Are Stocks Cheap? This Writer Thinks So.

Good Smart Money article that does a much better job talking about how the market is cheap.  It is what I was trying to show here.  {Excerpt with my highlights}

 

Panicking About the Markets? Read This -- Now

While the Dow plummeted nearly 250 points Monday, consider that many high-quality blue chips are on sale, and getting cheaper.   By BRETT ARENDS

No wonder markets are tanking. The financial crises, here and in Europe, are terrifying. Just ask anyone on Wall Street.  The super committee has broken apart in failure. The US budget process is in disarray. Meanwhile, across the pond, who knows what will happen next?  The euro could fall apart. The banks could collapse. This could be the next Bear Stearns -- or the next Lehman Brothers. OMG! This is no market for anyone but professional traders, right? I mean, ordinary mom and pop investors should run for the hills, hide in a cave, and put all their money in a sock.

Right?  Bah.  This is exactly why so many people are still so hard up. They don't know how to invest. They don't know how to handle the markets. And they certainly don't know how to handle the headlines.  Do yourself a favor. Stop worrying.....Take a deep breath. And give some thought to buying some good, high quality blue chip stocks. Yes, today.  Thanks to the crisis, they're on sale. And they offer a compelling investment for all but the most risk-averse..... 

....Only you know how your financial situation is fixed. You wouldn't want to invest money you will need in short order. And you may also fear that you already own too many stocks at your stage in life. But you don't need to overthink this too much either.  Could the European crisis get much worse? Certainly. Could the stock market fall much further? Sure. Could we enter another recession? Yup.  Let's even accept that it's a good possibility. I make no guarantees -- none -- about what will happen in the next few weeks or months.....But so what? You make money buying good quality securities when they are cheap, not by predicting the market's next twist or turn.

The reality is that fears about the European crisis have already driven down stock prices a long way -- including those of many strong, stable companies that will weather crises just fine. So in many cases you are simply getting a very good deal.  Investing in a crisis is simple, because there are cheap stocks all around. It's investing in a boom that's hard.

Take a look at the iShares Global 100. It's made up of companies...{that} have operations all over the world. They are fabulously profitable. They are reaping big profits in western countries, and rising profits in the emerging markets of Asia, Africa and Latin America. Higher-risk financial stocks make up just 12% of the total.   Yet the dividend yield on this fund, even after deducting the 0.4% management fee, comes to 2.9%. To put that in context, a ten-year Treasury bond is only paying 2%.   Plenty of {the fund's} stocks, individually, are yielding better than 3%. Quite a few, especially in Europe, are yielding better than 4%.

Stocks go down as well as up. But over time, they have tended to rise. And, also over time, dividends have generally risen faster than inflation. Bond coupons do not.  That means blue chip stocks offer you some protection against inflation. Regular bonds don't. They put you at risk from inflation.

Study after study shows that when it comes to stocks the public typically does the wrong thing at the wrong time. They sell in a crisis, when shares are cheap and a good buy. Then they wait till prices have boomed and they start buying again.   That's why they dumped huge amounts of stocks during the financial crisis, in the fall of 2008 and the winter of 2009. Data from the Investment Company Institute, a body that represents the mutual fund industry, shows they have been dumping stocks again recently.

Look at what this means. Dalbar, a financial research firm in Boston, does a study every year which compares what the average mutual fund investor actually earned with what they should have earned. Over the past 20 years, says Dalbar, someone who just invested $1,000 in the Standard & Poor's 500 index and left it there, reinvesting the dividends, would have made about $4,750 in profits.  The average investor in an equity mutual fund over that period? They made $1,000. No, really. A fraction of the total.  After accounting for inflation, the average investor barely broke even. No wonder everyone hates stocks.  From 2000 through 2010, the stock market went nowhere. But Mom and Pop mutual fund investors lost billions, because they bought at the wrong time and sold at the wrong time.  There's an obvious conclusion. Someone else made that money. Sophisticated investors. The ones who bought when others were selling in panic, and then sold when others were buying too greedily.  The blue-chip iShares Global 100 has fallen 20% since late May.

Analysts at GMO, the upscale investment firm in Boston, reckoned even a few weeks ago that a basket of high quality U.S. and international blue chips would earn you about 5.5%, plus inflation, over the course of the next seven years. Their numbers are only a guess, but they are based on some common sense assumptions and cautious forecasts. Based on the sell-off last week, the prediction should now be around 6%, plus inflation. To put this in context, cash and bonds are paying you less than inflation. And even a thirty-year mortgage is only costing you 4%, before inflation.

Link:  Panacking About The Markets-Read This Now

*No positions in the ETF or the mutual fund mentioned in the original article.  The stocks mentioned in the article are also positions held as components in various ETFs in which we invest.