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April 21, 2014

Andrew Silow-Carroll: Passoverkill? Suggestions to make next year's seders even more culturally sensitive

Sara Israelsen Hartley: Seeking the Divine: An ancient connection in a new context

Christine M. Flowers: Priest's execution in Syria should be call to action

Courtnie Erickson: How to help kids accept the poor decisions of others

Lizette Borreli: A Glass Of Milk A Day Keeps Knee Arthritis At Bay

Lizette Borreli: 5 Health Conditions Your Breath Knows Before You Do

The Kosher Gourmet by Betty Rosbottom Coconut Walnut Bars' golden brown morsels are a beautifully balanced delectable delight

April 18, 2014

Rabbi Yonason Goldson: Clarifying one of the greatest philosophical conundrums in theology

Caroline B. Glick: The disappearance of US will

Megan Wallgren: 10 things I've learned from my teenagers

Lizette Borreli: Green Tea Boosts Brain Power, May Help Treat Dementia

John Ericson: Trying hard to be 'positive' but never succeeding? Blame Your Brain

The Kosher Gourmet by Julie Rothman Almondy, flourless torta del re (Italian king's cake), has royal roots, is simple to make, . . . but devour it because it's simply delicious

April 14, 2014

Rabbi Dr Naftali Brawer: Passover frees us from the tyranny of time

Greg Crosby: Passing Over Religion

Eric Schulzke: First degree: How America really recovered from a murder epidemic

Georgia Lee: When love is not enough: Teaching your kids about the realities of adult relationships

Cameron Huddleston: Freebies for Your Lawn and Garden

Gordon Pape: How you can tell if your financial adviser is setting you up for potential ruin

Dana Dovey: Up to 500,000 people die each year from hepatitis C-related liver disease. New Treatment Has Over 90% Success Rate

Justin Caba: Eating Watermelon Can Help Control High Blood Pressure

The Kosher Gourmet by Joshua E. London and Lou Marmon Don't dare pass over these Pesach picks for Manischewitz!

April 11, 2014

Rabbi Hillel Goldberg: Silence is much more than golden

Caroline B. Glick: Forgetting freedom at Passover

Susan Swann: How to value a child for who he is, not just what he does

Cameron Huddleston: 7 Financial Tasks You Should Tackle Right Now

Sandra Block and Lisa Gerstner: How to Profit From Your Passion

Susan Scutti: A Simple Blood Test Might Soon Diagnose Cancer

Chris Weller: Have A Slow Metabolism? Let Science Speed It Up For You

The Kosher Gourmet by Diane Rossen Worthington Whitefish Terrine: A French take on gefilte fish

April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review

Sometimes, things really are different this time

By Morgan Housel





Why you must be careful when using long-term history to value the stock market


JewishWorldReview.com | The four most dangerous words in investing are said to be, "It's different this time." Someone uses them at the peak of every bubble to justify ignoring lessons of the past.

But being unshakably wary of "it's-different-this-time" arguments has its drawbacks. Some things really do change over time. Paradigm shifts can legitimately amend old rules and assumptions. There's an old rule of thumb that the economy needs to create 150,000 jobs a month just to keep up with population growth. That's not the case anymore, because the population is getting older and fewer Americans are of working age. Today, we need closer to 100,000 jobs to keep up with population growth, so a jobs report that looked weak two decades ago might actually be pretty good today. We can say, "it's different this time" because it really, actually is.

This goes for stocks, too.

The market will crash again someday. Maybe soon. It just does that from time to time. The S&P 500 seems fairly valued at best. Perhaps a little overvalued.

But be careful when using long-term history to value the stock market. It could lead you to erroneously think stocks are in a huge bubble without realizing valuation metrics that worked in the past may need adjusting. Why? Because some things have changed. It really is different this time.

Take these two:

1. The percentage of S&P 500 sales made abroad has more than doubled

About 23 percent of S&P 500 sales came from outside the United States in 1990, according to J.P. Morgan. By 2003, that was up to 41 percent. Last year, 47 percent of S&P 500 sales came from abroad.

