For What It's Worth

Analyst Jeremy Grantham recently anaylzed stock market history and he divided it according to how cheap or expensive stocks were at the time - and then looked to see what happened next. Since 1929, if you bought stocks at times when they were among the cheapest 20% in terms of P/E ratios, you would have earned an average return of 10.6% over the following ten years. If you had purchased them when they were at their most expensive - the top 20% in terms of P/E ratios - you would have earned only 0.6% per year during the following 10 years.

Where are stocks now? In the most expensive quintile. So what can investors reasonably expect? If history and theory are any guide, they can look forward to less than a 1% annual rate of return. So the question every investor should be asking him or herself is this one: "Why would any forward thinking investor buy stocks under these conditions? And the answer of course is, he or she wouldn't!

Which goes to show how little investors actually think at all. Let's look at the facts: The Dow is at an all-time high; the Federal deficit came in lower than expected; and even housing starts showed new energy. So what's not to like?

Even though the Dow is setting records, investors' real returns are still negative. Inflation has taken nearly 20% off of nominal gains over the past six years. And the returns on gold have been much worse during the same period. So measured in gold, the typical stock market investor has lost more than half his/her money since 1999.

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