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Morningstar's Pat Dorsey says the reason it's been a terrible decade for stocks, is that it all comes down to three things: ...
valuation, valuation, valuation.
Tags:Stock Valuation in the Past 10 Years,business tips,last decade poor stock performance reasons,last decade stock performance,morningstar,stock investment,stock valuation
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Hi, I’m Pat Dorsey, Director of Equity Research at Morningstar. Happy Holidays! Though you may not be feeling quite so happy, if you’re looking at your financial statement from 1999 and comparing them today given at the past 10 years have been frankly pretty awful for stock market and I’m sure you’re going to read a lot of articles in the media about financial media and otherwise over the next few weeks talking about just that. What a terrible decade it’s been for stocks somehow on inflation and just a basis you’ve actually lost money in stocks over the past decade.
And a lot of these articles are going to probably put a stand just thinking about my gosh, why are people putting money in the stock market at all and you’ve got everybody putting lots of money into bond funds which is of course I talked about last week, but I bet you that very, very few of these articles will talk about why the past decade was so terrible for stocks and will make the point that past is not always prelude. Let’s think about the past decade and why it was so terrible for the stock market.
Well, there's a pretty simple reason. Just like in real estate, where you talk about the only three things that matter are location, location and location and investing the only three things that matter are evaluation, evaluation and evaluation. And the price you pay for an asset has unbelievably huge effect on the returns you will have after that asset. So let’s roll the clock back and see what people were buying. If they both the SMV500 in 1999. I’ve pulled out the top ten stocks and pricing about 25% of the SMV500 in 1999. And you know its not a flaky bunch of companies, they’re pretty solid, Microsoft, GE, Cisco Wal-Mart, Intel, there’s the couple flaky names and their like loosing AOL which haven’t done so well over the past decade.
But you know I don’t think anybody would argue that Cisco is a good company then so their company now, Wal-Mart. The problem was the prices that these companies were trading here. Listen to some of this price to earnings ratio’s Microsoft at 72 times earnings, GE at 47, Wal- Mart at 57 times earnings; IBM was a bargain at 29 times earnings. On average, you were paying 43 times earnings for the market in 1999. That was an enormous headwind on returns over the past decade and that more than anything else is wide stocks has stunk over the past ten years because your starting point was so high in terms of valuations that almost no degree of earnings growth could have overcome that enormously high level of expectations implied by 43 times earnings.
So what are you buying today if you buy the stock market? Well, many of these fame names are on that list. Top 10 stocks in the SMV500 now, Exxon Mobil, Microsoft, Apple, P&G, Johnson &Johnson, IBM, J.P. Morgan, GE, Starworks great businesses, but listen to the way devaluations have changed. You’re getting Apple for 25 times earnings, Microsoft 20, Exxon Mobil at 15, J&J at 14, IBM, J.P. Morgan, GE all at 14 times earnings. That’s big difference from 57 times earnings or this average of 43 times earnings that you are paying a decade ago.
Well, I’m not going to argue that stocks are dirt cheap right now. You are not facing the headwind that you were in 1999 investing in equities today. Paying 14 times earnings for Johnson & Johnson or GE or J.P. Morgan chase, it’s not a very cheap price but it’s a fair price. It’s a reasonable price and if you think about the past decade is kind of like pedaling uphill on a bicycle against this enormous weight of a high priced earnings ratio, well it could probably that costing downhill right now, the way you were and same if you invested in March, but you’re at least on a plateau, it’s at least flat and you’re not facing this enormous headwinds, enormous fight of high priced earnings ratios and high evaluations.
So again, the point here is not that the market is dirt cheap right now, it’s frankly not. But the point is simply that 2009 is not 1999 and don’t read the past decade as prelude for the next one because valuations are starting out for the next decade in a much better place than they were in 1999.
I’m Pat Dorsey, thanks for watching. Happy Holidays!