Ned Davis Research: Why Big Profits Are Bad for Stocks

By Brian Hunt, Advisory Panelist, Investment U
Thursday, April 8, 2004: Issue #327

Surging profits are bad for the stock market? I couldn’t believe it but it’s true.

Buying stocks when earnings growth is slowing down sounds like a bad idea but it’s actually the best time to jump in the market according to Tim Hayes at Ned Davis Research (NDR).

You’ve probably never heard of Tim Hayes or Ned Davis Research (although we have mentioned NDR in this space before). Your financial planner probably doesn’t know them. And – chances are – 99% of the “experts” putting out stock market advice don’t know them.

That’s too bad, because the folks at Ned Davis Research do some of the best market analysis in the world and NDR’s brilliant strategist Tim Hayes has written a book called The Research Driven Investor that contains some surprising advice on investing. It’s advice that could save you a ton of money – by doing exactly the opposite of what the so-called “experts” are recommending.

Tim Hayes: CNBC’s Talking Heads Are Full of It

The experts on TV telling you to buy into the market based on big earnings growth are wrong. They haven’t done their homework. They’re just repeating what their bosses tell them – that it’s always time to buy stocks.

In The Research Driven Investor, Tim Hayes explains:

“To an armchair investor tuned into CNBC or the other sources of financial news that discuss favorable earnings news in bullish terms and unfavorable news in bearish terms, it may seem counterintuitive or illogical that rapid earnings growth is consistent with weak market performance

And it may seem equally odd that the historical record shows weak earnings growth consistent with strong market performance.”

Tim Hayes has done the homework, he’s taken time to run the numbers and it shocked me when I read his conclusion.

Hayes crunched the numbers all the way back to 1932 – and found when earnings growth (as measured by S&P 500 earnings) is strong, you make a measly 1% per year in the stock market.

During periods of negative S&P 500 earnings growth, stocks do great – earning about 15% a year.

The pattern between earnings and stock market performance seems crazy But remember: The stock market looks into the future, not the past. It’s a cliché, but the stock market is the ultimate discounting mechanism the good news of the future is already priced in.

By the time companies are reporting earnings growth of 20%, the market is already looking to the future – when earnings might slow down or decline.

Where Buffett’s Putting $36 Billion Now (Hint: Not in Stocks)

When it can’t get any worse, when the public hates stocks – that’s when buying stocks makes you big money.

Legendary investors like Warren Buffett and Sir John Templeton (yes, Templeton is so good he’s been knighted) have made fortunes by committing a lot of money to stocks when the public can’t stand the thought of buying them.

But Warren and Sir John are negative on stocks now everyone else loves them, and earnings growth, at a projected 10% for 2004, is high.

Warren Buffett has about $36 billion in cash he’s not putting into stocks – because the talking heads on CNBC are bragging about earnings And the public is pouring money into the market.

Now is a good time to remember Tim Hayes’ research and it’s always good to know what Warren Buffett is doing.

They’re both saying it’s a good time to hold lots of cash instead of lots of stocks maybe you should do the same.

Good investing,

Brian Hunt

• Warren Buffett’s Berkshire Buying Opportunities
• Warren Buffett’s Investment Strategy: Time to Buy the Ultimate No-Brainer
• Warren Buffett Investing: Welcome to the Oracle of Omaha’s “Long, Deep Recession”

Sign Up now and receive this Free report: Collect 122% in the Next 12 Months From Gold's Surge.

Could you use an extra $600 - or more - each month?

If so, you’ll want to check out the details of an overlooked government-backed program in THIS REPORT.

It shows you why the government is set to distribute $457 million to a small group of recipients, how to get your name on the list and the exact deadline you must meet in order to qualify.

Comments

Check out our selection of daily Investment Research:

We Respect Your Privacy

---

What is Investment U?

Since 1999, Investment U has provided impartial, no-nonsense investment advice on how to build long-lasting wealth.

---

Recent Articles

Platinum Services

The Oxford Club is an exclusive, global network of investors, who collectively participate in the pursuit of prosperity and wealth. The Club is renowned for its market-beating, tried-and-true investment principles.

The White Cap Report exclusively identifies companies, White Caps, which - by being among the earliest to gain traction - have secured dominant positions within untapped, billion-dollar markets.

With an elite trading team at the helm, the Xcelerated Profits Report shows any investor how to "invest like a pro," using high-level, yet easy-to-execute strategies that "xcelerate" profits while minimizing risk.

---