It is not easy being a stock investor these days with markets on a relentless downward spiral. The S&P 500 index is about 23% down from its highs and even the commodity-laden TSX Composite has fallen about 12%. While a bear market is painful to experience, there is a silver lining for long-term investors — lower stock prices today means higher expected returns from equities in the future. According to Standard & Poors estimates, the US market is currently trading at a trailing P/E ratio of 14.7 and a forward P/E of 13.9. The earnings yield on the S&P 500 index is 7.1% compared to 3.84% for 10-year bonds. Of course, the market could go lower from here but even if S&P earnings show no growth and valuations stay the same, equity investors can earn close to a 8% return for sticking with equities.
Jason Zweig, kicked off a new column titled “The Intelligent Investor” for The Wall Street Journal by suggesting that long-term investors should start loving the bear market and quoting Warren Buffett:
This May, at the Berkshire Hathaway annual meeting, Warren Buffett boiled down what it means to be an intelligent investor into two startling sentences: “If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Knowing he owns good businesses, Mr. Buffett wants prices to go down, not up, so he can buy even more shares more cheaply before the bounce back.
It’s easier said than done amidst all the fear and loathing on Wall Street and Bay Street but he concludes:
But if you are still in your saving and investing years, a bear market is a gift from the financial gods — and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.
I’m not exactly embracing the bear (truth be told, it is painful to find out half way through the year exactly where we were at the beginning of 2008) but I did finally pick up some Vanguard Emerging Markets ETF (VWO) to round out our allocation to foreign equities.
[Update: Link to the Jason Zweig column.]
