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reddingrunner (95.94)

Why stocks are currently underpriced...

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November 23, 2009 – Comments (2) | RELATED TICKERS: AAPL , HDB , BRF

The S&P 500 increased almost straight line by just under 10% per year from 1950 until just before the crash one year ago.  Project that increase and the S&P should be at 2000 sometime next year (currently approx 1100).

I've been hearing lots of good reasons why we're due for another huge correction.  I almost sold off a bunch of stocks in response, but I decided to wait for the S&P to revert to mean; even if it doesn't happen in 2010.

Of course, I could be wrong, as my current CAPS score shows.  Fortunately my real-life portfolio (heavy on AAPL, LFC, HDB,  and now BRF) has outperformed the S&P the past decade.  Time will tell.

2 Comments – Post Your Own

#1) On November 23, 2009 at 1:30 PM, davejh23 (< 20) wrote:

The S&P returned around 7% annually from 1950 to 1985...if that trend continued out to 2010, we'd be right at 1000, never having topped that number before.  Looking at a simple trend line, it looks like we've been above trend for about 20 years, and we've just seen the reversion to the mean that you're waiting for...1100-1200 looks about right.  However, considering that our economy is shrinking and unemployment is higher than at most points during the last 60 years, I'd expect the S&P to trade below the trend line.

If the S&P had returned 9.5% annually from 1950 on, the S&P would have topped 1600 in 2000.  That didn't happen even at the peak of a bubble that was building for years.  Without high inflation, the S&P 500 will not reach 2000 for at least another 5+ years...continuing the 7% trend, it will be another 9 years.

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#2) On November 23, 2009 at 9:19 PM, reddingrunner (95.94) wrote:

I'm looking at a chart right now, not at the raw numbers and of course the trend gets skewed by the starting and stopping point you use.  But if you draw a straight line on the chart from 1950 to 2007 it stays pretty close to the actual.  1990 falls right on the line and gives a 20 fold increase in 40 years which I believe is around 8% per year (not the almost 10% I erroneously stated above). 

 

The straight line connects again at 2007 with a 4 fold increase since 1990, again about an 8% increase (a 7.2% increase would be 4x in 20 years rather than 17).  So 1400 or so in 2007 looks about right and we should be at 2000 in about a year or two.  My number may have been wrong but my extrapolation is still right.

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