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When I read my weekly Barron’s publication I usually see at least one idea that I want to share with readers of The Financial Woman. This week was no different. Barron’s can be delivered to your mailbox usually on Saturday and most libraries have copies. Reading Barron’s is an easy way to keep track of the financial markets and learn about investing. I realize that many of you do not wish to spend time doing this in addition to surfing the web for good investing information and sights and that is one purpose of my blog; to save you time by providing quality financial information.
There are truly hundreds of thousands of authors and articles out there. Over past two decades I have learned to listen to a few favorite financial experts in the media. Their insights are generally the ones I like to share with you. If I am writing about something that someone else said it is either backed by performance data or a demonstrated history of financial wisdom. Website references are slightly different since many do not have a long history. When I reference a site the information posted makes good financial sense to me or the site contains helpful information and links.
There was a short but informative article by Lawrence C. Strauss on page 10 of today’s Barron’s (the weekend Barron’s has the following Monday’s date) about comparing the performance of long term bonds to that of stocks. This is a favorite topic of The Financial Woman since it involves both a long term approach and considers price valuations in the two major investment categories of stocks and bonds. Robert Arnott chairman of money manager Research Affiliates who manages $31 billion was quoted as saying:
“The widely accepted notion of a reliable 5% equity risk premium is a myth.”
This just means that it is false to expect that stocks will perform 5% above bonds over time. He goes on to say “We’ve had 30 to 40 years of building this cult of equities where if your time horizon is long enough it doesn’t matter what you pay for stocks. That’s dangerous.” Arnott goes on to explain that stocks are more attractive today with a yield of 3.4% for the S&P 500 than when the yield was lower and the PE (Price Earnings) ratio was higher. Recall that the yield is calculated by dividing the return from an investment by the cost of that investment. For example if a stock cost $100 and the stock pays a dividend of $3.40 the yield is 3.4%. In essence a higher yield then indicates cheaper stocks and vice versa. Overall stocks are now yielding around 3.4% in the S&P 500 Index which you may recall is a group of 500 stocks representing the market.
I really like this next statement by Arnott.
“Price matters. What you pay has a lot to do with what you are going to earn. If there’s a 4% dividend yield you can have a lot more confidence that you are going to have a decent return than if your yield is 1%.”
Is this incredibly simple but true?
Follow the link below to see a chart showing time periods during which bonds outperformed stocks and read a review of Arnott’s upcoming Journal of Indexes article: “Bonds: Why Bother?” research paper. Arnott takes the view that historical price valuations must be considered by investors to have good performance.
Next the article quotes Wharton professor Jeremy Siegel and author of Stocks for the Long Run who feels that stocks get a bad rap. Professor Siegel advocates more of a buy and hold approach with less emphasis on historical valuation.
“What I find interesting is that researchers cite the poor equity returns of the past 10 or 20 years as evidence that you should not hold stocks in the future.”
The article states that Siegel wrote in an email
“On the contrary the worse stocks have done in the past the better they are now; the worst backward-looking stocks were in July 1932 yet that was the single best time to buy stocks ever [as they outpaced] all other assets over the next five 10 and 20 years.”
It seems to me that both Arnott and Siegel are saying that stocks are cheap based on historical valuations. I respect the opinions of both of these financial experts. Whether you buy and hold stocks based on historical valuations or not the most important rule is to avoid buying high and selling low.