Growing Rich - Arabictrader.com

KIRK KAZANJIAN
SHATTERING OLD MYTHS
A changing world also caused Robert Stovall to throw out the
theory that originally got him a guest spot on Wall $treet Week With
Louis Rukeyser back in 1976. At the time, he wrote a column for
Forbes and popularized what he termed the “General Motors Bellwether”
theory. It stated that the price action of GM stock was a leading
foreshadower of coming trends for the entire market. He no longer
believes that to be true. “I am continually altering the way I think,”
Stovall says. “I have to. I don’t even like to talk about the old times
or people I used to deal with because that’s boring to the younger
generation and usually not too relevant either.”
There are many myths about the market that have been around for
decades. Stovall admittedly once bought into a number of them. Now
he claims they are pretty much useless. “One of my favorite mantras
was that you should always avoid stocks when the yield of the S&P
500 index falls below 3 percent,” he offers. “That wasn’t a bad rule
of thumb when companies were paying out 50 percent of their income
in the form of dividends. Unfortunately, you’re lucky now if they pass
out 35 percent. With today’s tax-law changes and the various incentives
available to corporations, many prefer to spend earned cash on
new capital investment or for buying back their own stock. In most
cases, companies can find more shareholder-pleasing uses for this
money than paying it out to investors. Shareholders also seem to like
that, since they pay less in taxes for capital gains than they do for
dividend income.”
Another myth that has been shattered by time is, “Don’t buy a stock
if its price/earnings ratio is greater than its growth rate.” That may
have worked when bull markets were dominated by fluctuating economic
cycles, but not anymore. “It used to be that companies would
do well for a year or two and then burn out with the changing cycles,
which used to last about four years apiece. Their fortunes were also
based mainly on domestic events,” Stovall says. “When that was the
case, this rule made sense. Today, however, the bull market is fueled
by great multinational growth companies with dominant brand names.
These globally diverse producers can enjoy long-lived boom cycles,
especially with the enormous markets now open to them overseas.
The stocks of many of these companies sell at up to twice their growth
rates. However, I would argue they are worth it, since there is convin-
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