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Latest Issue

No Free Lunch, Part 2

By John Mauldin

March 22, 2019

No Free Lunch: Return Is Determined by Valuation (Part II)
Fairly Valued vs. Overvalued
Implications for Your Portfolio Today
What to Do About It
Summary
Diversifying Your Trading Strategies
Cleveland, New York, Austin, and Dallas

Matching the stock market’s long-term average returns sounds like it should be easy, if you’re patient enough. But in fact it is remarkably difficult. In last week’s letter, Ed Easterling and I showed you why it is a longshot bet in almost every market environment. Returns over a decade or two are usually well above or well below average. Most of all, it’s fairly predictable which side of average will occur.

This has serious implications for retirees, near-retirees and accumulators. Fortunately, there’s a lot that you can do to still achieve investment success. Today Ed and I will expand on that discussion. If you missed last week’s letter, you might want to read it here first.

Ed founded Crestmont Research in 2001 to research secular stock market cycles and graphically explain everything about them. You can find a treasure trove of his fabulous charts and articles on cycles and market returns at www.CrestmontResearch.com. Longtime readers know that I’m a big fan of Ed’s work and highly recommend both of his books, especially Unexpected Returns.

We left off last week writing about the power of the price/earnings ratio (P/E) on the way to describing how it not only predicts, but also drives returns. Let’s jump back in; we have a lot to cover.

No Free Lunch: Return Is Determined by Valuation (Part II)

By John Mauldin and Ed Easterling

The price/earnings ratio (P/E) has a multiplier effect on stock returns. Over 10–20 years, P/E can dramatically increase or decrease,...

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