Here's something interesting: From 1988 to 2000, S&P 500 earnings grew an average 6.6% per year. The index itself increased more than fivefold during this 12-year period, from 277 to 1500.
From 1998 to today, also 12 years, S&P 500 earnings grew an average of 5.7% per year -- not drastically different than the preceding period. Yet what did the index do? It declined slightly.
Two periods. Similar earnings stories. Very, very different outcomes. What gives?
The answer isn't complicated, but is probably the single most important investment lesson you'll ever need to know: In the first period, valuations started low and ended high. In the second period, valuations started high and ended low. That's it.
Why is this simple point so important? Because starting valuation is the most influential variable in determining investment results. It's more important than earnings growth. More important than GDP growth. More important than interest rates. Buy at high valuations, and you'll do poorly regardless; buy at low valuations, and you'll do well regardless.
A great example of this is the recent history of Altria Group
Only one variable separated these two outcomes: Wal-Mart started last decade with a really high valuation multiple, Altria a really low one. That's it. This same phenomenon is what has caused companies like Microsoft
It's common to think investing is maddeningly complex. Sometimes, though, it's almost embarrassingly simple: Buy stocks at low valuations and hold them; sell stocks with expensive ones and don't look back. Rinse, repeat.