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STOCK PRICES:

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Title: STOCK PRICES:


1
STOCK PRICES ONLY TWO THINGS MATTER A
Presentation to the 2007 Texas Investment
Portfolio Symposium Presented by John W. Peavy,
CFA March 24, 2007
2
The Oracle of Omaha Speaks
  • Weve found it hard to find significantly
    under-valued stocks ... Our capital is
    underutilized now, but that will happen
    periodically. Its a painful condition to be in,
    but not as painful as doing something stupid. (I
    speak from experience) I made a big mistake in
    not selling during the Great Bubble. If these
    stocks are fully priced now, you may wonder what
    I was thinking when their intrinsic value was
    lower and the prices far higher. So do I.
  • Warren Buffet, 2005 Berkshire Hathaway annual
    meeting

3
In other news, the citys Optimist Club gave up
today.
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Were expecting stocks to rally but we dont
know which ones and when.
9
Histogram Large Company Stocks and Small Company
Stock Total Returns (in percent)
from 1926 to 2005 Large Company Stocks
Small Company Stocks
10
Basic Series Summary Statistics of Annual Total
Returns
from 1926 to 2005
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IS THIS NORMAL? The Dow Jones Industrial
Averages 12/31/54 12/31/81
Dec. 31, 1964 874.12 Dec. 31, 1981 875.00 Gain
0.1
13
News that a meteor would destroy the earth in 48
hours sent the stock market sharply lower today,
before it rebounded on rumors that the discount
rate would be cut again.
14
OR IS THIS NORMAL? The Dow Jones Industrial
Averages 12/31/81 12/31/98
Dec. 31, 1981 875.00 Dec. 31, 1998 9181.43 Gain
949
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You had more money than God. That a big no-no.
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Larry? Its me. How are my technology stocks
doing?
20
Its just a correction. The fundamentals are
still good.
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I got out of the tulips market after the market
collapsed, but Im slowly getting back in.
Especially pink ones.
23
STOCK PRICES ONLY TWO THINGS MATTER!
Dec. 31, 1964 4.20 Dec. 31, 1981 13.65 Dec.
31, 1998 5.09 Dec. 31, 2005 4.60
WHAT CAN WE CONCLUDE?
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Hello, Howard? The dividend from your feedlot
investment arrived today.
26
SP 500 P/E vs. 10-Year Treasury Bond P/E
Stock Bond
30x 25x 20x 15x 10x 5x
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  • WHAT IS A BONDS P/E?
  • Earnings (the E) is the annual interest
    payment (on a 5 bond 50.00)
  • Price (the P) is the market value, or 1000
    on a new 5 10-year Treasury bond

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SP 500 Actual Operating EPS vs. Trendline EPS
Projection Based on 7 Annual Growth
SP Trendline
  • Stock prices over long periods of time should
    ultimately reflect the earnings growth of
    companies and the inflation adjusted purchasing
    power of investors. The SP 500 has posted
    average annual profit growth of 7.

30
Hey, can I get back to you? I think the
restructuring has begun.
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Everybody wants to go to heaven, but nobody
wants to die.
33
The Long-term Outlook for the Stock Market
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My broker says dont panic Im still young
enough to recoup my losses.
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Lessons Learned
  • Asset bubbles take a long time to deflate
  • Monetary and fiscal stimulus typically work
  • Markets recover before economic activity and
    earnings
  • Recoveries often as sharp as downturns
  • Only two things matter But a lot of things
    affect them especially inflation
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