Establish a Sound Investment Philosophy 57Table 4.1 20 - Year Periods, 1919 to 2007, S & P 500 Stock Index: Net
Total Return
Net Total Returns
by Decile Range S & P 500 Decile
AverageAverage
Begin P/EAverage
Decile From To End P/E
1 1.2% 4.5% 3.2% 19 9
2 4.5% 5.2% 4.9% 18 9
3 5.2% 5.4% 5.3% 12 12
4 5.4% 6.0% 5.6% 13 12
5 6.2% 7.9% 7.0% 15 15
6 8.0% 9.0% 8.7% 16 19
7 9.0% 9.6% 9.3% 15 19
8 9.7% 11.0% 10.4% 11 20
9 11.5% 11.9% 11.7% 12 22
10 12.1% 15.0% 13.4% 10 29
Note: P/E ratio based on Shiller methodology; net total returns including market gains,
dividends, and transaction costs of 2 percent.
Source: Copyright 2005, Crestmont Research ( http://www.CrestmontResearch.com ).In business, you make money when you buy an asset, not when
you sell it. By that I mean that if you buy low, odds are very strong
that you will make money when it is time to sell. Occasionally there
are periods when logic and discipline don ’ t matter, and you can buy
at any price and sell at a better price. The Internet boom of the late
1990s and the housing bubble that started earlier this century are
two examples that come to mind. But blindly participating in peri-
ods of excessive speculation ultimately ends up doing more harm
than good to most participants.
Employing a sound philosophy with regard to stock invest-
ing demands that you consider the price paid. In order to buy
intelligently, you must know how to assess the value of the busi-
ness. Valuation is explored in greater detail in Chapter 6. In addi-CH004.indd 57CH004.indd 57 9/2/09 7:06:50 PM9/2/09 7:06:50 PM