After some forty years of banking and investments, I retired in 2001. But since I do not golf, I soon found retirement to be very boring. So I decided to return to the investment world after ten months. However, those ten months were not a complete waste of time, for I had spent them in trying to utilize my forty years of investment experience to gain perspective on the most recent stock market "bubble" and subsequent "crash."
There were several people who saw the stock market crash coming, but they had different ideas as to when it would occur. Those who were too early had to suffer the derision of their peers. It was difficult to take a stand when so many were proclaiming that we were in a "new era" of investing and that the old rules no longer applied. Since the beginning of 1998 through the market high of March 2000, among 8,000 stock recommendations by Wall Street analysts, only 29 recommended "sell."
I am on record as having called for a cautious approach to investment two years before the "Crash of 2000." In an in-house investment newsletter dated April 1998, I have a picture of the "Titanic" with the caption: "Does anyone see any icebergs?"
When I resumed employment in 2002, I happened to glance at the chart on the last page of Value Line, which showed the stock market as having topped out, by coincidence, in April 1998, the same date as my "Titanic" newsletter! The Value Line Composite Index reached a high of 508.39 on April 21, 1998 and has been lower EVER SINCE! But on the first page of the same issue, the date of the market high was given as "5-22-01"! When I contacted Value Line about this discrepancy , I was surprised to learn that they had changed their method of computing the index for "market highs" from "geometric" to "arithmetic." They said they would change the name of the Value Line "Composite" Index to the Value Line "Geometric" Index, since that is how it has been computed over the years. Currently Value Line is showing a recent market low on 10-9-02 and the most recent market high, based on this new "arithmetic" index, on 4-5-04, ANOTHER ALL-TIME HIGH! If they had stayed with the original "geometric" index, the all-time high would still be April 21, 1998!
Later that year, I was pleasantly surprised to read in "Barron's" an interview with Ned Davis, of Ned Davis Research, that said that his indicators had picked up on the bear market's beginnings in April 1998, the same date as my "Titanic" newsletter! So, my instincts were correct! I believe that we are in a "secular" downturn that began in April 1998 and the "Bubble of 2000" was a market rally in what was already a long-term bear market.
Another development transpired soon after I resumed employment in 2002. I happened to notice one day that, in its "Market Laboratory," "Barron's" had inexplicably changed the P/E Ratio of the S&P 500 to 28.57 from 40.03 the previous week! This was due to a change to "operating" earnings of $39.28 from "net" or "reported " earnings of $28.31 the previous week. I and others wrote to "Barron's Mailbag" to complain about this change and to disagree with it, since these new P/E ratios could not be compared with historical P/Es. "Barron's apparently accepted our arguments and, about two months later, changed back to using "reported" earnings instead of "operating" earnings and revised the S&P 500 data to show a P/E Ratio of 45.09 compared to a previous week's 29.64.
But a similar problem occurred the next day in a sister publication to "Barron's." On April 9, 2002, "The Wall Street Journal" came out with a new format that included, for the first time, charts and data for the Nasdaq Composite, S&P 500 Index and Russell 2000, in addition to its own three Dow Jones indices. The P/E Ratio for the S&P 500 was given as 26, instead of the 45.09 now found in "Barron's." I wrote to the WSJ and after much correspondence back and forth, they finally accepted my argument and on July 29, 2002 changed the P/E Ratio for the S&P 500 from 19 to 30! I had given them examples showing where some financial writers had inadvertently confused "apples" with "oranges" by comparing their P/E of 19, based on "operating" earnings, with the long-term average P/E of 16, based on "reported" earnings.
Because I started to be cautious about investing as early as April 1998, since I thought that price/earnings ratios for the stock market were perilously high, I was not hurt personally by the "Crash of 2000" and had tried to get my clients into less aggressive and more liquid positions in their investment portfolios. But the pressures to go along with the market were tremendous!
