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Published: September 17, 2009
The world's best investors don't see the market
the way you do.
And I mean that literally... They look at the market through
different lenses.
Most investors know how to value equities using various
valuation ratios – like the price-to-earnings ratio, the
price-to-book ratio, or dividend yields. These valuation studies
are important when you're buying individual stocks. And they can
give you some idea of whether or not the market as a whole is
attractive. But... there are much better ways to see valuation
in the markets.
For example, here's a chart of the S&P 500 going back to 1975.
This is the way you probably look at the market today. And when
you look at the market this way, it appears pretty expensive.
Stocks have been mostly going up for a long time. The recent big
selloffs didn't bring the S&P 500 index back down all that
much... or so it seems when you look at a plain chart.
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But there's a much better and more accurate way
to view the markets.
The next chart is the S&P 500 again, from the same time period
(starting in 1975). As you can see, this chart looks nothing
like the first one. In this chart, you can plainly see the big
top formed in stocks in the early 2000s. And you can see the
huge mania of the 1990s – where the chart goes nearly straight
up. But in this chart, the second top in stocks we saw in 2007
doesn't exist. It's like the bull market of 2002-07 never
happened.
This chart is the S&P 500, but measured in gold, rather than
U.S. dollars. What it shows is the value of stocks compared to
gold. Gold is a much better standard of value than the U.S.
dollar because it can't be printed or manipulated as easily as
the U.S. dollar.
What this second chart makes clear is how cheap stocks have
really become – something you can't see on the regular S&P 500
chart because of the effects of inflation.
At the bottom of stock prices in the late 1970s, just one ounce
of gold (then at $800) would have bought an entire unit of the
Dow Jones Industrial Average. Stocks and gold were trading on a
one-to-one basis, based on this measure. At the peak of stock
prices in 2000, a unit of the Dow was worth $14,000. And an
ounce of gold was only worth $260. To buy the Dow would have
cost more than 50 ounces of gold. Obviously, stocks were
extremely expensive – 50 times more expensive than they were at
the bottom in 1980.
Today, gold is trading around $1,000 an ounce. And the Dow, at
its recent low, was near 6,000. It would have taken roughly six
ounces of gold to buy the Dow.
Looking at stocks through the lens of gold gives you a much
better idea of where we are in terms of sentiment and valuation.
Using this gold ratio will help you make much better asset
allocation decisions. You want to buy stocks when the ratio of
the Dow to the price of gold is low – less than 10. And you want
to buy gold when the ratio is high.
While we may not yet be at the exact bottom of the gold-to-stock
ratio, we're close. I'm not telling you to sell your gold. I'm
not selling mine. But looking at the chart of stocks vs. gold,
you can clearly see it's time to begin to fade gold and buy
stocks.
-- Porter Stansberry
Editor
Porter Stansberry's Investment Advisory
This article originally appeared on
DailyWealth.com |
