No Free Lunch: Valuation Determines Return

Theories and Realities

Valuation Matters

Why Average Rarely Happens

New York, Cleveland, Austin, and Dallas

Last week, I described the enormous challenges retirees face. One reason for that, aside from insufficient savings, is that markets haven’t delivered the returns many experts said we could plan on.

Back in the late 1990s, we were told that the long-term average return (~10%) was a reasonable long-term assumption—even if the market cooled down from the tech boom. Instead, the S&P 500 index gained about 3% annually since 1999 with total return just over half of the historical average. As a result, Baby Boomers are having to work longer and harder to retire, as well as save more of their income.

Nonetheless, hope still springs eternal for historically average returns. In this week’s letter, longtime friend Ed Easterling joins me as co-author to explore the reasons that so many analysts and product purveyors pitch such hopeful expectations. (Longtime readers will know Ed and I do this periodically.) We’ll show how the long-term average is a longshot bet in almost any market environment. Most of the time, returns over a decade or two are well-above or well-below average.

Most of all, it’s fairly predictable which side of average will occur. This has serious implications, yet there’s a lot that you can do to still achieve investment success. This is also something you will not hear from many in the investment business. “Predicting” less than historical average returns in the future is not exactly a great sales pitch. But as I think Ed and I will demonstrate, it is the most honest and accurate way to talk about potential performance of the future.

Ed founded Crestmont Research in 2001 to research and explain secular stock market cycles. You can find a treasure trove of fabulous charts and articles on cycles and market returns at his website. I’m a big fan of Ed’s work and highly recommend both of his books, especially Unexpected Returns.

Before we jump in, let me quickly remind you that registration for the Strategic Investment Conference (May 13–16 in Dallas) closes Saturday night, March 16. As of now, we still have a few seats left, but they are going fast. We will start a waiting list when they are gone. Click here to register or add yourself to the waiting list.

I have finally rounded out the list of speakers. In addition to those previously announced, we’ve added former Secretary of Energy Spencer Abraham, intrepid investor Kyle Bass, and Dr. Woody Brock. This rounds out the most exciting speaker lineup of the last 16 years. You really want to be in the room with me. The China panel will be nothing short of amazing. There will be a very powerful energy panel. We will be focusing on how the world responds to ever-growing debt and government obligations, both real and unfunded. We’ll discuss geopolitics, political and social change, great investments and the future of the markets. I have asked some experts, some you know of and some you don’t, to join us. And as always, we’ll have special sessions focused on a particularly powerful investment theme. The SIC will get your mind looking at the world from different perspectives.

This is going to be the biggest and best Strategic Investment Conference we have ever done. Besides being incredibly packed with powerful ideas, it’s also going to be really fun. Be there. Now on to today’s letter.