Interesting, But Not Unusual, Observation

One way think about the market's decade and a half round trip to nowhere (the SPX first got to 1314 in April 1999) is as one big consolidation. Certainly some stocks have done very well but plenty of names have muddled along without making much progress price-wise but have gotten much cheaper valuation-wise.

One example of this is client holding Northrop Grumman (NOC). In the last ten years the stock is up less than 1% although there has been some volatility along the way. But in that time the PE ratio has gone from about 20 down to just over 7.5 and the dividend has gone from $0.20 to $.055.

This is not unique, Johnson & Johnson (JNJ) which is another client holding has tripled its dividend although there has been less in the way of multiple compression.

The message here is about stocks being relatively cheap when compared to modern history, like the last 20 years. I don't think this means much at all in the short run and maybe not even in the next couple of years but someone with 20 year time horizon is probably building a fantastic long term portfolio at these PEs and yields--this needs to include foreign stocks as well.

The obstacle is still the short run. NOC at 7.6 times and yielding 3.8% might be very cheap at $59 but if Europe implodes (further?) and the full brunt of the fiscal cliff comes into play in 2013 then NOC could easily trade at $45. Obviously that would be a much better price to buy for anyone favorably disposed to the name but what about the person who bought "cheap" in the mid or high $50s? If they bought low can they stomach the stock going lower?

This is about staying in touch with the suitable time horizon, remembering that markets occasionally go down a lot and realizing no one times all of them perfectly. The next recession/bear market will take stocks down a lot and then they will recover. A stock bought at $40 that goes to $90 ten years from now while doubling its dividend but does all of that by going to $27 first is not going to hurt a long term financial plan.

I realize most of this post should be an Investing 101 type of things but the above is easily forgotten at a time of emotion and will come more into focus on the next big downturn. Buying at a good price doesn't have to mean buying at the absolute lowest price.