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URL:  http://boards.fool.com/thanks-for-all-the-posts-and-i-will-read-those-22035581.aspx

Subject:  Re: Finding a good financial planner Date:  2/8/2005  1:42 PM
Author:  rrosenkoetter Number:  44387 of 76237

Thanks for all the posts. And I will read those books.

>> Any financial advisor who says he knows what the market will do in the future is one to walk away from. No one knows what the market will do in the future regardless of what they claim. <<

I'd like to revisit this topic. What do you all think about the correlation between the market's P/E ratio and it's subsequent performance?

Have any of you read Bull's Eye Investing by John Maudlin?

Historical data shows the average market P/E ratio swings up and down with bull/bear markets. Over the last 100 years, in every bull market, prices for stocks shot up faster than earnings. At the top of every bull market, P/E ratios were high (20+). Then the bear market takes over, and the pendulum swings the other way. Either prices drop drastically (Great Depression), or prices stay stagnant for many years until earnings catch up (1966-1982).

Historical data shows that if you invested when P/E ratios were low (low teens, single digits), you made a lot more money over the next 10 years than if you invested when P/E ratios were high (20+).

In fact, historical data shows that investing in the market (broad index funds) when P/E ratios are as high as they are today returned 0% over the next 10 years. The whole argument that the stock market averages 10% may be true, but there HAVE been times when the market made 0% for 10 years or more.

Now, like we always say... historical data doesn't predict the future (and this is broad stock indexes we're talking about - one can always make money on individual stocks).

BUT, if in 1902-1903 P/E ratios were pushing 20+, and a bear market followed, and in 1929 P/E ratios were pushing 30. and a bear market followed, and in 1965-1966, P/E ratios were close to 25, and a bear marekt followed....

AND in 1919-1921, P/E ratios were around 6-7, and a bull market followed, and in 1948-1950, P/E ratios were around 10-11, and a bull market followed, and 1982, P/E ratios were around 7-8 and a bull market followed...

What would a wise financial planner tell his clients about a market in 1999-2000 that was pushing a P/E ratio of 30? Could he predict the future? No... Could he say... the market is very high right now, and over the last 100 years, a bear market has followed this kind of pricing... perhaps we should move SOME money out of the market.

Very few said that... I want to find those very few.

I'll probably just do it on my own... time to buy lots and lots of books and see if I can separate the wheat from the chaff

What should a wise financial planner be saying right now, with P/E ratios still around 20? Every bear market has rallies... 1930 was a great year for stocks... even with a high P/E ratio of 23... those who jumped back in (like advisors are telling us to today) were demolished over the next decade.

I really believe that we're five years into a bear market, with another 10+ years to go, maybe longer. I want to keep as much as money as possible for when P/E ratios drop back to the low teens or single digits...

But I'm betting my families retirement on the choices I make today. I need more information, but I don't know who to believe. Those who did say "You know, companies can't grow at 30% forever - These prices are way too high"... Were they just lucky, or were they smart? Many commentators TODAY said it was obvious the market was in bubble back then. Well it seems that anyone who studied history would have seen SOME indications of danger. Most of the guys who saw it were the older ones.. the ones who lived through the 60s and 70s. How many advisors are out there today who have ONLY known a bull market?

How can these guys do this for a living and not have read every book I've read plus a thousand more?
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