Anyone gnashing their teeth because they never got back into what has become a roaring stock market may still have a chance. While the market may have reached all-time highs, I'm like, "Wait. There's more!"
The basis for my chronic optimism this time around starts with the enormous profitability of America's largest companies. Fortune magazine reports that its list of the top 500 largest firms earned $820 billion in 2012, near the all-time record set in 2011. Fifty-three billion dollars of that number was in technology, which bodes well for the Bay Area.
Meanwhile, profits as a percent of gross sales are at 6.8 percent. That's about 24 percent higher than long-term averages. Fundamentally, sales have steadily increased, and companies have managed the flow of new business without hiring more workers. The expectation is that rising demand will pressure companies to increase hiring, which will reduce their percent of profit, but a growing economy and rising sales will increase the dollar amount of earnings.
Meanwhile, the stock market's performance reflects the improving economy and tends to be a forward indicator in the minds of most lay people (those of us without economics degrees). In truth, a stock market that mirrors the economy can be just coincidental. In some cases, the market can be still rising as the economy slides into the abyss.
While the economic soothsayers at the Trends Research Institute suggest that the economy will continue to increase in strength through the balance of the year, its matrix of forward indicators is telling us that we can expect an economic slowdown in 2014. The strong housing market and other factors like automobile sales postponed what originally was predicted to be a slow down beginning in late 2013.
After a short economic breather in 2014, the period from 2015 through the end of the decade should reflect a worldwide economic boom of historic proportions -- fueled in part by what will continue to be low interest rates.
So what about us? What investment allocation makes sense in the light of these possible developments? Carol Loomis, Buffett's biographer, is interviewed in the latest AAII Journal (published by the American Association of Individual Investors). She quotes Buffett, who suggests that people who have missed this market rise should consider getting into the market on a piece-meal basis -- by feeding money back into the market periodically rather than jumping in all at once.
This avoids a disappointment that would have transpired for someone who had decided to plunge back into the market at the beginning, say, of 2008.
If, in fact, the market has over-reached what our newly strengthened economy would have justified, there will be a correction just around the corner. Dollar-cost averaging is the term applied to systematic piece-meal investing that helps people avoid buying at the top and increases the chance of purchasing shares during future dips in market values.
Buffett goes on to point out that amateur investors will always do better with index funds -- funds that charge next to nothing and that buy broad cross sections of the market. I should point out that it is possible to invest in Buffett's own Berkshire Hathaway through their "B" shares that are priced today at $117 per share. The famous "A" shares sell for $170,000 each, which is out of the question for many.
But it doesn't matter which share class anyone owns. Since September 2011, both shares have gained 69 percent. It's your choice. You can do what he says (index funds) or do what he does (invest in his company).
Finally, anyone who wishes they had more money in the stock market today needs to ask themselves why they won't feel the same way 10 or 20 years later if they don't act now. Remember that anyone well into their retirement years will need assets that will grow in value to offset inflation. The market has earned an average of 10 percent per year during most rolling 10-year periods.
What difference does it make if you take the plunge and have to endure a few temporary losses. Anyone sitting with all or too much money in cash today should consider just biting the bullet and taking Buffett's advice. And by the way, he too is optimistic about the future of the economy as he says in his famous annual letter.
Stephen J. Butler is CEO of Pension Dynamics. Contact him at 925-956-0505 or email@example.com.