Winter Letter {Conclusion}

Today is the final installment of our 2014 winter letter that was recently sent out to our clients.

In June of 2012 when stocks were at the same levels they had seen in both 2007 and 2010, we stated: 

“NEVER IN MY INVESTMENT CAREER {now spanning over a quarter of a century} HAVE I SEEN STOCK VALUATIONS THIS CHEAP BASED ON HISTORIC PE LEVELS AND ABSENT A RECESSION OR A SIGNIFICANT ECONOMIC CONTRACTION!!!!  Either we are going to have an event that provides a significant hit to growth or stocks are presenting a buying opportunity of a generation for longer term investors.”3.

I have also written this, specifically last summer:

“Based on what we currently know, I think that stocks have annual growth potential on a total return basis {price appreciation + dividends} between 4-8% per year.  I’m writing this with the belief that stocks will not rise in straight line, I believe some years will be better than others and we could see a down year or two in the running.  In spite of that, I think there is a high probability that we will be surprised at how well stocks will continue to perform throughout the rest of this decade. I’m saying this aware of current valuations and also well aware that this kind of statement could look foolish near term if we see some sort of market correction. But remember I said that I think stocks could average between 4-8% on a total return basis for the rest of the decade.  That may not seem like a lot.  It is substantially lower than the “go-go” years that characterized the late 90’s.  But don’t overlook the compounding effect of this kind of return.  A portfolio that compounds at an 8% clip will roughly double in 9 years.  Compare that with the return on bonds now and its hard not to still find stocks attractive on a longer-term basis.  As a side note you can still receive nearly all of the 10-year’s yield in the S&P 500 plus you can get that appreciation kicker.”4. 

I see nothing going forward to change that last statement and we now know that stocks presented that buying opportunity in 2012.  Stocks may not be as cheap as they were then but neither are they expensive on a historic basis.  While we may see a bit of a bump, based on what we are seeing in the tealeaves, probability suggests that the future is bright longer term.

3.  Solas!:  Valuation {06.19.12}

4.  Solas!: Summer 2013 Investment Letter {Part III}

As of this writing Mr. English held positions in ETFs related to the S&P 500 in client and personal accounts.