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It would be a bit extreme to call this the greatest opportunity you will ever see. It won’t be the moment you ask your future husband to dance for the first time. It won’t be accepting that first job at the bottom rung that leads to a long career at a great company. And it won’t be that flash of an idea that turns into the next internet craze. It might not even be the greatest investment opportunity you will ever have – I’m the first to admit that markets can certainly go down from here. But, it is a decent time to put your money to work in the great companies in the US and around the globe.
“Are you crazy?” you might ask. Then you might follow that question with a whole litany of today’s headlines: Housing Crunch Causes Banking Collapse; Unemployment To Hang On For Years; Wall Street Is Occupied; The Arab Spring Creates Massive Middle East Instability; Europe Is In Total Meltdown; US Politicians Are Completely Insane.
Let’s dispense with these right away. They are all too true and then some. But the combined total of the fears these headlines have created is the reason our current opportunity exists.
However, we often don’t see it that way. I love a thick, juicy, prime, aged rib-eye… especially when it is freshly cut, perfectly marbled, and only $5 per pound instead of its normal $16 per pound. In fact, lets say that you regularly eat this exact same cut and you haven’t seen this price for 10 years. You might buy and freeze every one you can get your hands on – assuming the quality is high.
“Jonathan, what does this have to do with the great companies in the US and around the globe?” Well, 10 years ago, in 2003, the S&P 500 was priced at roughly 1111. It enjoyed earnings of roughly $55 per share and paid dividends of almost $18 per share – they retained the other $37 per share to reinvest and expand future earnings. The market paid $20.20 for a single dollar of earnings (down from $43.50 for one dollar of earnings two years prior).
Fast-forward to today – the S&P 500 trades in the low 1600s, but (and this is a huge BUT) its earnings (according to FACTSET) are expected to come in around $115 per share and dividends have nearly doubled to $32/ share. Yes, if you followed the math, this means that they are retaining $83 per share to enhance their cash positions, reinvest in their business or increase future dividends. So today, you only have to pay around $15 for the same $1 in earnings.
This is the exact same discount as the example of the delicious rib-eye. In every other circumstance in our lives, when the price of the thing we want to own or use goes down relative to the benefit it provides, we get excited and back up the truck to buy more. In the area of investments, we freak out and run for the hills.
There is a Buddhist parable that describes two monks staring at a pennant flapping in the wind. One is trying to convince the other that it is the wind and not the flag that is moving, while the other tries to convince the one that it is the flag and not the wind that is moving. You can just imagine a third monk, smiling to himself or perhaps laughing aloud, before he calmly and clearly states that it is neither the flag nor the wind that is moving… it is only their minds that are moving.
Prices go up and prices go down. There may be a period in the future where you can buy $1 of earnings for $12 or maybe even $10; but there may also be a time when it will cost $20. Markets are the world’s emotions made manifest. It has almost nothing to do with how the great companies in the world are doing. In the worst of times, they are reducing costs to enhance shareholder returns when the rebound occurs. In the best of times, they are investing in plants, equipment and human resources to make sure they can keep up with the surging demand for their products. They are constantly looking to increase their revenues and profits, improving their cash positions, enhancing their dividends, and growing their enterprises as they serve more customers with better products.
The price we pay is today’s stock price, but the value we receive is the growing earnings and dividends and reinvestment of a great company. As long as you have cash to invest, the goal should be to get more earnings and dividends for each dollar you invest. Today, you have that opportunity.
Sure, the opportunity might get a little better. Yes, the market will certainly experience a pullback or correction, but we don’t know when or from what price level. What good is waiting for the 10% pullback, if the market goes up 10% before you see it? The market is fairly valued at the moment and this valuation won’t last forever. Above average prices will happen again and between now and then, dividends are attractive.
I don’t think you are too late, but you might be right on time.
Jonathan K. DeYoe, AIF and CPWA, is the Founder and CEO of DeYoe Wealth Management in Berkeley, Calif. Want more information? Follow DeYoe Wealth Management on Facebook at www.facebook.com/DeYoeWealth or Twitter at @DeYoeWealth.
Jonathan DeYoe, California Insurance License #0C21749, is a registered principal with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor – Member FINRA/SIPC.
The opinions voiced in this material do not necessarily reflect the views of LPL Financial and are for general information only and are not intended to provide specific advice or recommendations to any individual. For your individual investing needs, please see your investment professional regarding retirement planning.
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