The close of the worst decade for stocks in history

Happy solstice folks!

This morning’s Wall Street Journal has an article entitled, “Investors Hope the ’10s Beat the ’00s.” The story highlights that the past decade is the very worst decade for stocks in the 200 or so years that their performance has been tracked in the United States. On average, folks lost 0.5% per year in the past decade.

This is not a very interesting statistic to me because the imminent, and now dead, Peter L. Bernstein predicted that the returns on stocks for at least ten years would be poor. In a paper that influenced me deeply in my career Mr. Bernstein looked at stock market returns dating back those aforementioned 200 years. What he found was that valuations on stocks relative to all other major investment classes were drastically over-valued. Shocking! So his premise was simple: the massive over-valuation was unsustainable. Shocking! As a part of passing the baton upon my retirement from the helm of the Davis Appreciation & Income Fund I passed on to my successor, Keith Sabol, a copy of this paper and insisted that he read it. The paper was brilliantly argued and laid out a case that to me was ironclad.

Basically Peter Bernstein’s paper made the case that to unwind the massive excess returns experienced in the stock market from the mid-1970s to the late 1990s that there would have to be a sustained period of very low stock market returns. Fortunately valuations have returned to more normal levels. The S&P 500 – a broad enough index to be relevant – has a P/E of around 14 right now. Unfortunately many investors are getting frothy at the mouth again, anxious to sink their greedy teeth into stocks all over again.

Some things about investing are foreseeable many, many years ahead of time. One of which is that stock valuations should always be between 8-16x on average and over long periods of time. Consequently, I strongly encourage each of you to continue to monitor valuation levels as this is the single greatest predictor of long-term success as a stock investor.

Be well everyone!

Jason