Bulls eye investing
What is the 20-year horizon? Mauldin observed that every period of 9.6 percent market returns started with low P/E ratios. The P/E ratio amount strongly correlated with the trend in Market P/E ratio and none of the strong gains occurred without rising P/E ratios. Looking at the market trend, half of the investors realized compound returns less than 4 percent and 10 percent generated gains more than 10 percent. Subtracting inflation, taxes, and dividends the historical growth in earnings has been 2 percent. Only new companies have been able to produce 3 percent. Pensions need 7 percent in real growth. Is it possible some pensions are 1/7 their value? It is impossible to get a 9 percent growth assumption in a 5 percent bond market. Companies often make a 70/30 balance of stock to bonds. The cost for companies to drop their expected rate of return from 9.2 percent to 6.5 would be $30 billion according to CSFB assuming no recession that would correct the DOW to 6,000.