the myth of buy and hold

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    Here is a outtake from a research paper I received. Joseph


    a.. If you look at the stock market over the long run, as I've mentioned before, most of your returns come from dividends and dividend growth. I recently came across statistics that pointed out that if you invested $100 in the stock market in 1802 to present that would have turned into $ 700 million, if you had reinvested your dividends. It would have become $37 million if you removed the impact of inflation. The $100 would have turned into $2,099 if you took out inflation and dividends; and if you stopped your investment period in 1982 that $100 would have turned into $400. This example brings out two points. One is that over the long run most of your returns come from in flation, dividends and t he reinvestment of dividends. Secondly, the astonishing impact of the 1982 to 2002 period on your returns. Basically 80% of your returns without excluding dividends and inflation came from the last 20 years of the 200-year period.

    a.. On the subject of dividends and valuation, in his proposal for the elimination of dividend taxes, George Bush said "profit is an opinion but cash is a fact." Dividends are cash earned by a company and returned to the investor, they are used to evaluate whether the stock market is cheap or expensive. Looking back at the last 12 months the S&P500 companies paid $16.08 in dividends, the S&P was trading at 53x dividends at the end of January 2003 (855.7). The 77-year average for that price to dividend ratio is 28.8x. The current 53x is higher than the peak of the stock market in 1929 and the peak in the late 1960s. So certainly on a dividend yield basis the stock m arket is expensive.

    a.. More recently some have mentioned the Fed model which is currently saying that stocks are 39% undervalued, but I have pointed out in the past the short comings of that model (showing that Japanese stocks were very attractive at 90x P/E ratio just because Japanese bond yields were below 1%). Using BBB corporate bond yields in the Fed model as your interest rate to get valuation for the stock market, it shows the stock market is 10% overvalued. However, that is the cheapest level of over valuation since the 1980s. Overall I don't really look at the Fed model to decide whether the stock market is cheap or expensive.

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