In an old letter to clients, Tweedy Browne’s managers once stated that investors should be prepared to hold on to an undervalued stock for at least five years in expectation of the stock reaching fair value. Certainly, you can make the case that stocks can remain cheap for ten years or longer—Abbott Labs, Altria, and even Johnson & Johnson have proven that at different points in the past fifteen years. The only additional counsel given by Tweedy Browne is that the longer a stock remains undervalued after the five-year mark, the more likely it is that an investor is wrong about the valuation.
There are some people who look at The NASDAQ Index taking fifteen years to pass its 2000 highs and conclude that is some proof that the stock market is “rigged” or a “casino.” After all, if buying the largest technology names and holding them for fifteen years earns you 1% nominal returns (because of the dividends) and -2% actual returns (because of the inflation), then it seems to follow that a super-long period of no wealth-building would result in some skepticism about stock market participation in general.
Edward Jones enjoys an excellent reputation among its clients. It wins award after award for great service, and managed to expand beyond its humble origins in Des Peres, MO to build thousands of branches across the nation that offer individually tailored solutions for people that want to have a personal relationship with someone as they invest. The comfort that many investors feel with their Edward Jones advisor, however, is unwarranted.
As is often the case, the devil lurks in the details. Or as Edward Jones likes to call it, their “preferred product partners”, which we will get to in a minute.
Two factors right now are interacting to provide a distorted view of valuations for investors that make decisions based on historical P/E analyses of large U.S. stocks. On one hand, you have the growing trend of international profits contributing to the overall earnings of large U.S. multinationals. The average S&P 500 company currently generates 42% of its profits overseas. That matters because of our second factor: In the past twelve months, the United States dollar has gained almost 25% in value compared to the global basket of currencies index.