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On Old Posts and a New Year

I started this blog on Christmas Eve 2005 with this post. So, the blog is now just over one year old heading into 2007.

In the weeks ahead, I’ll review some of the posts of the past year as well as the performance of the twenty or so stocks discussed on this blog during 2006.

Different people started reading this blog at different times; so, I’ll use the start of 2007 as an opportunity to collect and organize past posts in a way that makes sense to relatively new readers.

Personal Favorites

I guess I should start by presenting my personal favorites from 2006 (in no particular order):

On Confidence

On Inflexible Enterprises

On Maintenance Cap-Ex and “The Pleasant Surprise”

On Formulaic Investing

On Value Investing

On Conviction and the Value Gap

On the Physical Effects Fallacy

On Technical Analysis

On Some Lessons from Buffett’s Annual Letter

On Paying a Fair Price

In Defense of Extraordinary Claims

Normalized P/E Ratios

Recently, I’ve written a lot of posts on normalized P/E ratios as part of a little study on valuations conceived as an attempt to offer some idea of what kind of long-term returns investors can expect from the stock market:

On 15-Year Normalized P/E Ratios for the Dow

On Normalized P/E Ratios and the Election Cycle

On Normalized P/E Ratios and the Election Cycle (Again)

On Normalized P/E Effects Over Time

On Calculating Normalized P/E Ratios

On the Difference Between Actual Earnings and Normalized Earnings

On the Dow’s Normalized Earnings Yields for 1935-2006

In Defense of Extraordinary Claims

On Normalized P/E Ratios Over Six Decades

Company Specific Posts

I spent much of the year writing about individual stocks. These are simply posts in which I discuss a specific company at length. You’ll need to actually read the posts to see what I thought about the stock at that time. Also, remember that some of these stocks are now priced very differently. Please use the date of the post to determine what the price was when the post was written. Here is a collection of my company specific “analysis” type posts (again, in no particular order):

An Analysis of Blyth (BTH)

An Analysis of Energizer Holdings (ENR)

An Analysis of Lexmark International (LXK)

An Analysis of Journal Communications (JRN)

An Analysis of the Journal Register Company (JRC)

An Analysis of Nintendo (NTDOY)

An Analysis of Overstock.com (OSTK)

An Analysis of Pacific Sunwear (PSUN)

An Analysis of Cascade Bancorp (CACB)

An Analysis of Fifth Third Bancorp (FITB)

An Analysis of TCF Financial Corporation (TCB)

An Analysis of Valley National Bancorp (VLY)

An Analysis of Wells Fargo & Company (WFC)

I now have a different view of some of these stocks. For the most part, this is the result of changes in the share price. Obviously, if the share price increased dramatically since I discussed a stock, that stock is less attractive than when I wrote the post. I’ll discuss a few of these situations in the next week or so.…

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On Normalized P/E Ratios Over Six Decades

After my last post, Bill Rempel (among others) inquired about the difference in normalized P/E ratios over different decades. He felt a standard applied across 70+ years might not be particularly useful today, because so much has changed (increased participation in equity markets, different monetary policies, etc.) As a result, it might be that while “relatively cheap” is better than “relatively expensive” within each time period, it is inappropriate to compare years from dissimilar decades as if the same standards applied.

I agree. So, over the next two posts, I’ll try to give you an idea of what the compound point growth in the Dow looked like following the low normalized P/E years and high normalized P/E years within each decade. In other words, I’ll look at low normalized P/E years and high normalized P/E years relative to other years in the same decade.

In this post, I’ll simply show you the results of two different comparisons across decades.

The first comparison consists of a group of the five lowest normalized P/E years from each decade vs. the five highest normalized P/E years from each decade. The second comparison consists of a group of the three lowest normalized P/E years from each decade vs. the three highest normalized P/E years from each decade.

Although this is still a comparison across many decades (for this post, I’m only using 1940-1999, because I want to use only “complete” decades), it should give you some idea of whether the normalized P/E effect is simply a result of a few years in just one or two particular decades, or whether the effect tends to hold up over many different decades.

In my next post, I will go a step further, and actually break down the results decade by decade.

The Least You Need to Know

If you can’t be bothered to read yet another post on normalized P/E ratios (I’ve written quite a few lately), here’s the least you need to know:

1. The five lowest normalized P/E years from each decade from the 1940s through the 1990s saw higher compound point growth in the Dow over the subsequent 1, 3, 5, 10, 15, 20, 25, and 30 years than the group of the five highest normalized P/E years from each decade.

2. The three lowest normalized P/E years from each decade from the 1940s through the 1990s saw higher compound point growth in the Dow over the subsequent 1, 3, 5, 10, 15, 20, 25, and 30 years than the group of the three highest normalized P/E years from each decade.

Obviously, there’s a lot more nuance to the results than is suggested by the above two statements; but, the most important point to take away from this post is simply that the combined low normalized P/E group (drawing equally from all decades from the 1940s through the 1990s) beat its high normalized P/E counterpart over all the holding periods I measured.

Remember, these are the combined groups. This post doesn’t address the …

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