Editor’s Note: With year-end stock market averages headed toward pre-Lehman collapse levels, Business Times Editor Henry Dubroff visited via e-mail with Paul Orfalea and Lance Helfert of West Coast Asset Management to get a longer-term view. Like the Business Times, West Coast Asset Management is celebrating 10 years in business in 2010. We will continue this informal series of investment Q&As in the new year.
Question: OK, so we lost one decade in the S&P 500. Do we have to lose another 10 years before we encounter another decade like the ’50s, ’60s or ’90s? Why or why not?
Answer: Not necessarily. The past decade included two very severe stock market corrections that resulted from the bursting of the tech and housing bubbles. During both of those periods of euphoria, asset values rose to levels that were not reasonably justified by their ability to generate cash flows. In the case of technology stocks, this was visible in the extraordinarily high price to earnings ratios on NASDAQ stocks. When you begin a decade with stretched valuations, everything has to go perfectly for the market to continue to rise. Clearly, that did not happen and the NASDAQ is still far below its all-time high.