By: GZ on Giovedì 15 Maggio 2003 13:06
Greed Is Good
Kenneth L. Fisher, 05.26.03, Forbes
The masses worry that in the war's wake the economy will weaken. So you don't have to. What should you worry about now? Letting the new bull market get away from you.
Financial markets are popularity contests. They discount commonly known information, whether the prospect of $1.10 a share in earnings for Microsoft this year or the risk that occupied Iraq will turn into a quagmire. Therefore it is pointless to worry about what others worry about. If you do and base market judgments on those worries you will be wrong more often than right.
Put it this way: If others worry about something, you just don't have to because they are doing it for you. You should worry about something else--namely, whatever they're not worried about.
In 1999 folks fretted over the Y2K bug in computer software. So that was one risk to the stock market you didn't have to spend any time on. In 2000 they worried about how to navigate the so-called new economy, hence one more thing safely ignored. Note, they did not worry about the economy going south. So you had to.
In late 2001 they began worrying about terrorists. Since then terrorist activity has declined. We didn't get the follow-on hit in the U.S. we expected. Suicide bombings in Israel have declined from one a week to one a month. A year ago the big worry was corporate integrity. Since then a river of scandal (Enron, Arthur Andersen, Dynegy, WorldCom, Adelphia) has become a trickle of scandal (HealthSouth). The feared catastrophe that does not materialize creates an upward push on stocks when fear finally fades and demand for equities returns.
Of course, this year the masses worried about Iraq. So you didn't have to. Now they worry that in the war's wake the economy will weaken. So you don't have to. I'm not saying the economy will be gangbusters, only that it won't fall into recession.
What should you worry about now? Letting the new bull market get away from you. Almost no one worries about that. Here is why it's a real risk. First, invert the market's P/E into an E/P, an earnings yield to compare with interest rates. In 2000 it was markedly lower than fixed-income returns. Ten-year bonds yielded almost 7% and stocks' earnings yield was below 3.5%. Now, the bond yield is below 4% while the earnings yield on 2003 earnings is conservatively at 6%. Further, in the next decade the bond yield on current holdings can't grow. The earnings yield will. Stocks aren't expensive.
Second, we've had three years in a row in which the return was below the market's long-term 10% average. In the S&P 500's history that has happened only seven times. On the previous six occasions the subsequent five-year return averaged 17% a year and was never negative; the ten-year performance averaged 12% a year and was never negative. Big performance numbers. You can't get them with bonds or cash. Cash yields 1% and change these days. The ten-year Treasury yields 4%. Whatever uptick you might or might not get over the next month on the T note, I can assure you that if you buy it now and hang on for ten years, you will get a 4% annual return.
You can expect far better from stocks over the next decade. Be greedy
