“If You Only Know 5 Things About Investing”

The Motley Fool’s Morgan Housel is quickly becoming one of my favorite writers on things financial. Morgan recently wrote a great post titled, “If You Only Know 5 Things About Investing, Make It These.”

Here’s a sample:

2. The single largest variable that affects returns is valuations — and you have no idea what they’ll do

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.

The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% per year.

What about the change in earnings multiples? That’s totally unknowable.

Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?

If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Posted by on May 28th, 2013 at 11:08 am


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