Start Buying

Stock prices have fallen to reasonable levels. This is a good time to start buying. Move into stocks GRADUALLY.

Valuations

P/E10 has fallen to 15. It makes sense to ease into stocks.

Valuations are likely to fall further. Expect them to come close to P/E10=10. Prepare for the possibility (about 50%-50%) that they will fall below P/E10=10.

Historically, the lowest has been P/E10=5. I doubt that it will fall that far.

Valuations are likely to hit bottom within a decade or so. You have time. The market is likely to go up at times, while trending down. Those rallies are “bear traps.”

For a good discussion of stock market behavior, visit Ed Easterling’s Crestmont Research site.

Crestmont Research

Long Term Timing

Short term timing is difficult, at best. Long term timing works.

For a good overview, I recommend Rob Bennett’s 56 minute audio on the subject: RobCast #12: Market Timing -- What Works and What Doesn't.

Rob Bennett’s RobCast page 2

General Thoughts

I have received two great letters recently. I have included my general thoughts in my response.

August 12, 2008 Letters to the Editor, Reconciling the Year 30 SWR with DVY and PFF.

August 12, 2008 Letters to the Editor

October 8, 2008 Letters to the Editor, Rob's podcasts/Valuation buy levels.

October 8, 2008 Letters to the Editor

If you are approaching retirement, look at the dividends of quality stocks. Today, it is easy to build a portfolio of high quality dividend payers with an overall yield exceeding 5%. Excluding the financial sector, which is under pressure, there is no reason to expect smoothed earnings to fall dramatically. Single year earnings can fall to zero.

Check out this article, which focuses on Benjamin Graham’s advice:

Historical Perspective: Dividends and Earnings

Check out this article on Dividend Quality.

Dividend Quality

Calculators

Take advantage of my calculators, especially the Scenario Surfer, which works in accumulation as well as during retirement. (To make a deposit, enter a negative withdrawal amount.) The Scenario Surfer trains you to experience a variety of possible future stock return sequences that are consistent with the historical record. It includes the effect of starting valuations and two forms of mean reversion. My experience is that the Scenario Surfer will train you to do better than any predefined historical algorithm. Yet, from my historical sequence calculators, I have learned that the optimal choices are broadly defined, not sensitive to the exact choices of thresholds and allocation percentages.

Have fun.

John Walter Russell
October 11, 2008