Last Updated September 30, 2012
Morningstar had an interesting video from the master of Common Sense Investing, Jack Bogle. The video was called Speculation Dwarfing Investment and in it Bogle basically says that there is about 200 times more trading and speculation than there is investment.
In the previous video called Markets About Fairly Valued Today, he covers much the same ground, saying in effect that rather than endlessly trading stocks and trying to make money out of the buying and selling, investors should really make money out of the long term earnings growth of companies and of course their dividend payments.
It’s always nice when someone basically agrees with you and it’s nice to see Bogle using CAPE (or inflation adjusted PE10) to value the market.
The very sensible way he does this is to look at the current yield, add in the long term earnings growth rate and finally to factor in mean reversion of a long term valuation measure like PE10, which is just good old common sense.
For the UK you could say something like a 3% dividend, plus 5% earnings growth gives you 8% annual returns, plus the PE10 is about 14 from memory, and the long term average is somewhere around 15 or perhaps slightly higher. So it’s not crazy to expect something between zero and one percent extra a year if the PE10 re-rates upward over the next 10 years.
9% a year nominal certainly sounds a lot better than we’ve seen in the last decade.