Tl;dr investing is much safer and easier to understand
2 Likes
Important.
1 Like
The market is pretty good are predicting what companies will fail, high short interest ratio stocks consistently underperform low short interest ratio stocks. If you short stocks with the highest short interest ratios, you will do well statistically.
I havenāt heard that before, Iād be interested to read more about it, do you have a link you can share?
So I looked at investing in FTSE 100 ETF. But when I look at the max graph on the app itās literally the highest itās ever been. Prudent to invest? Can it get much higher? Like wouldnāt I be investing at the top of the market so when there is an inevitable correction or crash I lose out?
Which ETF is it? the FTSE 100 itself it itās all time high in may last year, itās still a bit below that
People invest in the stock market because they believe that over time its value increases. If there was no misvaluation of stocks and no recession cycle, the current price of a broad ETF would always be higher than prices in the past. This is what you want to see, or you wouldnāt invest.
Since stocks can be overvalued, however, the question to ask is: are these stocks overvalued right now? What could my future return be if I purchased at this price?
One simple way to look at things would be 1/avg PE of the stocks as an indicator of your future returns. Doing this for US stocks right now, which are very overpriced, the returns look abysmal. But I think UK stocks are reasonably, perhaps even underpriced right now.
So, you could do your own research, see if youād be getting good value on the 100 companies in the ETF, and make your choice.
But generally speaking, you should not try to time the market. If theyāre overpriced and later on revert to the mean, eventually their true value will still climb higher than what you paid today. So if you believe in the stock market and are investing for the long term, what matters is time in the market.
2 Likes
Also the FTSE is priced in Ā£ but many of these companies do business internationally. The current weakness of the pound is partly what is propping the prices up. I think the Ā£ is likely to stay weak for quite a while, especially as it seems like thereās no end to this Brexit stuff!
If you are convinced a crash is just around the corner, but you still want to be invested, you could invest small amounts regularly to average out the peaks and troughs. Look up āCost Averagingā
Freetrade makes this much easier as you donāt get whacked with high commission on lots of small trades
Thanks everyone for your responses.
@Dave It was the FTSE 100 large cap stocks Ā£ISF. Will look up cost averaging. Cheers.
@anon287192 I take the point that time in the market is the most important. How would I go about calculating PE? Like I understand the formula, looking online, but how would you do that for an ETF that covers 100 companies? Work out the ratio for each individual company and take an average?
@ytsruh So if youāre looking long term it almost doesnāt matter when you invest it seems. Can we say with some conviction that because the stock market has always risen, despite various recessions, that it will definitely be higher in 40 years time?
Think the best we can say is we expect it to increase, nobody can guarantee this though
3 Likes
Itās hard to tell on the small graph, but if you set it to max, that peak around may last year is a bit higher than it is now. Personally I would look at things like Price/Earnings ratios rather than price alone to see if it looks overpriced. If the companies are earning enough money the high price is justified
1 Like
You donāt have to calculate PE, just look up a chart of the index concerned - people have already done this for you.
CAPE is another way to measure PE smoothing out the short term variations, and itās looking quite high at the moment but not flashing red as it was in 1928 or 2000. US markets are looking toppy, UK markets not much better, and recession is round the corner IMO (due to multiple factors, but mostly looming trade wars) but not priced in to share prices yet, so things may fall a bit for a few years in real terms, but these things are notoriously hard to predict.
Compare the CAPE chart though to the S&P 500 historical prices, and you can see why people say stocks only go up in the long term (in absolute terms at least), and events like Black Monday or the dot com bust are just blips along the way if you look at absolute prices (partly this is just inflation):
Personally, I think youāre right to be slightly nervous, but also that others are right that you should just get on with it and invest. Itās really very hard to call large market movements with any sort of reliability, and you will hopefully only see a few major recessions in your lifetime. If a crash does come, just buy some more solid stocks, good companies will be on sale!
Things I do to reassure myself when investing in such a market are to:
- Buy stocks which are likely to weather recession well and pay good dividends which can be reinvested
- Donāt limit yourself to just your countryās market/indexes
- Put some of my investment into cash in the investing account, so that I have money to spend if things to crash significantly, or even if individual companies I like get cheaper. It is dead money of course until you really want to buy something, but it means you are able to do so even as everyone else is selling and your other investments are underwater.
- Remember stock prices bounce back remarkably quickly (even if economies donāt)
4 Likes
Great advice, thanks @kenny
I wouldnāt bother trying to calculate it myself. Iād google it and try and find someone else who did the hard work 
I found FTSE-100 Stocks by PE Ratio (Price Earnings) Ā topstocktable.com , no idea if the numbers are reliable. You could spot check some of them.
Now you need to consider what measure you think is reliable. Trailing PE? Forward PE? CAPE? For every study that shows one metric is the best, thereās probably one that shows itās the worst.
And taking a simple average of the PEs of all the companies is too simplistic. There are crazy outliers in the list. And youād probably want to weight them by cap?
In the end the single number you come up with is no guarantee of anything, and can only be used to give you a general sense of if things are overvalued. But right now the best estimates (and the best might not be any better than reading tea leaves) suggest the FTSE is sub 15 for a 6.6+% expected return, which is good.
Personally, the most useful single web page Iāve found that gives me a general sense of whatās going on is: Buffett Indicator: Global Stock Market Valuations and forecast
But my conclusion isnāt to avoid the US and go all in on China! Itās to go with a global fund.
2 Likes
That table is also incidentally a great example of why relying on one metric is really dangerous, particularly if picking single stocks. If you used low PE alone youād end up deciding Rolls Royce and IAG are a bargain right now (I donāt believe this is true), Ocado looks really terrible, and for example Amazon had a PE of 3000ish in 2012, but has done rather well since then. I think Iād look for someone who plotted the entire index (that site I linked has that done for the S&P 500, here is the FTSE 100), and try to use a longer term measure like CAPE at least.
However sometimes keeping it simple is best, particularly as a retail investor with a long time frame for investment. Just buy something every month and try not to sell very often 
. I loved that story about the investors who did best being the ones who forgot about the account.
Can someone clarify if paper trading is possible on the freetrade app? As Iām a beginner investor I donāt want to spend real money yet, I just want to get familiar with trading on the app.
No, itās not possible.
Not sure what exactly you need to get familiar with though, thereās no CFD or leverage.Just buy and hold long term after researching what you want to invest in first
You will learn better with real money, investing is emotional. You will feel fear, you will feel greed. I suggest you start with a small amount of money, say below Ā£500 first. I would advise you to learn how stocks gets overbought and oversold and how you can time entry from that. But to sum it upā¦
āInvestors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.ā
Try and read Chapter 8 and Chapter 20 of The Intelligent Investor.
2 Likes