Growth stocks were in vogue by the end of 1972. The five most popular companies had a market cap of $100 billion on earnings of $2.2 billion.

$100 billion is nothing by today’s standards, but those five companies — IBM, Minnesota Mining (3M), American Home Products, Xerox, and Eastman Kodak — accounted for 15% of the total market cap of every company listed on the NYSE. They had an average P/E of around 40. The general view was their growth made them “safe.”

Therein lies a problem. Equating high multiples with “growth” is a common mistake made by investors. But making the leap from “growth” to safety compounds the error.

The skill is in separating growing companies from high multiple stocks that are rising in price. Because one meets certain characteristics that drive earnings growth over time. The other has only to do with price action. Continue Reading…

The popularity contest is alive and well in the stock market. The S&P 500 is at all-time highs, up 9.2% year to date. That’s total return, by the way. If that seems surprising in any way, you’re not alone.

On the surface, one might conclude that we’re in a raging bull market. The enthusiasm, the speculation, the day trading…all the ingredients are there.

A more nuanced answer is that there’s a bull market in a handful of names hiding a bear market in many more.

The largest companies in the S&P are performing exceptionally better than the rest. So much so, that it’s having an outsized impact on the index. The numbers are mindboggling really. Continue Reading…

In most games of chance, the odds are easily figured out. You can calculate the odds in advance for coin flips, dice throws (craps, backgammon), or a spin of the roulette wheel because each has a fixed set of outcomes.

Now take a game like the stock market. Calculating odds gets trickier because it adds complexity and uncertainty. The outcomes are no longer fixed and the number of variables to consider grows exponentially.

Unfortunately, human nature makes this worse. It turns out, we’re terrible at estimating probabilities. Our biases get in the way.

Our troubles begin with availability. A simple rule of thumb tells us to put higher odds on something that happens more often. Unless we have trouble remembering how often that something really happens.

The availability bias screws with how we estimate probabilities. When we weigh the probability of an event happening, our estimate is based on how easily we remember a similar event and how often we remember it happening. Unfortunately, how easily we recall something has more to do with recency, vividness, and personal involvement. Continue Reading…

I have nothing against a stock split. I did two in the Sixties, but this is really a non-event… It’s really paper shuffling. — Henry Singleton, CEO Teledyne

Mathematically, nothing changes with a stock split. The number of outstanding shares increase in proportion to the split, but the share price decreases in an inverse proportion.

In other words, a 2-for-1 stock split doubles the share count but halves the stock price. The market cap stays the same. So if the company was “expensive” before the split, it’s still expensive afterward. Thus, the paper shuffling.

And yet, companies still do it because they believe there’s a benefit. But why?

The latest announcement by Apple might shed some light. Its press release claims a stock split will “make the stock more accessible to a broader base of investors.”

That appears to be a popular answer. Similar responses have been used throughout history. Continue Reading…

The 1893 World’s Columbian Exposition in Chicago needed a centerpiece attraction. It had to be novel, different. Daniel Burnham wanted something to rival Gustave Eiffel’s tower built for the 1889 Exposition in Paris.

Proposals came in from everywhere. Everyone had the same mindset — a bigger tower. A log tower 500 feet taller than Eiffel’s, a telescoping tower, and an 8,947-foot tower with an elevator to the top and toboggans to get down were proposed. Even Eiffel submitted a larger version of his tower for the fair. It was denied.

Burnham wanted something unique. So he challenged American engineers to come up with something spectacular.

George Washington Gale Ferris Jr. accepted the challenge. The idea came to him in a momentary flash. He envisioned a giant steel “bicycle” wheel, 250 feet in diameter carrying 36 cars that could hold 60 people each. A complete revolution of his wheel would propel 2,160 people around in 20 minutes. Continue Reading…