A Cheaper Dow 10,000 ?
Interesting New York Times article about the overall markets’ valuation:
“Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.
Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.”
That would seem to argue for the value player’s approach to investing. And over long periods of time (decades), the value approach is indeed valid.
However, academic studies have shown conclusively that it is your asset allocation strategy that is the greatest determiner of your returns. The best stockpickers out there got crushed if they were 100% long US equities in 2008; The worst bond mangers still did well relatively.
Consider:
“The return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March . . .
Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.
For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent . . .” (emphasis added).”
What is also be worth looking at are other investable asset classes beyond US equities: How did emerging markets do? Convertible Bond Arbitrage? Private Equity? Real Estate? Commodities? Munis? Gold?
Even within the equity slug of your allocation, there are small cap value, big cap tech, alt.energy, etc. that may have outperformed the overall market over the same time period.
And when all of the above asset classes become correlated and start to head down, as they did last October, that is your signal to move aggressively to cash.
The overall conclusion of this article, which the Times did not explicitly state, is that most investors would be better off with an asset allocation strategy rather than sticking to the traditional stock picking or even index approaches so common amongst mom and pop . . .
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Source:
10 Years Later, a Much Less Expensive Dow 10,000
PAUL J. LIM
NYT, November 14, 2009
http://www.nytimes.com/2009/11/15/business/economy/15fund.html
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November 15th, 2009 at 10:59 am
That is a very dishonest column. As a matter of fact it is as far away from reality you can get without the label fiction stamped on it. How can that guy go through his entire column trying to discuss equivalency over that time and mention nothing of how the value of money has changed since then? I think the Grey Lady just coughed up another furball
November 15th, 2009 at 11:18 am
Not dishonest at all. “Money” is just another asset class… and the “value of money” is just how close to the target you are in your asset allocation.
You should have some cash as a asset class, but it’s just another asset class (albeit with unique properties, but that’s what makes it a unique asset class.)
As certain allocations fall below their target, you re-balance from the ones that are holding up into the ones that are dropping e.g. from your TIPs to your small cap, TSM, and or foreign equities. That worked well this year, as intended. Then as certain asset classes drive upward, you re-balance out of them to maintain your target allocation.
Simple and effective. Betting on the failure of America is a way to the poor house, especially after such a dramatic drop in equities. Note:
“…The Baltic Dry index, the global benchmark for freight costs for dry bulk commodities, jumped 21.2 per cent to 4,111 points over the week as bids rose daily for the Capesize vessels that transport iron ore and coal to China. Growing ship congestion outside key ports in China and Brazil has also driven the Baltic higher – up 85.2 per cent since the start of October…”
http://www.ft.com/cms/s/0/7e5673d4-d0be-11de-af9c-00144feabdc0.html
November 15th, 2009 at 11:21 am
The penultimate in honest valuation of an asset class:
http://paul.kedrosky.com/archives/2009/11/the_price_of_go.html
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BR: Heh heh — as you can see in the link Paul posted, the Barry he references is me!
November 15th, 2009 at 11:30 am
“Betting on the failure …As certain allocations fall below their target, you re-balance from the ones that are holding up into the ones that are dropping e.g. from your TIPs to your small cap, TSM, and or foreign equities. That worked well this year, as intended. Then as certain asset classes drive upward, you re-balance out of them to maintain your target allocation.” VD, above
VD,
I think ed. made your post more understandable..
HTCMSI,
speaking of ‘editors’, how many Dow/Gold Ratio charts were there, in that Article?
“All the Agitprop that’s Fit to Print” isn’t, nearly, as catchy, is it?
November 15th, 2009 at 11:30 am
Me knows (unfortunately me vocab skills be lacking – should have just said “ultimate”.)
November 15th, 2009 at 12:00 pm
BR,
while parsing the NYT is worthwhile, don’t forget this aspect of the endeavor– http://www.projectcensored.org/censorship/teachers-guide/
from
http://www.projectcensored.org/
as background http://www.projectcensored.org/top-stories/prior-archives/
just a friendly note, at the risk of sounding like an a**hat..
November 15th, 2009 at 12:28 pm
Ever wonder how refreshing it would be to see the CEO of a large US corporation speak an honest opinion that is negative on a MSM interview?
