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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Bill Harmond who wrote (16898)	5/11/2003 12:47:01 PM
From: Immi	Read Replies (2) \| Respond to of 57684

reed Is Good Kenneth L. Fisher, 05.26.03, 12:00 AM ET 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. If you didn't already know it by instinct, then the last four years should have taught you: When most investors are greedy you should be fearful, and when most investors are fearful you should be greedy. Investors now get the first part of this rule, but not the last part. Fear is pervasive on Wall Street, so this is a good time to be greedy. Sell your timid Treasury bills. Buy stocks. 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. Try to do even better still. You can try with these three options: Canada's Alcan (nyse: AL - news - people ) (29) is the world's best aluminum firm. Basic materials producers generally should do well for a while now, despite the common perception that they are dogs. Alcan isn't just any growth company; it's a growth company from which the market expects no growth. So it's cheap--17 times trailing earnings, against 25 times for its lesser peers. Look closely. Switch the "a" for an "o" and you get Swiss-based Alcon (nyse: ACL - news - people ) (43), which owns 25% of the global eye care market. Its product line ranges from drugs (like Azopt for glaucoma or Ciloxan for infections) to surgical goods (like AcrySof for cataracts) to consumer brands (like Tears Naturale). As populations age Alcon products build natural momentum. The company has been gaining global share for years but has been available as a stock only since Nestlé spun it off in March 2002. Investors fear that a spent consumer in a weak economy will doom retailers. So you don't have to fear that. From this comes opportunity. Try a package of beaten-down retailers in equal thirds to make one total investment: Dillard's Department Stores (nyse: DDS - news - people ) (14), Federated Department Stores (nyse: FD - news - people ) (31) and Toys "R" Us (nyse: TOY - news - people ) (10). All are cheap, with trailing P/Es below 9 and 50% below the norms for retailers. Kenneth L. Fisher is a Woodside, Calif.-based money manager. Visit his homepage at www.forbes.com/fisher