Reversion to Mean
Web
Buzz 2009.06.29
Many times we have written about the equity
cult that has built up over the years. We bet that you remember our frequent
complaint that in our early years of money management (1957-1981) we could
get no one to buy common stocks and then in our later years (1981 to date)
we could get no one to buy government bonds. The following charts reveal
this circumstance and give a little hint: “the worm she may be turning.”
Please consider the following: the S&P
500 stock index is presently selling at a price to earnings ratio of 61
times the reported earnings of $15 in 2008; 35 times the estimated 2009
earnings of $29; and 24 times the estimated 2010 earnings. It is almost
impossible for anyone to make anything over the next five or ten years
based upon any entry point at these levels. Well, you might say that your
purchase was years ago, and therefore your entry level is not today. Oh yes
it is, as every day that you don’t sell you are in effect “opting up” at
current levels. Valuations of stocks make no sense at all, while, when one
takes long-term risk into account, high quality bonds are probably the best
game in town.
It also makes sense that a long-term move
away from common stocks may well be underway as indicated by the charts.
Many of these pools of funds may attempt to use alternative assets;
however, those who have done so over the last five years have been badly
burned. Some will put their hand on the stove again, but the trend is not
their friend. Ouch!
Adapted
from ContraryInvestor.com
Central Plains
Advisors, Inc.
Information contained in
these commentaries is based upon information obtained from sources both
external and internal which we consider to be reliable, but the accuracy of
the information and the recommendations contained herein cannot be
guaranteed, nor do they constitute a solicitation for the purchase or sale
of any securities mentioned herein. Information contained in this
commentary may not be reproduced in any form without written permission
from Central Plains Advisors, Inc.
Disclosures: As benchmarks for
comparison, the indexes used represent an unmanaged, passive buy-and-hold
approach. The volatility and investment characteristics of the benchmarks
cited may differ materially from those of CPAI. Please be advised that the
comparison to the S&P 500 is not an apples to apples comparison, as
they are a different class of assets. The account performance figures
reflect the reinvestment of dividends and capital gains. Past performance
may not be indicative of future results and does not guarantee positive
returns. The performance results for 1991 through 2004 have been
independently compiled by CPAs from information provided by CPAI; CPA
compilation of 2005 through 2008 are pending. The period of 1991-1999 was
one of generally rising stocks and bonds. The period of 2000-2003 was one
of generally lower stocks, but rising bonds. The period of 2004-2007 was
one of rising stocks and bonds. The year 2008 experienced a stock market
crash and average bond market.
