Monday, December 1st, 2008
Stocks are cheap. Buy! (for the long term)
A few days ago I was discussing with a friend what might happen in the market.
I said there was a huge divergence opening up between short/medium-term tactics and long-term tactics.
The market still seems weak, despite the recent rally.
Sure we could have another bear-market rally, but I’m seeing nothing to indicate that stocks are going to make a sustained bull move any time soon.
For medium-term momentum traders that suggests the best place to be is in cash or short.
But when it comes to long-term funds for retirement, we should be buying. Stocks are cheap!
Many believe the market’s low PE and high dividend yield is simply a factoring in of a huge fall in profits (a fall in ‘E’) during a recession and a cut in dividend payments.
But William Bernstein, the author of the classic book The Four Pillars of Investing, has calculated the average real earnings over the past 10 years for the US, which he is using as his ‘E’.
According to his data, the market is trading on a PE (Price/10-year average real earnings) ratio of just 12 to 13 times – well below the historical average PE ratio of around 17 times. Stocks are cheap!
Long-term investors should be ignoring the bad news — and the good chance of more falls — and be buying equities for their retirement funds if they have a holding period of 10, 20 or 30 years.
This entry was posted on Monday, December 1st, 2008 at 8:03 am and is filed under Fundamentals, Market direction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
December 3rd, 2008 at 11:38 am
Right time for buyers.
December 10th, 2008 at 4:02 am
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