That's a real change in how companies make money. You can't just ignore it. Any historical analysis of S&P earnings or market capitalization as a percentage of the U.S. economy is misleading unless adjusted for the surge in global sales that's taken place over the past two decades.

Take a popular metric these days: corporate profit margins.

If you take corporate profits and divide them by U.S. GDP, you get a crude measure of profit margins that looks way above the historical average. But using U.S. GDP as a denominator doesn't make sense when U.S. companies have doubled the share of business they do overseas in the past 20 years. Use world GDP as a denominator and margins don't look that high at all.



2. The dividend payout ratio has plunged

In the 1973 version of his classic book, "The Intelligent Investor," Ben Graham wrote:

"Years ago it was typically the weak company that was more or less forced to hold on to its profits, instead of paying out the usual 60 percent to 75 percent of them in dividends. The effect was almost always adverse to the market price of the shares. Nowadays it is quite likely to be a strong and growing enterprise that deliberately keeps down its dividend payments."

There's been a strong shift in companies paying out less of their earnings as dividends over the past century. From the 1930s through the 1980s, companies usually paid out half their earnings as dividends, often far more. Today the average payout ratio is around 30 percent.

This matters. It can't be ignored when comparing the current market with the past. To me, it is one of the best explanations for why the CAPE valuation metric has been above its long-term average in all but nine months of the past 22 years.

When companies are paying out less of their earnings as dividends, they are using the leftover cash for share buybacks, acquisitions or internal growth, or they're just leaving it in the bank.


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In any of those situations, future earnings growth, or current book value, will be higher than it otherwise would have been if the payout ratio hadn't declined. That affects valuations. A company that pays out all of its earnings in dividends should trade at a lower valuation than one that uses part of its earnings to buy back shares or invest in its future.

Apple, for example, has a market cap of $470 billion and nearly $150 billion of cash and marketable securities in the bank. So about one-third of its current market value has nothing to do with the prospect of future earnings. Instead, it represents past earnings waiting to be paid out (to be fair, repatriation taxes need to be considered as well). These kinds of stories didn't exist in the world Graham describes. And it can make Apple's P/E ratio and other valuation metrics look misleadingly high, especially when compared with long-term history.

Saying "it's different this time" is dangerous. But so is assuming nothing ever changes and that the past is a perfect prologue. "If past history was all there was to the game," Warren Buffett once quipped, "the richest people would be librarians."

(The Motley Fool recommends and owns shares of Apple.)

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Comment by clicking here.

Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review.


Previously:


The things you shouldn't pay attention to

Putting a gap between you and stupid

8 fascinating financial insights from latest Nobel Prize-winner

Investing like a psychopath

Why you're so bad with your money

8 questions you might have about the debt ceiling

An open letter to everyone under age 30

15 biases that make you do dumb things with your money

If this scares you, you shouldn't be investing

What I plan to do when the market crashes

The three most important words in investing

Monkeys and investing

Two types of risk, two types of bubbles

The secret to financial success: Use ignorance to your advantage

How to effectively fight investors' greatest enemy

Four mistakes that make everyone a bad investor

Learning from the past, and the Next Big Tren

What newspapers were saying when you should have been buying

Why you never learn from your investment mistakes

The curse of success, and why most mutual funds fail miserably

If you know only five things about investing, make it these

Why spotting bubbles is so much harder than you think

When smart investors do stupid things

The deep downside of home ownership

The biggest retirement myth ever told

He's rich, smart and old: Listen to him

Admit it: No one has any idea what's going on

Gold collapse: The start of something big?

BAD NEWS: EVERYONE IS RIGHT!

Twitter: The carnival barker of investing

Warning: Don't waste your capital being fooled by profit prophets

25 important things to remember as an investor

New paradigm for both drivers and car companies

Biases that make you a bad investor

Nine financial rules you should never forget

Gaining from financial destruction

How to read financial news

Housing: Partying like it's 1925

A rebuttal to student loan horror stories

CONGRATULATIONS: We just saved half a trillion dollars

End this crazy tax: It will boost the economy

Medicare: A dangerously good deal

Economic future looks bright

The Biggest Threat to Your Portfolio (It's Not What You Think)

Bond Market Bull Run dead at 30



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