Why Nygren is bullish

Nygren says the stock market "hardly sounds overheated" with the S&P 500 down 20% versus two years ago and 10 years ago. He also says earnings will recover. Writes Nygren, "2009 appears to be a trough year for earnings, and we believe earnings should be markedly higher by 2011. Using Bloomberg's 2011 forecast, the S&P 500 now sells at 12 times projected earnings, which is well below average."

With the Wilshire 5000, representing the entire U.S. stock market, at 35.1 times earnings, it's hard for me to find many attractive stocks. Nygren is, I believe, making a mistake by using relative valuations, arguing that, "historically low returns now available on competing investments justifies a higher than average P/E multiple."

So... accepting a lower return is OK as long as other returns are even lower?! That's like saying it's OK to pay more because someone else is paying too much for some other asset. It's a greater fool theory, in which you estimate how the fool is feeling and what foolishness he's willing to engage in next.

If you use a relative valuation yardstick, you'll wind up tying up capital at low rates of return, simply because you're not patient enough to wait for the much better deals that inevitably arrive.

The fact that Coca-Cola is worth 30 times earnings doesn't mean you should expect to make much money owning it at that price. Remember, the only active role you play in getting a return in stocks is deciding at what price you'll enter. After that, the return you'll get is largely out of your hands and in those of Mr. Market.

So why does Nygren think in relative terms when it's such a bad idea? Because he's in the mutual-fund business. He's got money flying in the door when stocks are expensive, and running out the door when stocks are cheap. It's hard to be patient when you're more or less required to be fully invested.

This is excellent news for you and me. It means the competitive advantage of patience is not fully available for mutual-fund managers... But it is available for us. And with the average holding period for New York Stock Exchange stocks down to six months, this advantage is easier to get than ever.

Being patient is how great fortunes are built. Ask Warren Buffett. He once said it's not hard to get rich in stocks if you're not in a big hurry. Mutual funds and most other investors are all in a bigger hurry to get rich than they've ever been in. That can't end well for them.

Take your time, be patient, and buy only what's safe and cheap enough to make you a big return. You'll lose a lot less money in stocks and make a lot more.

I think it's all Chinese newspeak for, "If you criticize the government online, you'll go to jail just as quickly as if you do it elsewhere." Since late 2008, China has shut down thousands of blogs and websites and arrested thousands of individuals in its effort to create a "positive mainstream opinion environment." Censorship and hacker attacks are cited as reasons Google might leave China.

Witness Komrade Obama's latest disincentive, the "financial crisis responsibility fee." The new tax will force about 50 large financial institutions to pay the federal government a total of about $90 billion over 10 years. About 70% of the firms would be U.S. companies, with the rest being U.S. subsidiaries of foreign firms. The 10 largest institutions would pay about 60% of the tax.

How much of the financial crisis responsibility fee will be paid by the Fed? Ninety-nine percent of it, if there were any logic to it, which of course, there is not...

Did you get that? The big carmakers didn't go under because Toyota and Honda beat the crap out of them fair and square in the market for new cars. GM and Chrysler didn't go under because of the make-work rules and enormous pension burdens placed on them by the unions. They didn't go under because they refused to give car buyers what they wanted. No... GM and Chrysler went under because of the banks. That's why no one buys American cars anymore. Car buyers get up in the morning and say, "Since banks are doing what they're doing, I'm going to buy a Toyota. That'll make GM and Chrysler go under."

This is a hallmark of academia and government: Ideas that don't work can live on and on indefinitely. When the free market kills businesses like GM and Chrysler, the academics and government make up an excuse like, "it's the banks' fault," and tax and inflate and regulate 'til they drop (they can't drop soon enough for me)... whatever it takes to keep the lie going.

I can't believe no one is trying to impeach Komrade Obama. He's a little boy set loose in a man's world, like a child driving a tank down Main Street, having fun and totally oblivious to the awful destruction he leaves in his wake.

But wait! We're not done yet, folks! Yes, there's still more! The new bank tax wouldn't include small banks. Under the proposal, the government will levy a 15% tax on financial firms' liabilities. The tax will punish nondeposit-taking banks that rely on outside money to fund operations.

It's getting harder and harder for me to quote billionaires as sources of wisdom. They've won in a corrupt system, and instead of using their substantial influence to correct the system's abuses, they seem determined to entrench themselves deeper. Is there not an honest man anywhere among the world's billionaires? I'm not saying there isn't one, only that I can't name one off the top of my head.

I'm on my way to Mexico this month... It turns out you can pick up a lot of things cheap in Tijuana, Mexico... including a new set of dental filings and some nice bridgework.

Tijuana has one of the highest numbers of dentists and pharmacists per capita in the world – many trained in the U.S. and Europe. But the fees in Mexico are much less than for similar work here. And I've been hearing from my readers that they are venturing across the border, taking advantage of the unbeatable values: A $2,200 root canal only costs $465 in Mexico.

Look, folks. America doesn't have a monopoly on science and medicine... or even common sense. Plenty of doctors around the world are perfectly capable of performing knee replacements, heart bypasses, and cataract surgery. The more I research this stuff, the more I'm convinced "medical tourism" is a great answer for retirees. So I'm heading south of the border to have a cleaning and a full exam. I plan to compare that dentist's plan with one from the U.S.

"While it worked most of the year, as the VIX has cratered, I have not been able to pursue the strategy as I originally thought (3 positions of $5K expiring per month) because the premiums are too low. So as positions expire (and free up capital), I wait. And buy a few small positions while waiting for the inevitable (but super-tardy) correction that will create the next batch of short-selling puts to profit from. I have had 25%-40% cash nearly all of 2009, Keeping my 'powder dry.'

"With that cash position in mind, here is how I did, for the entire year: Jan: +0.4%; Feb: (-5.0%); Mar: +14.3%; Apr: +0.4%; May: +10.1%; Jun: +3.0%; Jul: +6.0%; Aug: +0.4%; Sep: +4.6%; Oct: (-0.4%); Nov: +9.5%; Dec: +6.6%

"Final Score: 10 Up months and 2 Downs. Total return for the year: +63.4% while holding 25%-40% cash. Imagine if I had been 'aggressive.'

"The education I received starting 15 months ago on how to trade puts (and calls) effectively has been the vast majority of those gains. I must admit, I loved seeing 'Option Expired Worthless' three, four, even six times each month. This would not have been possible for me on my own, without the education and the world-class research of you and your team.

"Thank you. Thank you. Thank you. I am looking forward to profiting from the pending sideways market over the next bunch of years. I'll keep you posted. (In case you were curious, January is +2% so far)." – Paid-up subscriber Jeff Persson

Goldsmith comment: If you read the January 2010 issue of the S&A Resource Report, you will get the name and ticker of the company. If you have trouble finding it call our customer service at 888-261-2693.