“Truth is the only safe ground to stand on.” – Elizabeth Cady Stanton

SH and her husband are looking toward a stronger stock market because they’ve seen their retirement funds decimated. What they have left is still enough to afford them a “nice” lifestyle, as SH put it. But how — I wondered — would they be if their nest egg were cut in half again?

“Don’t start with that,” she said. Like my mother-in-law (see Message #869), SH doesn’t want to hear bad news. And I can’t blame her for feeling that way. But the facts speak for themselves. The S&P 500 has a P/E ratio of 30 times reported earnings. If you figure core earnings — earnings without all the phony add-ons — the ratio is closer to 40.

“How much would you pay for a lemonade stand that earned $10,000 a year?” I asked SH.

“$50,000 at most,” she said.

“So,” I said, “when it comes to buying companies, you think that paying five times a company’s earnings is a reasonable deal.”

“I’ve never thought about it that way,” she acknowledged. “But, yes.”

And do you know what you are paying for the stocks you own now?”

She didn’t. And so I told her. She was nonplussed. “Did you say 80 times earnings for Amazon?”

“Yes.” She gulped.

SH is a very bright, very well-educated woman. In most matters of judgment, I’d favor her instinct over mine. When it comes to investing, however, she seems completely lost. It’s as if she wants to know what she’s doing — or she feels that she should care — but her natural interest in stocks and bonds is so low that she seems ready to do what everyone else is doing. She wouldn’t do so with her daughter’s health but is willing to do so with her life’s savings.

“We are in the fourth year of a bear market,” Bill Bonner recently pointed out in the Daily Reckoning. “Stocks are lower today than they were when the year began. Even with the war behind us … Mr. Market seems to see little reason to change course.”

If the market goes back to its 100-year average (in terms of P/E ratios), it will drop to about half of what it is today. If that happens — and I hope it doesn’t — SH and her family will be physically healthy (I hope) but financially ailing.

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