Kudos to Mr. Tisch…I listened to this interview and said, “this guy gets it and is actually not afraid to say it!”
http://www.cnbc.com/id/15840232?video=1329917692&play=1
Best quotes…”there WAS a recovery”…”it took us 50 years to accumulate all this debt…now it will take a period of years of debt liquidation that will be a serious headwind”
November 15th, 2009 at 12:56 pm
I don’t disagree with the idea of diversification, the problem is, most people don’t have any opinion on any markets, so “spreading it around” may in fact only help them lose 20% on 15 different investments rather than say, 4 or 5, if they don’t know when to buy and sell. Unless of course since you spread it around you think it’s ok to buy and hold, good luck with that.
The timing of this article is certainly interesting, are we to believe based on a 10 year average p/e that one shouldn’t bother to mention we’ve had a 60% rally might want to be a little cautious with new buys? I’m not sure how the E is considered either. In 2002 S&P changed the basis of its earnings reports to “operating earnings” making the p/e ratio ever since about half of what it really is yet we just compare away like nothing every happened. It was obvious then, as it is now, that companies didn’t want to report any bad news.
Remember This Chart?
You might also consider the massive credit expansion and what it does to the E over this 10 year trailing period. Look at any meaningful measure of the health of the economy, it doesn’t look better.
Grantham stated that stocks were undervalued in the spring of this year really for the first time in about 20 years. I suppose in buying this p/e NYT argument you’d also have to believe that investors are rationale for having bought so quickly at those levels. I’d love to hear the justification for labeling market participants rationale especially in the face of the largest credit deflation we have seen in decades.
I find P/E ratio to generally be of little value in determining when to buy and sell equities, it’s great that compared to 99 it looks like a better “value” but that still tells you nothing of the next 10 years.
November 15th, 2009 at 12:59 pm
SB, I agree with you. Tisch always comes across as a straight shooter. Like the man. His message, not so much.
November 15th, 2009 at 1:01 pm
“And when all of the above asset classes become correlated and start to head down, as they did last October, that is your signal to move aggressively to cash.”
Good point, though I wonder if you won’t see a disconnect between equities/bonds/CRE and commodities/PMs (excluding energy) when the s&*t hits the fan part deux.
November 15th, 2009 at 1:48 pm
[...] Paul J. Lim, “By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.” (NYTimes also Big Picture) [...]
November 15th, 2009 at 2:30 pm
And adjusted for the CPI (http://bit.ly/3KXlh0), Dow 10,000 today was worth over 30% more in March of 1999. http://jpetervanschaik.googlepages.com
November 15th, 2009 at 4:49 pm
Mark E. Hoffer,
Asset Allocation (with re-balancing)
http://en.wikipedia.org/wiki/Asset_allocation
… sure Bush destroyed the dollar from ’00 ’til he left, but “The Dow measured in gold” could be recast as the DOW measured in EEM, VWO, VGK, VPL VBR etc.. etc… not only GLD, got it now?
November 15th, 2009 at 8:31 pm
“an asset allocation strategy”
So much to do, so little time… Many citizens can’t read and/or write. Many don’t comprehend what they read. Many don’t have the discretionary funds available for this purpose. These are just a few of the reasons why this doesn’t work for many average Americans.
November 15th, 2009 at 9:32 pm
“Money” is just another asset class
Actually, money is just a legal document and its value is measured by the power mad lunatic who is running the creation of it
November 16th, 2009 at 5:28 am
Yes, the Dow is cheaper! Very interesting observation!
But it all depends on where it will be months from now.
There is a way to profit through from the ups and downs of the stock markets: use timing signals to figure out when to get in and when to get out.
Consider http://invetrics.com
Its daily DJIA index trading signal is up a respectable 68% for the year (as of November 1, 2009) and it is free of charge for individual investors.
November 17th, 2009 at 9:51 am
Barry, Barry, Barry….
Asset allocation? Come on. That argument always strikes me as a weezle word excuse for advisers who can’t make good investment decisions. Are you getting too successful now to actually speak negatively on the market?
How exactly is asset allocation not timing the market?