"Time makes fools of us all. Our only comfort is that greater shall come after us." -- E.T. Bell
Economic and financial prognosticators understand the long-term positive correlation of time and foolishness (small "f") perhaps better than anyone else. For example, in 1929, the great Yale economics professor Irving Fisher said, "Stocks have reached what looks like a permanently high plateau." For a while, at least, he appeared to be a genius, but time would eventually prove him wrong.
The 25-year test
Out of curiosity, I recently went to my local library to see what popular financial magazines were predicting back in 1983. Ten seconds later, I already had an article that proved to be downright stupid in hindsight.
The Feb. 14, 1983, edition of Forbes warned investors about buying into "highflyer" stocks and produced a list of 35 stocks with high P/E ratios (more than 30) at a time when the overall market was trading at just 12 times earnings.
The list of 35 companies included:
Company |
February 1983 P/E |
Return, 1983-Present |
---|---|---|
Home Depot |
70 |
7,300% |
Lowe's |
31 |
4,129% |
Pulte Homes |
38 |
423% |
Wal-Mart |
31 |
8,486% |
In fairness to Forbes, I hadn't even heard of many of the stocks on the list, so I assume they were either acquired or faded into obscurity. All in all, the author was right to doubt at least a few of the 35 "highflyers."
But that's not the point ...
Here's the thing: Even assuming that the other 31 stocks on the list went completely bankrupt, $1,000 invested in each of the 35 stocks back in 1983 would still be worth $207,000 today -- a 493% gain. In other words, those four big winners more than made up for 31 losers (though it should be noted that you would have trailed the market by investing in 31 stocks that went to zero).
That's still not the point ...
Going 4-for-35, however, is atrocious. You can do better -- and substantially beat the market -- by finding and doubling down on the companies that have the management teams and market opportunities (such as Wal-Mart and Home Depot) to grow into their valuations. These types of seemingly high-P/E stocks present great value opportunities in the long run.
For example, Oracle
Today's highfliers
There are plenty of stocks in today's market with higher-than-average multiples -- just look at Baidu.com
To identify potential long-term winners, investors should look for companies with innovative products or services, preferably led by an engaged founder, and the potential for dominating its market niche.
If you want some guidance for finding a few promising highfliers, Motley Fool co-founder David Gardner and the Motley Fool Rule Breakers team can help. They've recommended both Baidu.com and Akamai, and their picks overall are beating the market by nearly nine percentage points on average.
If you'd like to see the other stocks they've recommended, a 30-day trial to Rule Breakers is free of charge. Just click here to get started. There is no obligation to subscribe.
Fool contributor Todd Wenning hopes posterity judges him well. He does not own shares of any company mentioned. Whole Foods and Charles Schwab are Motley Fool Stock Advisor picks. Home Depot and Wal-Mart are Inside Value recommendations. The Fool's disclosure policy wishes life was more like 1983.