Bull’s Eye Investing Ten Years Later

Here is the link to last week's John Mauldin's Thoughts From The Frontline.  Mauldin begins to assess the accuracy of his best selling book Bull’s Eye Investing that was released 10 years ago.

I've highlighted a few key passages below that I think investors will find prudent

• We will make the case that it is more useful to analyze stocks during secular bear markets in terms of value than in terms of price… These cycles generally take a generation to work their way through the investor public, have significant magnitudes of becoming undervalued and overvalued, and have significant implications for the way that investors should approach each of these periods.
• Further, we show that volatility and frequent large rallies are the norm and not the exception, thus giving the astute investor some terrific opportunities.  Finally, we will make a connection between inflation, interest rates, and stocks that will give us further indications of the direction of the stock and bond market in the coming decade.
• These periods in the past have been the result of market valuation cycles represented by the P/E ratio. The valuation cycles have resulted from generally longer-term trends in inflation toward or away from price stability. The short-term, somewhat random, market gyrations are the result of then-current circumstances and market forces wrestling stock prices around a gravity line of the broader cyclical trend.
• It is striking that overall volatility is relatively similar for secular bulls and bears. Note the frequency inside the 10% and 16% ranges. In both secular bulls and bears, nearly 30% and 50% of the years fall inside the respective ranges. The difference is that bulls predominantly have upside years, while bears have more downside years.
• In all cases, throughout the years, the level of returns correlates very highly to the trend in the market’s P/E ratio.  The P/E ratio is the measure of valuation as reflected by the relationship between the prices paid per share to the earnings per share (EPS).  Higher returns are associated with periods during which the P/E ratio increased and lower or negative returns resulted from periods during which the P/E ratio declined.
• This may be the single most important investment insight you will get from this book. When P/E ratios are rising, the saying that a “rising tide lifts all boats” has been historically true. When P/Es are dropping, stock market investing is tricky; index investing is an experiment in futility. As we will see in later chapters, in these secular bear market periods, successful stock market investing requires a far different (and sometimes opposite) set of skills and techniques than what is required in bull markets….
• Although P/E has declined over the past nine years, from 26 to near 20 (using the Shiller method), stock market valuation remains relatively high. Almost everything in chapters five and six of Bull’s Eye Investing remains true today. The market has chopped around with fairly typical volatility. P/E is in the lower end of the red zone rather than above it. Most importantly, currently high valuations portend low returns from here.

I would encourage everyone to check out the full PDF version which contains some really great charts that give a visual picture of where things currently stand.