You can’t say that stocks are at all-time highs. Adjusted for inflation, the S&P 500 is 25% below its previous peak over 13 years ago. You can say that stocks are cheap, given that earnings on the S&P 500 are double what they were 13 years ago (even adjusted for inflation).
You can’t just put your money in an index fund and hope for the best. S&P/TSX index is down this year by almost one percent. Or maybe you can, given that the S&P 500 is up 11.6% year to date.
You can’t say corporate profit margins are too high and bound to revert when you can exclude profit margins from the technology sector and see that margins are not at record highs.
You can’t short the Canadian banks with the thesis that the housing market is bound to implode when you can see that Canadian banks have full recourse on any mortgage loan. We’re sticking with National Bank and BNS.
You can’t assume that rising commodity prices lead to rising stock prices for commodity producers. You can instead feel the pain. Since December 31, 2008, gold is up 67% while Barrick Gold is down 57%.
You can’t say that U.S. financials are too risky when you can see that they have fortress levels of cash, low prices to book value, low valuations and are ready to approve a huge amount of dividend increases and share repurchases to shareholders. Goldman Sachs and J.P. Morgan are two to own.
You can’t say that a business is in terminal decline and should be relegated to the trash heap when you can see that a massive amount of free cash flow can stem the tide. Best Buy, Gamestop, Dell and Hewlett Packard are all having a terrific year.
In the short run, you can look like a fool for buying cheap stocks, Apple, and you can’t do no wrong overpaying for others, Netflix.
You can’t spend your whole life worrying about the Debt Ceiling, sequestration, Cyprus and that Subway sandwiches have gotten narrower, when you can focus on what really matters when buying a stock: valuation, interest rates and inflation.
You can always wait for a better entry point, but why would you as you can’t compound your money when interest rates on cash and government bonds after taxes and inflation net you zero.
Disclosure: The author and or household family members own shares in Bank of Nova Scotia, National Bank, J.P. Morgan and Apple
Clients of Baskin Financial own shares in Bank of Nova Scotia, National Bank, J.P. Morgan, Goldman Sachs and Apple