"Wisdom is the reward you get for a lifetime of listening when you'd have preferred to talk". Doug Larson

About a month or so ago I read a very interesting article by John Bogle in the Financial Analysts Journal called "Black Monday and Black Swans"... Here is the link to a whole paper btw.

This article in my mind offers a few important points:

1. Concrete, quantitative justification for my conviction in the silliness of fund managers holding a ton of cash and trying to time the market.

"...The stock market has experienced relatively few of these extreme changes. And they are overwhelmed by the frequent--but usually humdrum--fluctuations that take place each day within normal ranges. For example, the Standard & Poor's 500 Stock Index has risen from a level of 17 in 1950 to 1,540 at present. But deduct the returns achieved on the 40 days in which it had its highest percentage gains--only 40 out of 14,528 days!--and it would drop by some 70 percent, to 276. Or eliminate the 40 worst days; then, the S&P would be sitting at 11,235, more than seven times today's level. A good lesson, then, about "staying the course" rather than jumping in and jumping out."

On the basis of the information above alone- investors should consider moving into an index ETF instead of cash whenever not sure about market's direction...

2. It is pretty well established wisdom in the financial literature that stock returns are composed of three components- dividend growth, earnings growth and multiple expansion/contraction with the first two being the major drivers... Very frequently you would hear "talking heads" on TV talking about "this time is different" or "this a new economy that requires a new valuation approach" mantra, but the reality is quite simple- numbers don't lie. In the long run earnings will grow roughly at the rate of the GDP- that's why I believe my focus on the overall economic overview is important.

"...Note that, with the exception of the depression-ridden 1930s, the contribution of earnings growth was positive in every decade, usually running between 4 percent and 7 percent per year. Total investment returns were only once (again, the 1930s) less than 6 percent annually, and only twice more than 11 percent. But if we recognize that corporate earnings have, with remarkable consistency, grown at about the rate of the U.S. Gross Domestic Product, this relative consistency is hardly surprising.

Speculative return is, well, speculative, and has alternated from positive to negative over the decade. But over the long-run speculation hasn't produced any Black Swans either. In fact, if P/E ratios are historically low (say, below 10 times) they have been likely to rise over the subsequent decade. And if they are historically high (say, above 20 times) they have been likely to decline (though in neither case do we know when the change is coming). Nonetheless, certainty about the future never exists, nor are probabilities always borne out. But applying reasonable expectations to investment return and speculative return and then combining them has been a sensible and effective approach to projecting the total return on stocks over the decades.

The point is this: Over the very long run, it is the economics if investing--enterprise--that has determined total return; the evanescent emotions of investing--speculation--so important over the short run, have ultimately proven to be virtually meaningless. In the past century, for example, the 9.6 percent average annual return on U.S. stocks has been composed of 9.5 percentage points of investment return (an average dividend yield of 4.5 percent plus average annual earnings growth of 5 percent), and only 0.1 percent of speculative return, borne of an inevitably period-dependent increase in the price-earnings ratio from 10 times to 18 times, amortized over the century. Despite the Black Swans of market history, ownership of American business has been a winner's game. "

So once again- key points- Markets go up in the long haul! So being a 100% short like some of the funds out there is in my mind a pure suicide. "This time is different mantra" is nothing but myth- earnings are virtually guaranteed to continue growing at the rate of nominal GDP growth and if we all believe that US GDP in the foreseeable future is going to be lower than in the past, stock returns will be lower as well. Here are my expectations for the next decade: real GDP growth roughly at 2-2.5% a year, inflation at 2.5-3% and dividend of 3% with negative contribution from contracting multiples of about 0.5% a year, which means the expected stock returns of roughly 7-8%... This in turn implies that if you expect 15% return- one likely needs to be an active investor...

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