My Favorite Post of the Year (So Far)

Those who talk, don’t know.Ā  And those who know . . . don’t talk.

–Lao Tzu

Better to keep your mouth shut, and let people think you’re an idiot, then open it and remove all doubt.

–Mark Twain

What’s going to happen in 2012?

Hell if I know — or am going to say! šŸ™‚

In lieu of serving up 2012 predictions, enjoy Barry Ritholtz’sĀ similar sentiments on the subject, my favorite post of the year (so far).

Stocks’ PE Multiple to (Further) Contract?

In fact, I do have one prediction for 2012 — actually, more of an observation.

Much has been made of the relatively low PE (price earnings) ratio prevailing in today’s stock market.

It’s also the case that U.S. stocks ended 2011 virtually unchanged, notwithstanding near-record volatility.

Ask yourself this:Ā  which investor experienced more stress and worry in 2011, the one with all their money in the market — or the one with their money in their mattress?

Risk Without Return?

No, I’m not suggesting that investors put their money in their mattresses (or gold, for that matter).

I’m just pointing out that — at least historically —Ā the converse of paying up for the chance of outsized returns was discounting for perceived (and actual) risk.

If 2012 delivers (even) more of the volatility we witnessed in 2011, look for investors to demandĀ a biggerĀ discount for entrusting their hard-earned savings to the vagaries of theĀ stock market.

Which, of course, means that stocks’ price earnings multiple — now a historically conservative 11Ā  — could very well be under further pressure in 2012.

CeterisĀ paribus —Ā Latin for “everything else held equal” (a favorite of economists, by the way) — that would result in lower markets the coming year.

P.S.:Ā  Company managements who want to override such headwinds and enticeĀ investors to buy (hold?) their shares have two options:Ā  1) hike dividends; and 2) use their free cash flow to buy back shares.

Look for (more) of both of thoseĀ in 2012.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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