Buy Stocks Now – Carl Choy
By: Carl Choy, CKW Financial Group
BUY STOCKS NOW. In an economic sense, an investment is the purchase of goods that are not consumed today, but are used to create future wealth to be consumed as needed. In finance an investment is a monetary asset purchased with the idea that the asset will provide income or appreciate and be sold at a higher price in the future. Today a company earning 5% and paying a 2% dividend should be considered attractive. If you were the sole shareholder of the S&P 500 you keep all the expected earnings of ~5% and all of the dividends of ~2%. $11.5 trillion is currently earning basically zero in cash like deposits. Rational depositors should assess their time horizons, adjust their risk tolerance and perhaps choose the possibility of a ~7% return.
An investment that replicates the S&P 500 is diversified, liquid, and can be purchased in a low cost, tax efficient way through an ETF. Remember the 1980’s when investors withdrew money from bank savings and CD’s earning 14% that were FDIC insured to invest in stocks. Rational investors seek the highest net after cost return over time. In the 1980’s the earnings yield approximately equaled interest rates at the time. Investors still purchased stocks because they believed their “investment” would be sold at a higher price in the future. Therefore, with the possibility today of earning ~7% and with current annual earnings growth of 8% (the worst is probably over for energy) vs. almost zero – we believe the S&P 500 is a bargain over cashlike deposits. The simple answer for choosing a return of basically zero is that maybe today’s “rational investor” is not rational.
We believe the 2008 Financial Crisis damaged the average investors’ behavior. Many had the same financial plan – sell and don’t do anything with accumulating cash. Just put all that cash into bank like deposits and wait. By 2010 the plan was clear; pay down debt from high interest rates to low. By 2011 and 2012, buy safe assets like gold and other assets investors can see, touch and go visit. In the meantime, the S&P 500 recovered to its 2007 peak in March of 2012 and is up another 50% from there and 200% from 2009. Investments are about earnings, since 2009, earnings have tripled and so has the S&P 500. If earnings grow at 7.2% annually, the S&P 500 will double every 10 years, so long as investors pay the same multiple of earnings. If earnings grow at 9% and P/E’s go to 18, money will double in 8 years. At 20 times earnings, the earnings yield is still 5% (E/P)*. A P/E of 20 should not worry anyone in a 0% interest world. Falling interest rates have supported high market multiples for decades. This is reasonable because if interest rates are lower then rational investors are willing to accept lower expect rates of return, therefore increasing P/E’s. This changed in 2000; interest rates continued to fall and P/E ratios went down , but earnings yields went up. So for every $30 of invested value in the S&P 500 there was $1 of earnings and approximately a decade later that same $30 investment in the S&P 500 basket now had $3 in earnings, 3 times more than before!
An investment in the S&P 500 currently represents: an investment return opportunity of ~7%; is globally diversified; can be purchased at a low cost; tax efficient; cheaper than before (in 2000, when people were going to quit their day jobs and just trade stocks); and still growing. We have included three charts: the E/P chart, consumer confidence, and P/E’s. The key to higher markets beyond earnings growth is the consumer feeling more confident which we believe will increase P/E’s when the psychological damage of 2008 passes their memory.