Tuesday, December 16, 2008

Cartoonist Logic

One thing I've always liked about the Dilbert Blog is that he often warns his readers "never get your financial advice from a cartoonist." However, sometimes you just can't beat his logic. His three pillars of finance:

1)History always repeats.
2)Past performance is no indication of future returns.
3)Asshats are trying to steal your money.

These three truisms can explain any financial phenomenon. For example, if your financial advisor suggests that you invest in a market bubble that is about to burst, he will explain that the past is no indication of future results. Just because a Price/Earnings ratio of 45 has never been sustainable in the past doesn't mean it won't be perfectly safe in the future.

And when the bubble bursts and you lose half of your money, your advisor will explain it's because history always repeats. In other words, he's an asshat trying to steal your money.

For decades, a golden rule was to sell at a p/e ratio of 19. They rarely went over 20. It was one of the first rules I heard about when I started investing. Every old-timer I knew followed it. At the beginning of roaring '90's, with the dot-com's going through the roof, they went into the high 20's/low 30's. Before long, nobody talked about them anymore. Even the value stocks were over 20. I honestly don't know where they were this time last year, but there's an awful lot of them in single digits now.


E!!-lizabeth Crum said...

This is totally unrelated to the subject, but one of my favorite Dilbert cartoons is on a PostIt-like pad that sits on my desk.

Dilbert is doing a Diversity Training, and while pointing to a large illustrative wall chart he says: "There are basically four groups of people in the world:

Cute Smart
Cute Stupid
Ugly Smart
Ugly Stupid"

(I think it's pretty funny because I really think there's some truth in it.)

Local So-and-so said...

He's a perceptive guy. He was probably the one doodling in his notebook in the back row during math class, half paying attention and half just observing.