Vol 2, Issue 4. Quarter 4 – 2025.

One of my go-to recommendations for young workers beginning to think about investing is a great little book entitled, “Millionaire Teacher” by Andrew Hallam. (See Hallam, 2017.) I have given away 4 or 5 copies (No, I am not going to send you one.) because it covers all of the basics, including spending habits, the power of compounding, and the value (or lack thereof) of market forecasting. Andrew makes clever use of a simple analogy that I often come back to and I will paraphrase it here.

Andrew tells the story of a dog named Sue, that was about as active and manic as any dog you can think of.  Andrew would take the dog on long walks in the countryside to burn off some of that excess energy. He describes the behavior of the dog during the walk. The dog would sprint ahead in excitement from time to time. She would follow a squirrel to the right, or a rabbit to the left. The dog would sometimes lag behind as she needed to since dogs don’t use toilets inside very well, and so on.  As a highly energetic pup, the sprints ahead could be quite sudden and to an outside observer might look like the beginning of a race. However, there was one major catch to this scene. Andrew kept the dog on a long retractable leash. As he explains what happens next in his own words:

If I ran from the lake to the barn with Sue on a leash, and if it took me 10 minutes to get there, then any observer would realize it would take the dog 10 minutes to get there as well. True the dog could bolt ahead or lag behind while sticking its nose in a gift left behind by another canine. But ultimately, it can’t cover the distance much slower or much faster than I do – because of the leash.

Right now you are probably asking yourself that age old question – “What the hell is he talking about?” Let me draw the answer from another favorite of mine by the name of Nick Murray. His monthly newsletter is a bit pricey, but I gladly pay it because it serves to keep me from doing stupid things. Nick likes to periodically look at how the S&P 500 has performed from his birth to the present day for illustrative purposes. Let’s do this looking from my year of birth (1963) to 2022. This data is readily available here: (S&P Data 1960-2022)  When I consider this simple exercise here is what I see. In 1963 earnings of the S&P 500 were roughly $3.67. In 2022, they were $219.49. Over that same period, the price of the index rose from $75.02 in 1963 to $3839.5 in 2022. Did you catch that? Probably not, so let me make it plain. The earnings rose by a factor of 219.49/3.67 = 53.15, while the price rose by a factor of 3839.5/75.02 = 51.18.

That’s the leash. As earnings grow, price grows. Yes, these can get out of sync for a while, and a while can easily be a decade. But eventually, they will come back in line. The dog can sprint ahead for a while or fall behind for just as long. This will be shown by a P/E ratio that is significantly above or below the long-term average of about 17. For example, from 1975 to 1984, the P/E ratio stayed around 10. On the other hand, from 2013 to 2022 it was roughly 20. As of today, it is roughly 23 (Based on projected earnings over the next 12 months.) That’s the dog sprinting ahead of its master or trailing behind by a notable bit. But we all know that eventually, it will come back to its long-term average.

Rest assured, it will come back. The leash never completely breaks because a share of stock is nothing more than a claim on future earnings. Before you panic too much about the current “over-valuation,” let’s add in one additional point. Your payment for holding a share of stock is not simply the price appreciation. It is also the dividend payments made along the way.  The average dividend yield over that same period was roughly 2.8%. Combining this with the growth in earnings, we have seen dividend payments increase over this range by a factor of roughly 30. As the earnings grew, the price grew, but for a great many retirees, this was never a major issue because when the dog lagged behind, the dividend growth was enough to tie you over until she caught up. Just for the sake of perspective, let me also point out that prices, as measured by the CPI index have increased over the same span of time by a factor of 10. If dividends grow by a factor of 30 while prices grow by a factor of 10, you can keep your bonds. They are of no interest to me.

What can we deduce from all of this?

1. Stock markets are volatile and can be TEMPORARILY “overpriced” or “underpriced” in comparison to fundamental values such as earnings.
2. The total return (Price change plus dividends) easily exceeds inflation, by a lot if the planning horizon is long enough, and
3. The long-term prospects for the price (and dividends) will be based on earnings, which have grown much faster than inflation over the past 60 years.

Let me give you one last point for the sake of perspective. The growth in price and dividends is a bit misleading in the following sense. For most investors, the dividends are reinvested up until the point of retirement. If we consider the $75.02 price in 1963, and let that grow with the market and reinvested the dividends paid out each year, we would end up with a final value of $9,978 in 2022, which is a lot more than the S&P 500 level of 3839. In other words, the average increase in the Index level greatly understates the total payoff, because dividends are real money. 

The bottom line is this. Short term forecasts offer nothing of value in comparison to these simple facts.