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and you know like any big rally sometimes it backs off i mean it's healthy in fact i mean i'd rather gone down a thousand points than gone to twelve thousand if you look at japan japan went from five thousand to fifteen thousand on their dao it was fairly priced at fifteen thousand on earnings and everything else then it went to forty thousand and that caused seven years of inflated real estate people overspending and basically they've been a recession for five or six years because their market went up too high i mean the market goes up too high i mean if the market goes too high you're discounting earnings seven eight ten years out everything is overpriced yeah and that doesn't help anything the market since world war ii has sold between 10 times earnings and 20 times earnings if you look at the dow jones or the s p fund if you add up all the companies and take the earnings you say there's a relationship and it follows mcdonald's earnings have been terrific the last 30 years and the stock's been direct there's a direct relationship so the earnings of the s p 500 have been between this range of 10 and 20.
we were just about to go over the 20 which is the high end of the pe range there wasn't a lot of pe of 20 is too is is it the top of how high it should ever be right it's been over there only a few times ever over 20 and that's when usually inflation's about zero in the early 60s when inflation was about zero we're a little bit over 20.
now we have a very low inflation rate so if you usually have subtracted inflation from 20 you've had the p of the market that's been a pretty good ratio when inflation was 12 percent you remember in the early 80s with eight or nine p in the market so dr lynch says all of this has been good for us well it's like i'm telling you it would not have been helpful it's like a purgatory i never thought i'd ever wish for the market to not go up dramatically but let's just let's argue the market went to 16 000 tomorrow yeah basically there's earnings behind companies okay but i'm not arguing that i know that's true and they're very crazy and stock market price ought to be dictated by earnings and earnings performance and future earnings potential that's right that's right i got that even i got that right now let's just take this for me sure uh was the decline yesterday in a sense it let off some of this overvaluation the market was even overvalued at where it was right and by letting it off right then we got back to what was reasonable yeah i would say fairly priced maybe for the larger companies they're now okay there might be some small companies we've had 3 000 companies come public the last four years that's two of business day some of those companies have gone down dramatically and that sort of a research zone that average people in the stock shop that's we can find some people know a lot about this ten thousand public companies a lot of them are very attractive no one's following them and there's lots of people following ibm but that's what you got in companies that nobody else followed right i'd like to go to see companies with unions or companies in trouble or companies that no one loves hotels that have nice beds well yeah you have to look at a lot of them you look pantyhose your white water that's the story okay you've got pure one imports my wife found that one too but but you have to look at 20 to find one it's just you know go to the mall and find the stock i mean you have to say my god this sounds like it's good then you have to do some steps you have to do an organized method people are careful when they buy a toaster careful they're careful and they buy it they do they do some research but they don't do it with stock they call it the broker they see somebody at lunch and they said man i got this hot stock and you run right out and you spend five thousand dollars small investors yeah well any more they put an option in international data whack they don't even own international data they have a 90-day plan but bill said it was good and they make a lot of money right and it's and it's like a casino yeah so it's like a casino you get the same results as if there's more paperwork but just stay with me in terms of people who are bedazzled by what's happened right if you look at yesterday and you look at today right nothing has happened in the fundamentals of economics of any company right right but their stock may have gone down well 10 yesterday and up five today one modest point though i mean every time you get you have to get a it's memories it gets very cold in the winter in some parts of the country you get a memory that winter's coming something did really happen in southeast asia i mean those are different things those are economies because of what happened in this market i think so that was the reminder saying by the way you know profits can go down i mean there's a downside but why was that the cause i mean did what's happening in southeast asia affect the earnings potential of all these companies you're talking about it did because they can't sell their products no because those economies been growing double-digit and all of a sudden now they're gonna because of bank problems because they're over financed they're under leverage i mean they're going to have they're going to have to draw on their belts those parts and then people said whoa maybe that'll become it'll have china is now the fourth largest economy in the world maybe china can go into recession this sort of woke people it was like a wake-up call saying whoa maybe there's a chance ernie's gonna go out i mean this is not a big deal for the united states when mexico went down much more important but it sort of said people was it much more important to mexico mexico much more for the united states than thailand is or the philippines their economy is very important to us they're a big consumer very important they're a neighbor a lot of people there that's a very important when that went down that effect of latin america was more important so the recession of 1990 but it sort of reminded people they'd say wait a second there is a downside we have we've had nine recessions since world war ii we'll have other ones tell me what took place overnight between yesterday at the close of market and today at the beginning mark what were the guys that you used to work with saying to each other at fidelity and what were the people you know for example ibm made a decision to buy back their stock right right and that presented some kind of push on the market and their stock went up six points well one thing you're trying to do is all these public companies out there here's the company i really like the fundamentals are terrific their earnings are doing well their competitors are doing poorly i think this company's doing terrific and all of a sudden the stock might have gone from 40 to 30 because of this decline that would say wow here's a chance to buy it so you're trying to say some companies might have been overpriced at 60 and all they did was go to 50 and say big deal so you're trying to find companies you liked anyway right now you liked them and now they've had a haircut that's what you would do you not not just like the one from overpriced to fairly priced something was fairly placed at the start of this exercise and then had a very you know a five for four sale you know if you had been managing the magellan fund this morning you would have been buying like crazy i would have been researching like crazy i've been saying which companies are the same story is there anything really happen this is a non-event for them they're still doing well even if we have a recession there's nothing to do with them and that's the kind of kinds i'm trying to buy but let's say if a company just think of this as being you say to yourself i think this guy is going to earn something in the future if it's already discounting that if it's selling at a huge multiple you say it's already it has to work and then it's only going to stay even so you have to say yourself if i'm right how much am i going to make if i'm wrong how much i'm going to lose that's the risk reward ratio in stock shop we talk about if i'm right i hope i'm going to double trip my money if i'm wrong may i lose 30 40 percent that's a favorable ratio you say if i'm right the stock's not going to go up it's already discounting terrific things if discounting terrific things are already in the stock i don't know okay so this morning you get up and you go in and you look at at those companies that fit that you know something about you have to have an itch let's say cement industry goes from crummy to semi-crummy to fairly good the stocks are going north you're going to make money that's the industry you know when if you know the publishing industry you're you some people have you have an edge you work i mean what if you last 30 years you worked the restaurant here you would have seen taco bell you haven't seen some barrels you've seen pizza hut you've seen chili's you've seen these companies doing very well you should have bought those instead of trying to buy biotechnology stuff you know nothing about i mean i know nothing about local area networking a lot of people are buying this cisco they're buying the equipment saying we're going to root together all these peripherals and put together the servers but but that's not a bad buy because they own a huge percentage of their market you know what that was they're saying only a few people had that went to my god if it works for us other people try it then colleges will try it high schools will try it they'll go overseas they knew they were early in the ball game and they should have been buying that company instead of out buying something they don't know anything about some oil drilling company i mean people have this tendency to always buy something they don't all you need is a few charlie all you need is a few good stocks this is your song this has been your song for a long time but only by what you know but people wake up in the morning and say there's 5 000 companies out there which one should i buy the average person ought to be able to follow four or five companies there would be a lecture on
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