As an investor – it’s very important to know the rules. For example, if the rules are constantly influx – it leads to uncertainty. With heightened uncertainty – you pull back. That’s what faces investors. For example, consider the following: (i) direction of monetary policy (e.g., as Powell raised concerns on inflation); (ii) A torrent of policy shifts from the White House; and (iii) major disruption with artificial intelligence – as investors question return on capital invested. Uncertainty in each of these buckets makes it hard to commit to stocks with conviction.
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2025 – Finding Quality at Reasonable Prices
The S&P 500 recorded a 23.3% gain for 2024. For the first time since 1998 – posted two consecutive years of gains above 20%. Not bad right? Well if we extend our time horizon to include 2022 – the market’s CAGR is just 7.2% (below its long-term average of ~8.0% exc dividends) Mmm. Not as good. And over 5 years – the S&P 500 CAGR is is 12.7%; and over 10 years its 12.4%. It’s important we measure results over a period of at least 5 years (preferably 10). 2-3 years is a very short amount of time… where all kinds of distortions will happen. But over time – these distortions are always corrected. My point? Things always mean revert… and one should never ‘cherry pick’ dates to fit a narrative.
Tobin’s Q-Ratio Trades at Historical Highs
By just about any intrinsic measure – the stock market looks expensive. Ben Graham would be warning investors to heed caution. Now one of the more widely cited metrics is its forward price-to-earnings (PE) ratio – which trades at a very high 22x. However, another intrinsic measure is James Tobin’s Q-Ratio – which now trades at a record high – exceeding that of the dot.com bust. And whilst not a great timing tool – it maintains a very reliable record of picking long-term secular highs.