Week 6 - Keeps looking better

Week of February 26, 2009

Not even ratios can save us...

In class we discussed financial ratios. Essentially a ratio can help a person to understand any relationship between any two numbers. In fact, we even discussed making our own ratios. However, in the Wall Street Journal this week John Mauldin says that ratios are based on assumptions and in the current economic conditions, you cannot uses conventional assumptions. Most future rates are based on current numbers. However, financial uncertainty causes us to not be able to project appropriately into the future. So, essentially financial ratios are completely useless right now for valuation purposes. Pay particular attention to the comments left with this article.
http://online.wsj.com/article_email/SB123605688123316929-lMyQjAxMDI5MzA2MzAwNTM2Wj.html#articleTabs%3Darticle


Just continuing with the theme of gloom and doom...In this opinion piece in the Wall Street Journal today it is speculated that there is a 1 in 5 chance that our current economic situation will lead to a depression. Robert Barro studied many countries to formulate his conclusion, not just the United States. But remember there are always two sides to every percentage, so there's an 80% chance of avoiding a depression.
http://online.wsj.com/article/SB123612575524423967.html

This video advices us to never pick individual stocks, but rather invest in mutual funds. Is that really good advice considering all the bad press that Bernard Madoff is giving this traditional investment instrument. He also recommends that when diversfiying with bonds, your percentage invested in this instrument should correlate to your age...so it gets bigger as you get older and need those more stable returns.
http://online.wsj.com/video/a-guide-to-the-end-of-wall-street/07B2FEB7-21BA-4A31-9EED-404F2BB8C9AF.html