DECEMBER 2002

Best Time For Investors In 15 Years? In Some Ways, Yes

From NAIC's St. Louis Chapter

It sure would be easy to find fault with this statement, wouldn't it? After all, a review of market performance in 2002 (so far) reveals: Dow Jones Industrial Average down some 14.7 percent as of December 12. The Nasdaq -- far worse -- down 28.2 percent. In 2001, the Dow Jones Industrial Average was down 7 percent, and the NASDAQ, down 21 percent for 2001.

Popular stocks like Cisco, EMC, GE, Microsoft, and even drug companies like Pfizer have been disappointing, at least in terms of their negative total return over the past couple of years.

Mutual funds, managed by professionals with advanced degrees in finance, have had dismal results. Diversification theory or not, mutual funds have lost a lot of money lately. Corporation after corporation have been investigated by the SEC and then the federal court system for misreporting various aspects of their finances. Investor confidence in getting accurate financial information from corporate America is perhaps at an all-time low.

Bruised and bloodied investors have been limping away from stocks in droves, looking for anything with a semblance of guaranteed returns.

What could Phil Keating be thinking?

Best Time To Be An Investor In 15 Years

Before I get to his reasoning, allow me to share my own thoughts, pro and con, on the subject. Perhaps this will spur you to survey the situation and form your own judgments and expectations.

1. The argument above is based on past performance, just looking at the past twenty-four months. Looking back much further, over the past seventy years, stocks have averaged a return of 11 percent. Chances are even greater after two bad years for a return to normal levels. There is no guarantee of that, of course. The recovery depends on when the economy finds a way to stabilize, and on political events that are beyond any investor's control.
2. Price-to-Earnings ratios (P/E) levels are much lower now than they were earlier in 2002. Currently, Value Line's 1700 stocks have an average P/E level of 16x. Much lower than the 19x of a year ago, but not as low as at the beginning of 2000 when the average PE for the same number of stocks was 14x. Lower P/Es suggest more reasonable levels of valuation, and hence the possibility of enhanced rates of return. I think P/E levels have to go down before the market as a whole gets into a "bargain mode." So at this time, there are mixed signals about the current investing environment.
3. The level of scrutiny by the SEC is, arguably, significantly greater than in previous years. Accounting firms and auditors are being held to a higher standard, because of their past errors. Lax accounting firms, including some big names, are no longer in business. And investors certainly can expect SEC Chairman-designee Donaldson to hold all companies to a much greater level of fiscal responsibility. The SEC has also proposed rules requiring mutual funds to disclose their holdings each quarter instead of the present process of twice per year.
4. On the positive side, NAIC investors have many more tools than they had even a year ago. At a very reasonable price, reliable S&P data for some 10,000 companies can be provided to individual investors through the Online Premium Service (OPS). Stock Prospector, a revised software program from IClubcentral, gives investors the opportunity to screen for outstanding stocks and to scrutinize industries as well. The Toolkit 4 software from Investware and NAIC Classic Plus & Stock Analyst Plus from STB/IClubcentral permit investors to download data into SSG format almost seamlessly. All of these options were unavailable one year ago.
5. Even closer to home, St. Louis NAIC members have options for learning that were not available in previous years. Classes on Value Line, Annual Reports, and Judgment were offered for the first time in 2002 and will be repeated this year. The St. Louis Computer Group now presents monthly stock studies, demonstrating NAIC software programs like Toolkit and Classic Plus. More improvements and offerings will be developed during 2003.
6. Where else can you talk stocks and learn in a friendly, educational environment? The St. Louis Chapter of the NAIC offers inexpensive and often free learning opportunities on a regular basis to members and non-members alike. No other organization in St. Louis presents such valuable programs. And furthermore, those who want to learn more and share in detail have the opportunity to become presenters and facilitators. In the past year, Dee LaFata, Candace Baker, Earline White, Mark Otti, Dan Bauer, and Jan Wenk have joined the chapter as associate directors and already are making significant contributions.

NAIC chapters nationwide are developing and delivering outstanding programs to help people to become Better Investors.

Phil Keating's reasoning is logical and I concur. In Phil's article, Finding Companies That Walk The Talk, on the theme of financial reports, Phil states, "Earnings quality and corporate governance should be much better for the next few years..." On the kind of research available to investors, Phil suggests that capitalism "is democratizing the investment process by bringing information and computer power to the desktop of every investor." Finally, on the twists and turns of the market, Phil remarks, "It is important to recognize and celebrate our core values and put them into action, realizing that much of the distress in cleaning up the market is quite normal and has happened many times before.... We will soon enter a period [of expansion] that, based on the precedent of the last two business cycles, will likely last another nine or ten years."

In my opinion the economy of 1988 gave hints of much better returns in the years to come than our economy does today. But the advantage the investor has today is that the information available today is far superior than anyone dreamed of fifteen years ago.

I welcome your thoughts in our continuing discussion about the market. I am glad to have survived the past two years, painful as they have been, and look forward to better opportunities ahead, particularly with the tools that are available to us here in St. Louis and nationally.

Bill Biedenstein -- NAIC, St. Louis Chapter

Bill is president-elect of the St. Louis chapter and a frequent and respected contributor on the BetterInvesting I-Club-List.