Long-term Return Outlook

John Hussman's November 27 review of some of Ben Graham's sayings was interesting from a value methodology point of view. However, we think the chart that was included is particularly relevant to investors who want some guidelines for 20-year returns. Bottom line: the model is predicting 5% per year for the S&P 500 over the next 20 years.

The S&P 500 has returned 84% on a price-only basis since the lows of October 2002; nearly 100% if you count dividends. Good market performance brings out the Ibbotson "buy-and-holders" who say never sell. Ibbotson: "Markets go up over the long-term." (link) Sure, they go up over the long-term, but sometimes it takes 20 years to get back to breakeven after substantial losses. Sometimes, if you happen to live in the wrong country or the wrong century it never happens. In contrast, long-term wealth is created by analyzing where the values reside and investing accordingly.

Strategy Update: since the bottom of the international equity market in June our Focused International Strategy has outperformed the EAFE Index by 10 percentage points through overweights in emerging and asian markets as well as specific country weights in Australia and Brazil. Our manager has elected to move out of some of the asian exposure and create a 20% cash reserve in the Strategy.