Calling Mr. Blackwell…..

In our continuing efforts not to lose touch with popular culture, the daily reading includes a taste of what is happening and we also listen to the excellent NPR news quiz program, Wait, Wait, …Don’t Tell Me.

In our lecturing days, we would listen to the top bands and watch the most popular shows.  Fifteen minutes with Mork and Mindy was enough to provide a few illustrative examples, showing that the "young prof" was in touch.

This breadth of reading explains why we are somewhat aware of people named Britney, and Paris, and Justin, and even some guy calling himself "Perez"  who seems to have a good business model.

This is by way of explanation of how we are aware of one Richard Blackwell, who annually produces a  Ten Worst Dressed Women list.  We have no idea who is on the list.  We do not care, and neither should you, although many seem to be interested.

Investments Are Different

The individual investor needs this kind of help.  The "worst-dressed" in the investment world is much more meaningful.  It can cost you money!

Misleading research is expensive.  It costs more than the price of the subscription.  Investors who make poor decisions from such advice are adding years of work before retirement.

We need a Mr. Blackwell award for such articles.  The nominations are open and we also need a good name.  Meanwhile, today’s Wall Street Journal provides a good nominee.

The Lost Decade

In a front-page story in today’s Wall Street Journal we are told about a "lost decade" in stocks.  The article shows a powerful graphical representation of the three worst stock market periods, reaching back to the Great Depression.

It would be possible to write such an article in a neutral, expository fashion.  Unfortunately, we are in an era where the drive for readership leads to the confusion of opinion with reporting.

The article was written in a way to attract attention.  The basic theme, and the facts are accurate, is that investors buying the market in 1999 have gained little or nothing.

The Standard & Poor’s 500-stock index, the basis for about half of
the $1 trillion invested in U.S. index funds, finished at 1352.99 on
Tuesday, below the 1362.80 it hit in April 1999. When dividends and
inflation are factored into returns, the S&P 500 has risen an
average of just 1.3% a year over the past 10 years, well below the
historical norm, according to Morningstar Inc. For the past nine years,
it has fallen 0.37% a year, and for the past eight, it is off 1.4% a
year. In light of the current wobbly market, some economists and market
analysts worry that the era of disappointing returns may not be over.

Investors Actually Did Worse

In fact, most individual investors did much worse than the averages.  The individual investor chases performance, buys market tops, and sells the bottoms.  The long-term market gains for stocks are about eight percent annualized and the individual investor gets only half of that return.  Many investors bought tech stocks and Internet stocks near the high, rode losers like WorldCom, Enron, Lucent and others through to the bottom, and then shifted into real estate.

They made these mistakes, in part, by following hype, and then by getting scared by misleading media reports.

Missing the Opportunity

Actually, the ten-year period was a great opportunity.  Any investor who followed basic valuation concepts (or trusted an advisor who did so) found this era to be quite profitable.  The time chosen happens to cover our professional history.  We have a free report (covering methods and actual results) available to anyone interested in what could and should have been accomplished during this time.  The opportunity is much better right now.

If the average investor is losing a lot of money, someone is making it….

Analyzing the Article

The article provides a good test for the ability of investors to make their own decisions.  Interested readers should be able to generate their own checklist, but here is a little help.

  • The Title.  Does it reflect the body of evidence?
  • The time periods.  Are they chosen to represent logical buying and selling points?
  • The chart.  Charts are powerful, but there are only three periods cited.  Are the prior two periods indicative of current conditions?  Is this like the Great Depression?  Is it like the double-digit interest rates of the early 80’s?  Is anything different now?
  • The authorities.  Does the author seek out a representative group of authorities?  Whose opinions are featured?

A Useful Comparison

Tonight’s Kudlow and Company featured a discussion of the WSJ article.   The panel pointed out the relevance of interest rates, the atypicality of the periods selected, and the long-run bias in favor of owning stocks.

Larry Kudlow’s program (on our TIVO list for careful viewing and reviewing) is a consistent source of quality debate on key economic, political and market issues.  Unfortunately, many more (quickly and carelessly) read the front-page WSJ story than spend the time watching Kudlow.  Even fewer, of course, read "A Dash."

Another good comparison comes from Doug Kass.  While he still sees many economic problems, he has noted that current prices reflect anticipation of economic stress.  His work is featured on the paid version of (where we contribute — full disclosure, but regular readers know that we have read and profited from Doug’s analysis for many years).  His work is sometimes moved to the public access section of the site.  Check out this one for his entire analysis where he takes an objective look at various valuation metrics.


We will never know how many people called brokers saying "go to cash" based upon  this particular article.  It is only one of many such articles.  The challenge for investors is that the media sources (and the most popular blogs) need ratings.  The "man bites dog" stories get the ratings.

Legendary fund manager Peter Lynch said that he could not predict the next 1000 points in the Dow, but he was confident about the next 10,000.

Peter Lynch would never get a "Blackwell Award."   We’ll be watching for more nominees this year.

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  • Mike C March 27, 2008  

    Is it a “stock market” or a “market of stocks”?
    I wish more articles in the media focused on this distinction. Even some commentators/managers whose analysis I generally find compelling tend in my opinion to spend too much time and effort on “stock market valuations” instead of making the case why stock ABC or stock XYZ are undervalued or overvalued, or really digging for the compelling individual stock that is a bargain.
    Since 1999, the S&P 500 hasn’t done much but how about the performance of numerous individual stocks in the energy and materials sectors? Alot of 5-10x baggers.
    For the record, even though the S&P 500 has declined 20% from peak levels, I still do not believe it is priced anywhere near where it needs to be to deliver long-term (5-10 years) returns of 8-10%.
    Kass presents some interesting comparative valuation statistics, but the evidence tends to show the single best predictor of long-term returns (not 1 year or 3 years, but approx 10 years like 99-08) is initial P/E and we are still on the highish end of the range at 17. Whatever the market does over the remainder of 08 is more likely to be driven by technical and sentiment factors then any particular valuation statistic.
    Despite that view, I am still finding numerous attractively priced individual stocks. I won’t name them but there are a couple of energy E&P names with mid-teen multiples that will likely grow EPS at 20%+ over the next 3 years.

  • Bill aka NO DooDahs! March 27, 2008  

    The indices’ performances are irrelevant as benchmarks, anyway. Your system, your asset allocation, and your personal triumph over the fear and greed responses you have to the market, will be the REAL determinants of your success.

  • Brian March 27, 2008  

    Why did the author of the article choose 1362 which was the close on April 27 1999, not quite a decade ago? Why not choose the close of 1225.5 on March 3? Were investors more likely to rush into the market on April 27 than say March 3?
    My crude, back of the envelope calculations, not factoring in dividends and inflation, is that in total the S&P has gained 9.29% from 3/3/1999, but from 4/27/1999 that total move is -1.59%

  • Mike March 27, 2008  

    …”Even fewer, of course, read ‘A Dash.'”…
    I am glad to be counted among those few. Thanks for your work!