Not Planning to Retire Soon – Hope for Less Rosier Headlines
The Dow Jones Industrial Average recently climbed to a record high of 18,000 for the first time on December 23rd. Investors cheered this news and the media proclaimed that the bull market was heading even higher. There was no cheering from us at Constant Guidance Financial (CGF). We reflect back on Warren Buffett’s quote from his 1997 Berkshire Hathaway shareholder letter, “Disinvestors Lose as Market Falls—But Investors Gain.” Buffett’s point was that savers are able to deploy funds more advantageously at lower prices. The stock market is the only market where people don’t like to buy “on sale”. If you are contributing to a 401(k) or other retirement vehicle and do not plan to retire in the near future, you should be hoping for less rosier headlines.
The Dow Jones Average is up nearly 175% since the low reached in November 2009. It is hard to believe that the index was at 6,547 such a short time ago. While we prefer not to experience a significant market correction, we do prefer lower prices. We follow Buffett’s advice, “… smile when you read a headline that says, “Investors lose as market falls. Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” As fundamental investors, we tell all of our clients who invest with as that we prefer lower markets. It is much easier to find better values when prices are lower.
In our view, there are not many bargains in equity markets these days. Investor confidence is at near all time highs, international investors are piling into the U.S. markets, companies are buying back record amounts of stock, and oil prices collapsed over 40%. Moreover, companies are flush with cash, jobs are plentiful, wages are on the rise, inflation is nonexistent, consumers are in a spending mood, and investors continue to buy every dip in the market. According to Barron’s Magazine, EVERY Wall Street strategist is bullish in 2015. They all expect to see a stronger U.S. economy next year.
At CGF, we do not make future market predictions because if we could accurately predict the market like the brokerage firms attempt, we would leverage our bet multiple times and plan to retire in 2016. We believe the best way to accumulate wealth over time is to find undervalued businesses and slowly compound returns over time. We are constantly reevaluating our clients’ portfolios and looking for new investment opportunities. In the past, we were evaluating companies with earnings yield over 6%-8%. In this current market environment, the highest quality companies are now yielding between 4%-6%. Earnings yield is the quotient of earnings per share divided by the share price. We use earnings yield because we can compare the earnings of stocks to bonds. Earnings yield is the reciprocal of the P/E. Today’s earnings yield is low relative to historic valuations; however, it is actually high when compared with bonds, CDs, and other assets. In this deflationary environment, many investors are satisfied with an average 4%-5% earnings yield versus an investment grade corporate bond with a 2% yield that has a 5-year duration. Earnings yield continues to favor equities. If interest rates begin to rise next year, then we would assume that equity markets would become more volatile. In the meantime, we will continue to hope for lower markets for our long-term clients and are willing to hold a small cash position for our clients nearing retirement as equity valuations remain slightly elevated.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
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Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.
