Perfect foresight is impossible in the complicated and dynamic world of investing. Even the best investors typically turn out to be wrong – meaning they don’t beat a risk-free rate of return – on 30-40 per cent of the investments they make. That’s perfectly fine – if your winners on average also go up more than your losers go down, you can build an outstanding record over time.
The fallibility of investment foresight came to mind recently when I revisited a feature article in Fortune magazine that appeared in the summer of 2000 under the ambitious headline “10 Stocks to Last the Decade”. As the table (below) indicates, a portfolio of this august group has tumbled 39 per cent since the article ran, versus a meagre, but positive, 3.5 per cent gain for the broader market as measured by the Russell 3000 index.
... Valuation matters. Guess what the average price/earnings ratio was of the stocks on Fortune’s list. 30x? 40x? Such ratios were for wimps in mid-2000. How about a nice round 100x? As Jeremy Siegel writes in The Future for Investors: “The long-term return on a stock depends not on the actual growth of its earnings, but on the difference between its actual earnings growth and the growth that investors expected.” That’s something to remember every time you buy a stock, especially if you’re betting on “sweeping trends”.
[via brknews]
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