General Electric
POT Index is 121.5, buy is 75.0

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By brettmarfool
January 4, 2002

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To FrankDude, AnOptimist and KodiakBear - I'll start with the disclaimer that I think the three of you are just plain wrong on your powers to divine the future short term or intermediate term direction of the market. I'll also admit that I do not believe that I have any such powers either.

It's still a guessing game, plain and simple. Each person can look at the same factors and reach a different conclusion. One important factor for me, that I'm not sure you have adequately addressed in your prognostications, is that interest rates are so low compared to any time in the past 20 years that attempting to draw on the experiences of that past 20 years to predict where we're headed from here just doesn't seem to be a complete enough exercise.

The richness of this market is more justifiable in times of extremely low interest rates, particularly since there are fewer and fewer investment alternatives to the market. When CD's yield 10 percent, the market PE is typically lower than when CD's yield 5%. Your fear for the current PE ratio of the market does not seem to take this into account, or if it does, then I've missed it. While this is not the only factor that matters, it's an important one that would tend to diminish the significance of the current PE ratio.

If you believe that corporate profits will recover over the next few years, and if you believe that interest rates will remain relatively low during that period of time, then what I would distill from those predictions is a fairly good environment for the stock market, a continuation of the bull market that began in August 1981. I cannot predict how modest or robust the upturn will be, but I'd rather be betting long than short. Particularly since I am a LTBH investor, and I've been long the market since before 1981, this is the right environment for someone with a long-term orientation. This is a good market for GE, along with C, WMT, LMT, PEP, BAX, HDI and even the big oils like XOM, BP, CVX and RD.

Of all the things that I've seen posted to the various boards of the stocks just mentioned, nothing strikes me as more wrong headed than the POT index. Sorry, nothing personal. I just think that it is way too arbitrary to be a good tool. A bear would set the entry point at 75, and a bull might set it at 140. So what? That's what I think you did - you let your natural predisposition create a rule, and then you follow the rule. Frankly, we are all guilty of the same thing more or less. If I weren't a long term, patient, optimistic sort, I wouldn't be making the comments and statements that I make on these boards.

I'll admit that the three of you may end up being correct for the next year or so. That's always possible, but your models and theories require you to keep on making guesses and being correct in those guesses. You are simply increasing the odds of making wrong investment choices over time. Once bad guess can wipe out several good ones. When you factor in interest rates, the aging baby boomers, the environment for US corporations, and other factors, I can make one guess and pretty much stick with it - it's always a good time to be a long term bull, if you're patient and invest in quality stocks and mutual funds. Only changes like a sustained increase in interest rates would prompt me to reevaluate where we've been headed since rates started to fall in the early 80's. We're still not finished with that cycle, and if you plot interest rates and stock prices over the past 2 decades, I think you'll see a beautiful inverse relationship between the two.

Hope you guys make money your way. But I'd like others on these boards to also think about another way to approach investing.

Good luck to all.


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