Price/earnings ratios do not enable us to "time the market." But comparing them to past historical performance does enable us to tell when a stock market is high and vulnerable to eventual correction, even though others around us may have lost their bearings. High P/Es alert us to a need for caution and a conservative approach in our investment decisions, such as a renewed emphasis on dividends. Very high P/Es usually indicate a long-term bear market may ensue for a very long period of time. We are apparently in such a long-term bear market now. But in determining whether the market is high, we must be vigilant with regard to what data mambers of the financial press are reporting to us, so we can compare "apples" with "apples." When the financial information does not appear to be correct, we, as financial analysts, owe it to the investment community to challenge such information. That is what I have concluded from my personal "odyssey" in the investment world.
After three years of the DJIA and the S&P 500 closing below their previous year-end figures, the market finally closed higher at the end of 2003. But the P/E ratio is still high for both indices.
Does anyone see any icebergs?
Henry V. Janoski, MBA, CFA, CSA is a 1955 graduate 'magna cum laude" of Yale University and a member of Phi Beta Kappa. He received his MBA in finance and banking from the Wharton Graduate Business School of the University of Pennsylvania in 1960 and holds the professional designations of Chartered Financial Analyst (CFA) and Certified Senior Advisor (CSA). As a registered investment advisor representative with the title of Senior Investment Officer, he is located in Scranton, PA. His biography is listed in "Who's Who in Finance and Industry" and in "Who's Who in America." E-mail address: hjanoski@aol.com
Right now there doesn't seem to be any "gold fever".... Read More
A few years back ? it seems like an eternity... Read More
I am hearing predictions by brokers, financial planners, talk show... Read More
You have a lock on your house. You have a... Read More
On Friday or Saturday evening my wife gets a movie... Read More
I'll bet with almost anyone that has stocks or mutual... Read More
Are you one of those many people who dread reading... Read More
Maximizing a stock market investmentThere are several factors an investor... Read More
If you have been watching the stock market at all... Read More
In 1960 an engineer working for a watch company in... Read More
I have watched my cat play with a bag of... Read More
Regardless of the fact that the world's stock markets have... Read More
I often hear from people, "I don't trade. I invest.... Read More
I feel that an investment strategy in the stock market... Read More
It looks like the market is ready to start up... Read More
Invest in the stock market for the RIGHT reason, using... Read More
Let's say you are interested in this one company. You... Read More
An investor can find and research the best stock on... Read More
What does it mean to short a stock?This means that... Read More
After the publication of the first part of this two... Read More
Ever done any whitewater rafting or canoeing? Long periods of... Read More
All stock trading and investing methods must deal with the... Read More
Let's assume that you want to make some serious money... Read More
Let's go into the details of why non-indexed mutual funds... Read More
TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More
If you've ever flipped on the television to CNN Financial... Read More
Money management starts with protecting your capital, realizing profits and... Read More
It looks like the market is ready to start up... Read More
Economists know more about how the fragments of society work... Read More
There is a current movie entitled "Eternal Sunshine of the... Read More
Have you bought any mutual funds this year or late... Read More
During the day I watch CNBC-TV, the stock market channel.... Read More
Using Swing Trading Strategies and Technical Analysis when Trading Stocks... Read More
With the internet such a huge part of our daily... Read More
If you're like many investors who squander those small dividend... Read More
For some "long term" would mean holding a stock position... Read More
When an individual investor wants to roll up his sleeves... Read More
Let's first define insanity. It is doing the same thing... Read More
The basis of diminishing return discussions surround such simple notions;... Read More
When purchasing mutual funds we are cautioned to read the... Read More
You remember (they show it on TV every year) the... Read More
When will the stock market stop going down and start... Read More
I would like to share with the reader an article... Read More
It is difficult to make money in a bull market,... Read More
On Monday, November 25, 2000 Investor's Business Daily listed on... Read More
Every publicly traded company is required by the SEC(Securities and... Read More
The stock market can present you with a lot of... Read More
Duck! No I don't mean a quack, quack. I meant... Read More
IT'S REMINISCENT OF THE OLD children's tale about an old... Read More
When it comes to buying a stock or mutual fund... Read More
Stocks & Mutual Fund |