Will the run continue? Or will the bubble burst? World-Class Coaching Event

The chart below should be a great encouragement to investors.

But first, let me say that at any given point in time, the stock market, for a billion different reasons, can make a sharp correction. Just because we recently recovered from one crash does not mean we’re protected from another one. The market is no respecter of our retirement portfolios – even the target-dated kind. If you don’t respect it, it will not respect you.

That said, let’s settle in on one very important comparison of stock prices.

My clients have heard me talk about the difference between GROWTH Stocks and VALUE Stocks. Growth Stocks are those whose stock price is high as compared to that company’s book price. The stock price (adding up all outstanding stocks) is the company’s market value – what you could sell it for as a going concern. The book price is that company’s accounting value – the value of all of the separate parts (computers, land, buildings, patents, etc.). If you see a stock that is selling at 4 or 5 times the book value, you generally have a GROWTH company stock. If you have a stock that is selling at or below the book value, you generally have a VALUE company stock.

We make the distinction between these two “kinds” of companies for two main reasons: First, the returns are better over time in value companies. Second, this attribute is helpful in finding asset classes that will move in different directions. In other words, we own both kinds of companies because we get a return premium for them AND we offset negative years by owning them together, giving the investor the benefit of higher returns and lower risk (volatility).

But there is more we can take away from knowing the book value of companies and the Price to Book (PTB) Ratio. See the chart below:

invite 3 chart

Current S&P 500 Price to Book Value: 2.69 -0.01 (-0.32%)

11:32 am EST, Mon Jan 6







(Mar 2009)



(Mar 2000)

As you can see by the chart, in the year 2000 the PTB ratio – over 5! – was MUCH higher than it is now. AND the stock prices then were lower than they are now. This tells us at least two interesting, if not encouraging, things:

First, the prices of stocks in the S&P 500 can still rise considerably against their book values before they reach their 15-year average much less their 15-year maximum PTB. If the value of the S&P 500 rose to over 2000 the PTB would still be less than 2/3rds of what it was in the year 2000. Can it go higher? Yes, it can. Will it? No one knows. Make sure you rebalance OUT of the gains you’ve enjoyed in that part of your portfolio this past year and take on the New Year as just that – a new year.

Second, and even more encouraging for the long term, this chart reminds us of the reason that capital markets make such a great long-term investment. In January, 1999, at the beginning of the chart, the companies that made up the S&P 500 had a value of 1286. This 1286 value was 5 times book value. So stated as book value (1286/5) the S&P was worth 257. Although a different list today than 13 years ago, the S&P 500 has more intrinsic value (book value) than it did then. Today, the value of the S&P 500, 1831, stated as book value (1831/2.69) is 681. The actual asset value, or the intrinsic value, of the 500 largest companies in the US has grown by nearly three times.

Let me try to illustrate this a little further. Remember the tech stock craze of the mid 90s? What was the problem there? New companies with an idea and some working venture capital were achieving huge stock price increases before they had anything of real value to show on the books. They hadn’t produced anything; in many cases, they didn’t even own anything yet. They just had an idea. So the PTB was a very high number. At some point though, you want the assets to catch up with the promise of profits. Well, this is what you have here. The last time the S&P 500 was trading at 5 times PTB, the prices were less than they are now.

On January 29th I will be speaking on the important topic of investment bubbles—why they cannot be predicted. But more importantly, we’ll look at why you as a prudent investor, who avoids bubbles and predictions, have more reason today than ever to trust markets for exceptional returns.

Please make plans now to attend.

Call Liz Trawczinski at 517-381-3450 to reserve your seats.

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