outpace earnings growth.

Today’s CAPE is double the mean and median of 16.80 and 16.15 respectively. That doesn’t seem like a good sign and if history is a good metric, can be taken as a sign of poor returns going forward. Unless we see massive earnings expansion then one can expect poor returns if the CAPE has a tendency to revert to the mean in the long run.

The question lies in whether that’s a safe assumption to make and the answer to that is less clear despite how the graph looks. Continue reading “Is the stock market overvalued?”

Investing in video games

Gaming has become a huge part of everyday life. I’ve always been a gamer. I spent way too many hours during my high school days locked up at home playing RPGs on my Sony Playstation. It was only in the recent decade, however, that gaming has stepped out of the shadows of basements into the mainstream.

The appeal of video games for me was the great value proposition they offer. I could spend $20 on a used video game as a kid and get hundreds of hours of entertainment. I simply couldn’t beat that outside of a long fantasy novel and that appeal of the $$ spent/hr of entertainment stuck with me as I got older.

The video game industry has always been good at adapting to the changing nature of tastes and product cycles and the various revenue opportunities that exist and could be harnessed.

The model started with a game you could buy for a $50 to something like an MMO that added a recurring monthly fee and an ever expanding world. All these games started to tap into the addictive nature of progression based gaming as publisher began to realize that they could get more than just the initial sales price and the user base was willing to pay for it to fund additional content.

The turning point was when the old model of selling physical copies morphed into digital copies with additional DLC(downloadable content) that could be purchased.

The proliferation of mobile devices thrust the world of video games into the mainstream and publishers began to realize the benefits of mobile games.

Just like digital, there was an ease of distribution as well as additional ways to monetize the massive user base that mobile games attracted.

Companies realized that a that small portion of users were willing to spend extra money to customize a character or get an advantage in the game. They took advantage of the ability to attract that type of gamer to improve profits.  Micro transactions, first used outside of mobile in limited scope, became a much bigger deal on mobile. These allowed developers and publishers to sell a variety of things like extra lives, power boosts or loot boxes containing items that users could use to customize their characters. The freemium gaming model(free game with in-game purchases) became massive on mobile as publishers wanted to capture as many people as possible in hopes of catching whales(gamers who would spend a ton of money to max out everything possible).

This model soon transitioned back onto PC and console games with an added focus on micro transactions and capturing more and more revenue from the whales that would spend extra money beyond the cost of the initial game to get everything the game had to offer.

Personally, this model doesn’t appeal to me and I never pay extra for a game and will avoid any game where you can buy an advantage but the financials don’t lie.

Video game companies have done very well in recent years and a lot of it is due to the new ways of monetizing their releases.

The truth is that there is always a need for escapism and video games provide one of the most effective ways to achieve that for the end user. The product captures the attention of users due to having a low(often free) cost of entry in relation to amount of entertainment produced leading to a high user base. That means there’s often(not always) a revenue boost for the company when a game first sells. On top of that, game designers have added a very addictive progression based flow to many games with the idea of monetizing a certain percentage of the user base in a big way leading to very high margins and repeating revenue on successful games.

That new foundation of monetizing games after released has meant that the global video game market has exploded in recent years. Almost $110B in revenue has been generated by video games in 2017 and that number is expected to grow at ~6% per year until 2020.


One of the most visible trends that has driven this is the growth in Mobile based gaming. The mobile chunk of the pie started at 39% of $101B in 2016 and is projected to be 50% of nearly $130B in 2020. Continue reading “Investing in video games”