bearfund

Will You Look Back on Today as Your Greatest Missed Opportunity?

These companies have been around a lot longer than 10 years. Using a period containing an enormous stock bubble for comparison purposes when much longer track records are available will lead to overvaluation. A longer-term view shows that the overall market is still trading above typical multiples; the highest and lowest multiples over the past 50 years were about 7 in 1979 and about 45 in 2001. On a log scale (the appropriate measure here), we're a lot closer to the high end than the low. So if you're buying at today's still-high multiples, you are betting on either explosive growth or a return to bubble conditions. Either is possible, of course; the Fed is printing plenty of money, so another stock bubble is not out of the question, but it would seem unusual to have two bubbles in the same asset class in a single decade. As for growth, I don't really see where it's going to come from. These are US companies and some of them do not or cannot export their products (ED, for example). For those that can, the BRICs are cooling down and Europe is its usual sluggish self. Exports grew rapidly last quarter but with the dollar rising and growth abroad slowing or reversing, that trend seems unlikely to continue. About the only thing I can see driving growth in the next few years is a huge burst of government spending ("infrastructure"!) fueled by printed money. In that case, good luck guessing at the real value of your returns (and don't forget that you have to pay taxes on the inflation component).

In the longer term, a decade-long deleveraging and large-scale restructuring of the American economy, its citizens' values, and its system of government could restore the kind of conditions that would lead to solid growth and justify today's valuations. But the probability of that happening is much less than 1/37, so you would achieve a better risk/reward ratio by putting half your portfolio in T-bills and betting the rest on 23. In fact that is very much like buying stocks at today's prices: most likely you'll lose about half your investment as multiples contract toward historical bottoms, but maybe a miracle of some kind will occur and people will once again be willing to pay 25x earnings and 50x dividends for 9% nominal growth in an inflationary environment. A curious position to take, but the market welcomes all kinds. Good luck to you.