Reading Between the Lines

When I was a kid, one of my father’s many recurring jokes was: “If it’s raining and you want to stay dry, just walk between the drops.”  Sorry Dad, it wasn’t that funny, and, of course, it wasn’t even possible.
 
It is possible, however, at least interpretively, to read between the lines of some of the negative economic news these days and find something favorable.
 
For example, take comments published in the Wall Street Journal from London Business School finance professor Elroy Dimson on long-term investment returns:
 

• “Stocks may face a long road back.”
   
• “There’s no guarantee of a quick rebound.”
   
• “We’ll have to wait nine more years before the Dow Jones average has a 50% chance of hitting its 2007 highs.”
   
• “It may be a long time before investors are again willing to value stocks at much higher than the long-term average of 15 times earnings.”

 
U N C L E!  Enough already!  OK, so here’s the silver lining between the professorial comments:
 

First, if, as the good professor professes, the Dow Jones average will double in nine years, that will signify a total return of 7.5% per year. Try to get even close to that by stashing your money in a bank account.
 

Second, for more than 100 years through 2008, U.S. stocks have averaged an annual 6% return after inflation. Not bad either.
 

And third, there are many stocks of solid companies these days that are trading well under 15 times earnings, leaving plenty of room for appreciation.

 
So be careful, but jump in already. The water’s not that bad.  Just don’t try walking in between the raindrops.

— Roger Pondel, rpondel@pondel.com