I recently posted Entry #9 for my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Stocks Are Not Worth Buying Today.
Juicy Excerpt: There’s no guaranty that history will repeat exactly. But there’s good reason for anticipating that it will at least rhyme. It’s not an accident that times of insanely high prices have always brought on times of insanely low prices. Insanely high prices cause millions to believe that they possess far more in the way of real wealth than what they really do possess. That belief causes millions of bad financial decisions; bull markets make people spend more than they can afford to spend. When people realize that they have been making poor financial decisions for years or for decades, they panic. Panic causes insanely low stock prices.
Rob says
The author of the Financial Samurai blog put forward some good comments overnight. His comments appear at the thread on the blog entry entitled “We Don’t Want to Know What Works, We Want to Know What Makes Us Feel Good, Accurate or Not”
http://arichlife.passionsaving.com/2010/06/25/we-dont-want-to-know-what-works-we-want-to-hear-what-makes-us-feel-good-accurate-or-not/
and at the thread on the blog entry entitled “Right Now, Rob, You Are Your Own Worst Enemy In This Matter”
http://arichlife.passionsaving.com/2010/06/28/right-now-rob-you-are-your-own-worst-enemy-in-this-matter/
Rob
Evidence Based Investing says
The S&P500 closed yesterday at 1,041.24
When I plug in a P/E10 value of 18.6 (which corresponds with an S&P500 value of 1,042.92) into the Stock-Return Predictor and press Calculate I get a Most Likely 30-Year Percentage Return of 6.00% real.
I find this hard to reconcile with the statement that “Stocks Are Not Worth Buying Today”
Rob says
You’re making an important point, Evidence.
If you’re willing to wait 30 years, stocks are a good deal even at today’s prices.
The data doesn’t point to a single reality. It points to multiple realities.
Rob
Evidence Based Investing says
I think the key is to make sure that short term worries do not get in the way of long term goals.
Rob says
Thanks much for helping out, Evidence.
Rob
Rob says
I should add that the point that Evidence is making applies at all times.
The highest valuation level we have ever seen is the valuation level that applied in January 2000. Even stocks purchased at that valuation level were highly likely to provided a strong value proposition if held for 30 years.
I am going to go over to the 1000 Papercuts site where the column appears and add a comment letting people know of the point you raised here, Evidence.
Rob
Lostinthedesert says
No one knows what tomorrow will bring. The odds are that stocks will have a small positive return over the next 10 years. Remaining in cash will yield about zero to a negative return. Bonds returns are likey capped at about 3% real assuming a decade of no inflation and quite possible could deliver high negative returns.
I believe that one might consinder one’s cash holdings as potential future stock holding (at lower levels) and one’s stock holding as likely returning about zero to slightly positive real.
If at a PE10 of 12-13 one would be comfortable holding 70% equities and 30% short-term bonds/cash, then a reverse strategy might make sense today. 30% equities and 70% short-term bonds/cash.
Rob says
Thanks much for taking time out of your day to stop by and help us all out, LostInTheDesert. I hope you will pay us return visits.
Rob