Money Minute: Demand for Music Downloads Slips; Investors Ready for Flood of Earnings

Before you go, we thought you'd like these...
Before you go close icon

Music downloads take a sudden downturn. That's one of five money stories you need to know this Monday.

This is the busiest week of the corporate earnings season, with nearly one-third of the companies in the S&P 500 providing quarterly report cards. Among those we'll be paying close attention to: Microsoft (MSFT), McDonald's (MCD), Boeing (BA), AT&T (T), Procter & Gamble (PG), Amazon.com (AMZN) and Ford (F). All of them are leaders in key sectors of the economy, and their performance will tell us a lot about how their industries are performing, and give important clues about consumer spending and the overall economy.

Investors would love more of the same, after the market posted strong gains last week. The Dow Jones industrial average (^DJI) rose more than one percent, the Standard & Poor's 500 index (^GPSC) jumped 2 percent to a record high, and the Nasdaq composite index (^IXIC) soared more than 3 percent.

US-IT-INTERNET-APPLE-ITUNES RADIO
Josh Edelson, AFP/Getty Images
It was just a decade ago that the iTunes store debuted, raising fears that it would mean big trouble for the music industry. Instead, it sparked a wave of buying music downloads. But now, for the first time, Nielsen says downloads appear headed for an annual decline. The reason isn't yet clear, but some analysts point to the rising popularity of streaming services such as Pandora (P), Spotify, YouTube and Apple's new iTunes Radio.

LinkedIn (LNKD) has used information from its 238 million users to rank to most in-demand employers to work for, and tech giants and consumer-product companies dominate the list. Google (GOOG) and Apple (AAPL) are first and second, followed by Unilever (UN), Procter & Gamble, Microsoft and Facebook (FB). Rounding out the top 10 are Amazon, Pepsi (PEP), Shell (RDS-A, RDS-B) and the business consulting firm McKinsey.

And the Justice Department is expected to announce this week one of the biggest-ever corporate penalties to come out of the financial crisis of 2008. News reports say the government and banking giant JPMorgan Chase (JPM) have agreed on a jaw-dropping $13 billion settlement of civil charges related to the sale of mortgage-backed derivatives. But this accord doesn't stop the government from seeking criminal charges.

-Produced by Drew Trachtenberg.

7 PHOTOS
If You Only Know 5 Things About Investing, Make It These
See Gallery
Money Minute: Demand for Music Downloads Slips; Investors Ready for Flood of Earnings

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.

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.

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.

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.

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."
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE
Read Full Story

Markets

S&P 500 2,387.31 13.16 0.55%
DJIA 21,000.16 236.27 1.14%
NASDAQ 6,023.78 39.96 0.67%
DAX 12,467.04 12.06 0.10%
NIKKEI 225 19,079.33 203.45 1.08%
HANG SENG 24,455.94 316.46 1.31%
USD (per EUR) 1.10 0.01 0.78%
USD (per CHF) 0.99 0.00 -0.37%
JPY (per USD) 110.96 1.32 1.20%
GBP (per USD) 1.28 0.01 0.52%

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic
Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside
Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts