Now that P/E10=23

Stocks are in bear territory. It seems that bargains abound. Should you buy now?

Perhaps. Perhaps not. It depends on your strategy.

P/E10=23 is still in the danger zone. We are still in a long lasting (secular) bear market. If we look 5 to 10 years out, P/E10 is likely to be much lower, below its historically typical level of 13 or 14. If we wait, we will pick up great bargains. For dividend investors, yields will be twice as high as they are today. Carefully selected preferred issues are likely to make the waiting worthwhile.

You do have to be careful, however. The problem with preferred shares is trying to sell them without taking a beating.

It makes sense to wait. But it also makes sense to have some exposure to the stock market.

From my experience with the Scenario Surfer, a 20% minimum allocation always makes sense. There is a real possibility that the market will go up. According to Benjamin Graham, a 25% minimum stock allocation makes sense. Rob Bennett’s number is 30%.

You have to live with the possibility of regret. How would you feel if the market jumped 30% next year? Would you start investing at a worse time, at even higher prices? You have to live with your emotions.

What if you are an income investor? Or what if you are a dividend blend investor? Your strategy allows you to invest fully at all times. Yet, you may wish to wait for even better bargains.

I like the idea of adopting more than one approach. I like the idea of owning some high quality dividend payers, possibly as part of a dividend blend. I like the idea of keeping most of your money on the sidelines. But that is a matter of personality. Whatever you do, be sure that you can live with it: whether the market continues down sharply or if it recovers and shoots up for a season.

Have fun.

John Walter Russell
June 27, 2008

P.S. For an excellent discussion of the stock market and stock cycles, visit Ed Easterling’s Crestmont Research site. I recommend his article about The Truth About P/Es especially.

Crestmont Research
The Truth About P/Es