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2012 — A Great Year to Buy Stocks
On the horizon: The next great revolution in productivity.
purchase
By Mark Phillips
DISCLAIMER ...
I am not a stock market analyst,
licensed broker, financial ana-
lyst nor financial planner. I do
own stocks, including S&P
funds. This article is not
meant to be stock market
advice nor a predictor
of future performance.
It is an economic
analysis of the stock
market, more from an
academic, theoretical
point of view, based
on how I see the data.
Do not make a decision
on your money based on
this article. I disavow any
responsibility for any deci-
sion you make. You do so at
your own risk.
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This should be a great year to buy U.S.
stocks. The market is finally realizing the
promise of the dot.com boom and is
poised to see the potential of the next great
revolution in productivity. There will defi-
nitely be bumps in the road; but over three
years or more, these should smooth out and
U.S. stocks should be a good investment.
The stock market is a discounting
mechanism. It takes a set of expectations on
the future performance of businesses and
brings it into the present. It answers ques-
tions like: How much is a company worth
now that will grow at 50 percent per year
for the next five years?
This shows the relative value of earnings
(for some specified period of time) com-
pared with the current price. High-growth
companies tend to have higher price/earn-
ings ratios corresponding to the higher
future earnings of that company. In other
words, a company that generated $1 billion
in 2011 but will generate $2 billion in 2012
is worth more than a $1 billion company
that will generate $1.2 billion in 2012.
When something new arrives on the
scene that promises to radically change
business, the market likes to jump on it,
figure out its effect and place a bet on it.
Whoever accurately predicts the effect of
that something new stands to gain the
most because they will be ahead of the
curve. As more and more people realize
the potential effect (and come to the same
conclusion), they will place their bets in the
same way.
Similarly, when something is wrong that
the majority of investors don't yet see, those
with clairvoyance can make money by bet-
ting on the downside. It's all about seeing
something before other people do.
The market started to "get it" about the
transformational power of the Internet
around 1994. Just a decade before, the
power of the PC was felt in the workplace
and in homes, bidding up the value of com-
panies like Microsoft and Intel. The stock
market soared as people jumped on the
Internet bandwagon.
There are only two ways for the market to
get back to its long-term average:
1.Earnings go up.
2. Prices come down.
Both of these have happened, with the
most beneficial being the rise in earnings.
The market has grown into itself. The prom-
ise of the business gains from the dot.com
era has proven true.
Now the Internet promises to radically
alter the landscape all over again.
With markets converging on their long-
term P/E, there's an opportunity to capital-
ize on the next the "big"thing. We've seen a
wave of transformative change take place
over the last three years. Smartphones,
tablets, the spread of the Internet globally
and a change to a more "projectized" way of
working are a few of these changes.
But the market has been held back from
bidding up these changes by unsettling
short-term factors like unemployment,
political impasse and the Euro. These short-
term factors will pass as the dynamism of
the U.S. economy continues to roll ahead.
It is this dynamism that underlies my be-
lief that the most productive and innovative
years of this country are still ahead. And the
market will start to realize it soon. kr
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16 February 2012 I
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