Throughout history, the best time to buy stocks has been when valuations were low. No economic or fundamental variable other than valuation was predictive of long term stock returns. By definition, in order for valuations to be low the consensus must be that stocks are unattractive. If the consensus were that stocks were attractive, everybody would be buying and valuations would no longer be low. Generally, when everyone is bearish there is economic turmoil and uncertainty.
Today's market valuation is among the lowest in history. There have been cases where the market has traded lower but longer term returns from current valuation levels have been very satisfactory. I have been scaling into the market with the intent of becoming fully invested if the S&P 500 reaches 600, which would be very close to the most extreme valuations.
As I look around, I see stocks that have the potential to double and triple in value. American Express (NYSE:AXP) shares trade at five times the earnings of just their transaction processing business. Microsoft (NASDAQ:MSFT) trades at six times free cash flow. Boeing (NYSE:BA) trades at six times earnings. These stocks will almost surely double in value when this bear market finally ends. I wonder if I am not being penny wise and pound foolish by holding out for even more extreme valuations.
Currently, we are stuck in a cycle where lower prices are leading more people to liquidate and short sellers to become more brazen, which leads to yet lower prices. There are numerous clues that suggest we are very close to the end of this. While we might need a final capitulatory move lower from here, I believe those losses would quickly be recouped if they occurred.
Disclosure: Long AXP.