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Abacus Wealth Partners is a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Abacus Wealth Partner’s website and its associated links offer news, commentary, and generalized research, not personalized investment advice. Nothing on this website should be interpreted to state or imply that past performance is an indication of future performance. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with a tax professional before implementing any investment strategy.
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Note from the CIO: Your Edge
The Abacus Investment Committee
It is not uncommon for an investor to say that the stock market seems like a casino. In Las Vegas, the house has the edge. In every game, the odds are narrowly in the favor of the casinos so that after many games, the law of large numbers guarantees that the casinos will win more games and take in more money from gambling customers than they pay out to them. In the stock market, the long-term investor has the chance to be the “house”.
In our financial plans, we assume that the odds of the stock market exceeding the rate of inflation over a given year is about 60% (the historical odds are a bit higher but we prefer to be more conservative). That would be like a coin with a tiny bit of paint on the heads side such that after every 100 flips, approximately 60 come up heads. During most years, 60/40 odds compared to a 50/50 bet are not even perceptible to most investors. But for the disciplined, patient, long-term investor, this is an edge — or a structural advantage, as finance professionals refer to it — and it is everything. The likelihood that stocks beat inflation rises dramatically to 90/10, if the stocks are held for 10 years. Those are the types of odds on which we can construct a lifetime financial plan. The long-term investor has an edge over the market, and few know it.
Is the Market Overheated?
On March 1, the S&P 500 closed at a new all-time high of 2,395.96. The consensus estimate for the 12-month forward earnings of those same 500 companies on that day was $133.78. This means the forward-looking price to earnings ratio, or P/E, of the S&P 500 on that day reached 17.9 (2,395.96 divided by 133.78). This is a commonly watched, albeit imperfect, indicator for the temperature of the market. The 25-year average P/E is 15.9.
If we flip the P/E ratio upside down (1 divided by 17.9), it tells us what yield the 500 companies are expected to earn us, which on 3/1/17 was 5.6%. The 25-year average is 6.3%. The yield on the 10-year U.S. Treasury bond is currently 2.5% and its 25-year average has been 4.5%. The S&P 500’s yield in excess of Treasuries (3.1%) is more attractive than it has been on average over the past 25 years (1.8%).
Too often, investors look at simple “nightly news” types of values to determine if something is overvalued, rather than looking at the underlying substance of what they’re invested in, corporate earnings. Through this lens, today’s market value is not extreme at all.
Disclosure: Abacus Wealth Partners, LLC (Abacus) is an SEC registered investment adviser with its principal place of business in the State of California. Abacus may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This brochure is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Abacus with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Abacus, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
This is not an offer to sell any type of security, and there is no investment currently available through Abacus. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
For additional information about Abacus, including fees and services, send for our disclosure brochure as set forth on Form ADV from us using the contact information herein. Please read the disclosure brochure carefully before you invest or send money.
For more information about Abacus and this article, please read these important disclosures.
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