S e a r c h i n g f o r t h e R i g h t S t o c k

Stocks and Their Valuation

© SEBASTIAN

KAULITZKI/SHUTTERSTOCK

9

CHAPTER

269

A recent study by the securities industry found
that roughly half of all U.S. households have
invested in common stocks. As noted in
Chapter 8, over the long run, returns in the U.S.
stock market have been quite strong, averaging
12% per year. However, the market’s perfor-
mance recently has been less than stellar. Trying
to put things in perspective, Fortune magazine’s
senior editor Allan Sloan offered the following
comments about the market’s performance:

When the greatest bull market in U.S. his-

tory started in the summer of 1982, only a

relative handful of people owned stocks,

which were cheap because they were con-

sidered highly risky. But by the time the

Standard & Poor’s 500 peaked in March

2000 amid a fully in! ated stock bubble,

the masses were in the market. Stocks

were magical, a supposedly can’t-miss

way to pay for your kids’ college, save for

retirement, enrich employees by giving

them options, and regrow hair. (Just kid-

ding about the hair. Alas.)

Stocks might go down in any given

year, the mantra went, but in the long term

they’d produce double-digit returns. How-

ever, one of the lessons of the past eight

years is that the long run can be... really

long. As I write this in late February 2008,

the U.S. market—which I’m de" ning as the

Standard & Poor’s 500—is well below the

high that it set on March 24, 2000. Even

after you include dividends, which have

run a bit below 2% a year, you’ve barely

broken even, according to calculations for

Fortune by Aronson & Johnson & Ortiz, a

Philadelphia money manager.

One month later in March 2008 the stock market

fell further in the aftermath of the startling col-

lapse of Wall Street giant Bear Stearns. While

most experts believe the stock market will ulti-

mately rebound, most doubt that investors will

average double-digit returns from common

stock returns in the years ahead.

As we discussed in Chapter 8, the returns of

individual stocks are more volatile than the