A big IPO in less than 140 characters, and customer data is compromised at Adobe. Those stories and more are what’s in Friday’s Market Minute.
The Dow Jones industrial average (^DJI) fell 136 points Thursday, dropping back below 15,000. The Standard & Poor’s 500 index (^GPSC) lost 15 and the Nasdaq composite index (^IXIC) dropped 40.
Today was supposed to be a “jobs Friday,” but the government shutdown has forced the Labor Department to delay the release of September’s employment numbers.
Twitter says it plans to raise a billion dollars through its initial public offering. The company previously said it planned to go public, but it didn’t reveal any financial details. Now we know the social media giant had revenue last year of $317 million, triple the number from the year before. Despite the revenue jump, Twitter suffered a loss of more than $79 million. The company is still not saying how many shares it will offer, or the price per share. The lead underwriters — Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM) — will share in a big payday.
Last year’s mega-IPO in social media was Facebook (FB). The company now says its Instagram unit will start placing ads on photo-sharing feeds.
Adobe Systems (ADBE) reports a serious attack on its computer system that may have compromised personal information of customers as well as the source code for some of its programs. It says names and some encrypted credit card information of nearly 3 million customers were accessed.
Shares of Forest Oil (FST) are set to rally. The oil and gas producer has agreed to sell assets in the Texas panhandle. The buyer is privately held Templar Energy. The price: $1 billion.
Union Pacific (UNP) issued a disappointing forecast, partly because of weak demand for coal shipments. The news could also pressure the shares of rival railroads CSX (CSX) and Norfolk Southern (NSC).
And Time Warner (TWX) is expecting a big opening weekend for its movie “Gravity,” starring George Clooney and Sandra Bullock. They play astronauts dealing with a crisis in space.
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Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.
1. Compound interest is what will make you rich. And it takes time.
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% a 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.
2. The single largest variable that affects returns is valuations — and you have no idea what they'll do
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.
3. Simple is usually better than smart
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
4. The odds of the stock market experiencing high volatility are 100%
The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.
"Everything else is cream cheese."
5. The industry is dominated by cranks, charlatans and salesmen
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