Markets are now in their Santa phase. Expect rallies with brief interruptions for consolidation or p...
Ed Finn: the Outlook from Barron's
02/28/2003 12:00 am EST
Few in the financial media can match the impressive credentials of Ed Finn. He is editor and president of Barron's and the editor-in-chief of SmartMoney, The Wall Street Journal magazine of personal business. He has been writing about the financial markets for over 25 years. He tells it like it is, and was widely criticized for his negative views of technology stocks in 2000. Now, he sees a return to a more normal long-term environment.
"I'm always impressed with how much American investors have learned about investing. Whether I'm talking to a cop or a plumber, I'm impressed with the level of insight that people have about the stock market. That's one of the things that gives me optimism about the future. This has yet to happen in other countries around the world, but the average American has become more educated about investing over the last 20 years. And that education is continuing. Unfortunately, some of the lessons we have learned lately have been hard knocks. But I am an optimist about the market and about the economy.
"I think we are at an unusual period now. I don't think much is going to happen in the market until Iraq is decided. That could come in ten days or ten weeks. But I don't think it will last much longer than that. A lot of smart investors I know are taking this time to look over stocks that have been beaten down. It is a good time to collect your thoughts and figure out what stocks you are interested in, as there are a lot of good stocks that have been beaten down. I think the next five years will be very different from the last five years. I hope to leave you today with what those differences will mean to you.
"For instance, it's no longer good enough to pick a broad sector. I don't think the tide is going to lift all boats this time around. You can look at the telecom sector or the drug sector and many other areas and find that a lot of companies are just not going to make it and will never return to their former glory. But a lot of companies are, and they are poised to do that very soon. And as is always the case in America, there are small companies that are up and coming. And I would suggest that a lot of investors are taking the time to consider new investments in this sector. Warren Buffett is one of them. You've seen him make some very big investments lately. He was not banging the table at the top, and now he is taking very significant positions in recent months. Other smart investors are doing the same. So I would advise you to look at this as a time to reflect and look at your portfolio and study individual stocks. Now is a good time to do it, because the heat of the market will soon be upon us. My guess is that the market will pop up about 10% following any resolution to the Iraq situation. It's going to happen very quickly.
"In the end of the day, if you can't make a profit, you can't stay in business. But we feel fairly good about the market at the moment. This year, earnings for American companies are expected to rise about 10%. Next year, my guess is almost the same. In the end, the overall stock market should not rise more than earnings rise. So as you look out over the next five years, I don't think we can have the 20% or 30% gains we had in the late 1990s. Nor do I think we will see an awful purging process, which we have seen in the last two or three years. We have to be content with 8% to 10% growth. You can do better, and that's by picking the companies that will do better than average. That's one of the things that keeps this a game for a lot of us. But it's more than that, and it's more than each of our individual livelihoods or retirement money or the funds for our kid's education. It's the American system of capital. That's what keeps this country on top. With all kind of new inventions being brought to market. And there is the thought all around America that people can make it. They can succeed. If you look at Canada or many countries in Europe, the financial structure is not democratized. They have to go to a very limited group of bankers to get money. I would submit to you that one of the things that has made America different is that we have 14,000 banks, whereas a country like Canada has only 7 major banks. Most investing is done on a local basis. In America, if there is an opportunity out there, venture capital will find it. If there's a good idea, it will get funded. But this is not the case in other countries. So as America spreads its investments around the world, we will see more prosperity in our country and others.
"I've been a proponent of international investing for 20 years. Those of you who have watched the dollar weaken over the last year realize it's been a good time to have at least some of your money invested outside the country. I would suggest that 10% of the average person's portfolio should be invested internationally, through mutual funds. So that others can watch the currency fluctuations and pick out the stocks for you. That's something I think will be a wave of the future, as more money gets to more countries around the world - both developed and developing. This creates new businesses. Eastern Europe is now the new 'factory' for Europe. They have fairly low wages, great skill sets, and a great work ethic. Those markets have come up a lot in the last year, and I think you'll continue to see them outpace more developed markets. China has become the 'factory' for its region.
"If I could leave you with anything, it's these three cornerstones of investing. The first is perseverance. The fact that you continue to be interested in the stock market even after this bear market, suggests that you have that one all figured out. The second word is balance. Investors who had large positions in bonds in recent years are much happier than those who were 80% or 90% invested in stocks. I would suggest the old rule of thumb is a place to start: take your age, subtract it from 100, and what you have left is the percentage that you should invest in stocks. That's very conservative for most people. I also want to leave you with the word selectivity. The situation where all stocks go up is unlikely to be a characteristic of the next five years. You have to be more selective, and for a lot of people, this means studying companies. For others, it involves getting into mutual funds and picking a fund manager whose style is something you like. People seem to question if they should be in the stock market or not. People should always be in the stock market, but no longer is it going to rise in a uniform fashion.
"Traditionally, the Dow - over the past 75 years - has traded at about 15 times earnings. We had gotten to a point where the average stocks was trading at 30 times earnings and many tech stocks were trading for 80 or 100 times earnings. Right now, based on next year's earnings projections, the Dow is trading at about 16-17 earnings. So we are a lot closer to historical norms. The earnings yield on the average Dow stocks is almost 5%. That's quite high relative to bond yields. So it is a time to look at the market. The market is not wildly undervalued, but with rates so low, the market is probably slightly undervalued at this point. If you can find a company that has good management, good products, and good prospects, with earnings expected to grow 10%, 15%, or 20%, with a p/e that is at that level or lower, that's the kind of stock that has good potential.
"Finally, also pay attention to dividends. Even if the yield is just 1% to 2%, that's money in hand. People who have been very successful investors over the long-term always consider dividends, and so should you. You'll now even find dividends in the technology sector. So my guess is that Iraq will be over in a few months, and the market will react immediately by going up 10% or more. I believe it will then go up roughly 10% a year for the next few years, and that investors that will do best by keeping a balance between stocks and bonds, that correlates with their tolerance for risk.".
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