Spiders's Bear's Rebuttal
by Paul Larson ([email protected])

While I enjoyed the word-smithing Jeff used in his initial argument, nothing could be further from the truth as far as who his opponent is. Instead of wearing a dark suit and tie while writing this, I sit in standard-issue Foolish attire -- sandals, T-shirt, and "FOOL" baseball cap worn on my head backwards. And instead of swinging blades, I come at my friend and foe with something more powerful -- numbers.

Let me restate the most important metric for being cautious about the market as whole at this time. As a multiple to corporate earnings, the S&P 500 is at historically high levels. It's funny, but in the few days between writing my initial argument and this rebuttal the trailing P/E ratio fell to below 29x earnings mostly due to the market falling. While lower than a week ago, the number is still far, far above the 15x average historical multiple.

I find it funny that I, as the bear, tagged the annual performance of the S&P as a higher number than Jeff did. I guess this is a gentlemanly duel, and neither of us are trying to boost our arguments by exaggerating the empirical data. The difference between the 11% Jeff cited and the 12-13% I threw down as the historical annual performance can be due to how far back you look at the data. The data I was using went back 25 years, Jeff's obviously went back further. In any case, we both agree that the long-term performance of stocks is the best of any asset class.

But what if an investor does not have ten, twenty, or thirty years with which to invest in the market? The assumption that all investors here have decades until their money is needed for another purpose is quite a naive one. Surely, Jeff and I as twenty-somethings can invest our IRA money in Spiders and have plenty of time with which to wait out any turbulence. But let's be a bit more empathetic here and realize that not everyone is as far away from retirement as we are. And with valuations what they are, the less time I had the more worried I would be.

Furthermore, Spiders may beat at least 80% of all mutual funds in any given time period, but what if stocks as a whole underperform other asset classes? I'm talking CDs, bonds, real estate, whatever. As someone wise once told me, you can be the best dog in the kennel, but still be a dog. And if Wall Street's performance starts smelling a little and barking a lot, relative performance will be of little comfort.

I'll let Jeff shoot at me with his lucky "11" bullet, I just hope he's prepared for my particular silver bullet coming at him -- the S&P's historical P/E multiple of 15x earnings.

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