Investors have very different needs and concerns. Broadly speaking, I classify people between those more interested in preserving wealth and those trying to build wealth. There are other considerations, but that is a good place to start.
Many investors of both stripes now wish they had bought the market in the Spring of 2009. As stocks rallied, there were three distinct choices:
- You could decide that you had "missed the bottom." This meant that you would sit on the sidelines, perhaps forever, because you could not get over your initial mistake.
- You could accept the fact that you were not a big-time risk taker. You wanted to see evidence that there would not be a great depression. At some point you decided to climb aboard.
- You are still trying to decide.
Those taking Path 2 did great on a total return basis, making 32% plus dividends, but it required buying at a point of near-maximum risk. It iss OK to be cautious, especially if you are preserving wealth. The Path 3 investor has an opportunity that equals that of 2009 on a risk-adjusted basis.
Let us look at the data.
Getting a Second Chance
Usually we do not get a "do-over" in life. Because of the pervasive negative sentiment about politics and the fear trade, the opportunity to buy traditional investments at good prices is still there.
T0 understand this, you must ignore absolute prices and forget about the fact that you did not buy the market in 2009. That is all history. Where are we now?
| 5/8/2009 | 12/8/2010 | |
| S&P 500 | 929.23 | 1228.00 |
| Forward 4q eps | 60.47 | 91.98 |
| Forward P/E | 15.37 | 13.35 |
| Inverse of Forward P/E | 6.5% | 7.5% |
| L-T eps growth rate | 7.0% | 7.0% |
| 10-year Treasury yld | 3.2% | 3.2% |
| Difference | 3.3% | 4.3% |
Stock prices have rallied, but earnings estimates have done even better. When you compare the market to the bond alternative, the yield differential is striking. Regular readers know that I have produced unrefuted evidence that one-year forward earnings estimates are excellent.
Briefly put, if you have waited for a favorable risk/return to buy stocks, the time has come.
Investment Conclusion
Buying stocks today has more upside than at the bottom in the Spring of 2009. Since many of the major issues are off of the table, there is even less risk. Since many issues remain, stocks are still cheap.
The table shows the S&P 500 averages. Successful investment advisors who have beaten these averages over a long time period may do even better.
There is an extra kicker. The political dynamic has changed for the better. As I noted in my weekly review, the tax and unemployment benefit compromises have dramatically improved the prospects for economic growth. This will immediately help corporate earnings and eventually help the deficit projections. Some market sectors will benefit more than others.
