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| About Me |
Writer of an investment letter--Scott Carter's Modern Portfolio Letter www.scottsmpl.net
BS. Economics and Business
MS. Finance
M.A.S. Accounting
CPA
CMA
Member of the Chicago CFA Society
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Modest Returns in stocks for the last ten years
Saturday July 04, 2009
The newsletter was started on July 1999 and is 10 years old. The stock market in 1999 was very over valued with the P/E ratio of the S&P 500 at 47. Generally when the P/E ratio is over 20, the market has trouble advancing for the next year. If a 10 year moving average of the P/E ratio is used for the S&P 500, the value was extremely overvalued. Benjamin Graham the father of fundamental analysis recommended using the 10 year moving average of the P/E ratio to forecast the next 10 years of the stock market. Based upon this analysis, the returns would not be good. The returns were not good. The S&P 500 index with dividends included returned a negative 2.25% per year. A simple portfolio of t-bills would have returned a positive 3.22% per year. The short term portfolio did 7.6% above the S&P 500 index. The long term portfolio did 11.18% above the S&P 500 index. These numbers do not include dividends and only show price movements. Over 80% of the active managers of mutual funds do not beat the S&P 500 index funds. The valuation of the stock market is much more reasonable and the returns should be better for the next 10 years. I would expect the short term portfolio relative performance will improve to the long term index. So buy a mixture of the short term and long term stock picks, there will be value in both stock portfolios. It pays to pay attention to:*valuations of individual stocks*diversification by arbitrage theory and domestic and foreign stocks *quality of the financial statements*the amount of debt that the company has Common sense and a helping hand from the newsletter will provide better returns and less risk. Read and learn by reading, history has a tendency of repeating itself. EditorScott Carter CPA CMA
Will the Real P/E ratio please stand up.
Sunday June 08, 2008
Minter, Charlie and Marty Weiner. What is the Real P/E Ratio? Barron’s May 26, 2008 Pg. 45 The price earning ratio or P/E ratio is a common valuation metric in evaluating stocks. The price per share is easy to find but what about the earnings per share. There is where the difficulty is, some analysts are using projected earnings per share for the upcoming years, while other analysts are using historical earnings from the previous year. Also the income statements have many levels of earnings that an analyst could use: net earning with every thing netted out or operating earnings with the elements of common expenses and revenue not including write offs or unusual charges. This flexibility allows the average P/E ratio of the S&P 500 to range from 13 to 27. What to use? The use earnings projections have a very bad history; the average growth rate in earnings has been 6% a year in long term studies. Projecting earnings faster than that is dangerous. Analysts from brokerage firms are notorious for being too optimistic in projecting earnings; they are trying to keep their jobs in a business where it is better to be optimistic than pessimistic. Also charge offs are becoming more common from the 1990’s going forward and tend to have a continuous nature. It there is one charge off there will be more later on and the charge off should be used to reduce earnings to get a more realistic number. If these adjustments are used the P/E ratio is over 20, historically this represents modest returns in the stock market. Also, if an investor looks at growth rate of the book value of stocks this has slowed down considerable. Slow down in book value represents aggressive accounting and large write offs.
Stock Market Health
Monday June 02, 2008 Most of the loses in the stock market have been in the interest sensitive area such as banks, insurance companies and brokerage firms. If the investor had stocks in defensive areas, or cyclical stocks that have large outside sales with foreign countries, the results are not bad. Even the inflaltion sensitive stocks have done well. So, it pays to diversify by interest sensitive, cyclical, inflation, and defensive stocks. This diversification is called arbitrage theory. Scott Carter CPA CMA
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