Time to buy? Maybe not.
17 October 2008
For those of us who stare and the Bloomberg all day wondering what’s going to happen next, we know the numbers. For the rest that brokerage statement that came in the mail last week tells you (almost all of) the story. And you already knew that which is why you left it on the staircase.
The S&P 500 is down over 30% from the beginning of the year.
So is now the time to buy, like Stephen Harper and John McCain have suggested during the election? Even Obama-supporting Warren Buffet wrote this in an op-ed piece in the NY Times yesterday:
I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.
What about the broad market, though? How low can it go, really? Earlier in the decade a portfolio manager I worked with used to get that question about Nortel all the time as it dropped below $100 then $80 then $60 … His answer: Zero – it can go to zero.
But with the S&P 500 down over 30% from the beginning of the year are we getting boxing day prices on the broad market? I don’t think so based on the attached graph which tracks the P/E ratio of that index back to 1936. Based on the closing price today the S&P 500 is trading at about 18.3 times trailing 12-month earnings. Compared to the past 20 years that looks pretty cheap; the median P/E for 20 years is about 20.3 times. “Greatest bull market ever” they call it.
But we are in unprecedented times here. So let’s look back over the past 70 years. The median P/E for that period is 15.5 times as shown by the green line on the graph. The 25th percentile is 10.8 times, shown by the red line on the graph. These P/E ratios imply that the market can correct by another 15% to 30% before we get into a historically low range.
For Warren Buffet, arguably the world’s best stock picker, this is the time to pick up great companies on the cheap. But for me, it’s time to hold tight. No selling, no buying, just hunker down and ride out the storm.
CWN
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