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Pastimes : The Big Picture - Economics and Investing
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To: Sid Turtlman who wrote (321)9/6/1997 9:06:00 AM
From: Mike McFarland   of 686
 
Sid wrote "The risk in the stock market, IMO, is not that prices are too high relative to book, but that people have overestimated future earnings power..."

Yes, back to the basics! (that is all I understand anyway)

All the positive ways of looking at this bull market and all the excuses people give for still being fully invested in this market sometimes wear me down a bit--I start to wonder if I've been wrong not to jump on board, will I ever be vindicated with large correction or crash? People say, "this time is different" (really--someone at work said that to me the other day), maybe it is. But the small amount of data and evidence I can juggle around in my untrained and flabby mind suggests that a market which trades above 20 times earnings really is very rich. There is no compelling reason to expect that earnings can rise fast enough to catch it (after all if the World economy is growing at 5% a year, maybe that is a good first approximation for how much growth US business can capture...and 5% growth does not support PE20 (am I right...I here often people look for multiples equal to groth rate). Anyway, I am not listening to the increasing productivity argument anymore as the reason to expect continued high growth rates...I see no evidence in my life that the the US companies I can observe are becoming ever more efficient-- productivity is topped out. NOW how do you get high enough growth to support PE 20? Historically the DOW trades between around 7 times and 22 times earnings--if you're fully invested at PE7 and mostly in cash above 20 I'll bet you would do pretty well.

I have forty years to test this theory. After several years watching the markets, business shows and reading the WSJ this is the only theory I have come to like. I should read an economics text too but haven't gotten around to it :(
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