Is the Market One Big Wal-Mart in the Mid-90's?
*Graham and Doddsville Revisited* -- "The Intelligent Investor in the
21st Century" (3/24/98)
"The underlying principles of sound investment should not alter from
decade to decade, but the application of these principles must be
adapted to significant changes in the financial mechanisms and
climate." (Benjamin Graham)
A reader writes:
> This market reminds me of Wal-Mart in the early 1990s. Their
fundamentals were
> superb, but their share price more than discounted that performance.
Hence, despite
> continued progress toward becoming the dominant retailer in the US.,
the stock
> went sideways to down for three years while that story caught up to the
stock
> price. In 1995/96, the stock eventually became a steal below $20 and
those
> that bought it then have since profited handsomely. But those that
bought it in
> the early 90's based solely on the fundamentals (i.e., having no regard
for
> share price) have dramatically underperformed the overall market.
> I wonder if the same thing can be expected of the U.S. market as a
whole for the
> next three years.
It is an interesting comparison. Wal-Mart's fundamentals in the 1994 to
1996 period were not as "superb" as investors had previously come to
expect. This was a period for Wal-Mart of declining profit margins and
return on equity. Not a dramatic decline, but the shares were priced too
high to allow for any decline at all.
And, consistent with your comparison, that might be just what lies ahead
for the overall Market in the next 2 to 3 years: mild declines for margins
and ROE in a Market priced for no declines at all.
Not only the dour John Bogle, Sr., but even the permanently optimistic
Peter Lynch, have predicted that total returns on the Dow going out 5
years were likely to return to the long-term historical mean of around 9%
per year. However, they made this prediction more than five years ago.
As it turned out, the total return for the 5 years ending 12/31/97 on
Vanguard's S&P 500 Fund was 22.6%.
In the case of Wal-Mart, the average annual return over this 5-year span
was 5.0%. This is far less than the return the S&P 500 produced. But, if
the alternative had been leaving the Market entirely, it should be noted that
bonds were not much better, and that cash was no better at all. Corporate
A-rated bond funds returned around 7.3% over this period. T-Bill money
market funds averaged 4.2%.
In the 3/23/98 GADR Update, I predicted that the stock market would not
double in the next 3 years, as it has in the 3 years just past. But, I would
not want to predict that bonds or cash would be a better alternative. If the
Market is now one big overpriced Wal-Mart, I would rather hang in with
an overpriced Wal-Mart. The alternative would be to wait in cash or
bonds for a profitable re-entry point that might not materialize, which has
been the case for so many investors who have left the Market over the
past 5,000 points.
*********
[For a free e-mail subscription to GADR, reply to: gadr@nyct.net
In the subject header, type: SUBSCRIBE.
Kindly remember to turn off the "quote message" feature before
replying.]
The *GADR* Reader's Forum is now on Silicon Investor, at:
Subject 19528
*********
Graham and Doddsville Revisited
Editor: Reynolds Russell, Registered Investment Advisor
Web Site Development/Design: ariana <brla@earthlink.net>
Consultants: Axel Gunderson, Wayne Crimi, Bernard F. O'Rourke,
Allen Wolovsky
In addition to editing *GADR*, Reynolds Russell offers investment
advisory services. His goal is to provide total returns in excess of
those produced by the S&P 500.
His investment strategy applies the principles of Value Investing
established by Benjamin Graham to the circumstances of today's economy
and securities markets.
For further information, reply via e-mail to: gadr@nyct.net
*********
"There are no sure and easy paths to riches in Wall Street
or anywhere else." (Benjamin Graham)
(C) Reynolds Russell 1998. |
