“The most rewarding things you do in life are often the ones that look like they cannot be done.”

“I’ve always made a total effort, even when the odds seemed entirely against me.

I never quit trying; I never felt that I didn’t have a chance to win.”

— Arnold Palmer

Arnold Palmer!  Well done our wonderful friend, well done.  And welcome home!


Some years ago, Susan and I were watching Arnie’s final Masters.  She gasped, “Oh my God, what was that?”  She looked at me and asked, “Is that really his swing?”  (If you’ve never seen his swing, it’s fair to say “unorthodox” comes to mind.)

His style was not subtle. His father, a professional greenskeeper at Latrobe who had set him up with a cut-down three-iron when he was four, told him to hit the ball hard, and he obeyed. Even his putts, delivered pigeon-toed and slightly knock-kneed, packed a punch. To play any other way, he said, would be to deny his feelings.

“Go for broke” was his motto, and his speciality was the “Palmer charge,” where he would roar in from behind to clinch a title: most famously at the 1960 Open again, with seven birdies in the final round.

It seemed risky, and often was. Double-bogeys might be followed directly by eagles, and vice versa.  It all made for great television as elation and dejection chased across his handsome face.  (Between holes, in his prime in the early 1960s, a cigarette added to the glamour.)  But the risk seemed less to him.

– First, he found golf pure joy, despite the exasperation; as a boy he had even played in deep snow, towards cups frozen solid on iced-over greens. Risk added sweetness.

– Second, though he didn’t relish booming shots into trees and sandtraps, he found the getting-out fun.

– And third, he never tried a shot he couldn’t make. “Powerhouse Palmer” always believed he could pull it off. And he generally did.

His heart was simple; a man for steak, beer and Westerns, a conservative and unashamed provincial who spent most of his time in Latrobe, looking out at the woods where he had practised escapes to an audience of trees. His champions’ medals were set in an old walnut table in the games room—with a few holes left ready to take the ones he felt sure he could win in future.

– Excerpts from The Economist (I wish I could write that well.)

I loved his unassuming and humble way.  Arnie’s Army…then, now and forever – count me in.

“He never tried a shot he couldn’t make.”

I feel that $15 trillion in central bank liquidity has driven the ball way left and nearly out of bounds.  Is there a recovery shot to be played?  Can Yellen, Kuroda and/or Draghi get the ball back in the fairway?  The game is being played in a debt-loaded and highly leveraged storm.  I wish Arnie was standing over the ball.

Last week, I shared my views on valuations and probable forward returns.  Today, let’s take a quick look at two charts that I found that may be helpful in explaining to your clients the returns we might expect over the coming 10 years.  You’ll also see the same data presented that tells us we have less of an idea as to what returns might be over the coming three years.  I think this information may help us decide the type of shot we need to play.

What do historical valuations and returns look like statistically?  Ned Davis Research (NDR) analyzed monthly 10-year earnings data going back more than 100 years.  They looked at each month-end earnings data point and calculated the actual subsequent 10-year annualized return.

For example, what was the earnings data at the month ending January 1976?  Then, what was the annualized return over following 10 years ending December 1985?  What was the earnings data in February 1976 and the annualized return through January 1986?  Every month, 10 years later, plot return, step forward a month, plot return, etc.

NDR then grouped the returns into five quintiles.  Cheapest to most expensive.  Below is what the 10-year data looks like.  The dark line in the middle of each box is the median 10-year annualized return.  That’s a lot of data and the outcome is telling.  The green line shows the single best 10-year return in each quintile and the red line the single worst.  (For each quintile, the green line represents the best outcome in more than 1,600 data points.  So think about that when you’re placing your bet.  The red line is the single worst 10-year outcome by quintile.)

The yellow highlighted box, “Most Expensive” quintile, is where we find ourselves today.  The black line in that box tells us odds favor a 3% annualized return outcome over the coming 10 years (before inflation).  Statistically, that may be the most probable return outcome, but you could get 9% (doubt it) and you could get -6% (doubt that also).  Remember the returns are annualized returns, so -6% per year for 10 years is a loss of more than 50% on top of 10 years of lost return opportunity.


Source: NDR

As Warren Buffett said, “We in the Buffett household like hamburgers, and when the prices go down we sing the Hallelujah chorus [we get much more for our money], when they go up, we weep.”  He doesn’t understand why investors don’t think about the markets in the same way.  The 10-year data is a pretty good proof statement.

The easy part is measuring market valuations.  The problem is they may stay elevated for extended periods of time.  What about the next three years?

The next chart looks at the data the same historical valuation data but then plots and quintiles the subsequent returns over three years.  What this is telling us is that valuations are not as good a predictor of three-year returns as they are of 10-year returns.


Source: NDR

The median returns for quintiles 2, 3, 4 and 5 are fairly bunched together in the 4% to 8% range (dark line in the center of the shaded boxes), but there still exists a much tougher shot to be played when we find your ball sitting in quintile five.  The clear winner is quintile one, the “Cheapest.”

You might be wondering about five-year data.  The median annualized return drops to 0% for the quintile we find ourselves in today (“Most Expensive”).  Keep in mind that GMO’s most recent seven-year return forecast is calling for a -3.2% annualized real return for large cap equities (real means nominal return less inflation).  Show this to your clients and before you do, know that, in general, the average investor is expecting 10%.


Investors are looking to score a 10% return over the coming years on equities.  The data says 0% over five years, and maybe 3-4% annualized over 10 (before inflation).  The hamburgers are expensive.

What is crystal clear from the data is that valuations matter and are good

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