Geoff asked the following question:

What annual total return do you expect from the S&P 500 over the next ten years?

Here are the results:

The poll closed on March 25, 2007.  It received 137 votes, which isn’t bad given that we only ran it on a few relatively low traffic websites for one week. The results of this poll might be bias by an over-weighting of value investors since it ran on at least 3 prominent value investing websites.  However, Geoff did try to broaden the scope of this poll by asking other investment blogs to also host this poll.

The median expected long term return for the S&P 500 is clearly between 7.5 and 10 percent. I actually also selected the 7.5% - 10.0% category when I voted. I was surprised to see that 3.6% of the voters decided that average returns would be greater than 20%.  Those 5 voters must be quite bullish.  I was equally surprised to see that only 2 people voted for negative average annual returns over the next ten years.  I thought there were more bearish investors out there.

How do these expectations match up with past S&P 500 returns?  The total return of the S&P 500 was 15.79% last year.  The average annual total return of the S&P 500 over the past ten years was 8.42%. It is therefore no surprise that most people polled expected average returns to be from 7.5% to 10.0% over the next ten years. What do you think the future holds for the S&P 500?

I currently own a REIT, Hospitality Properties Trust (HPT), that I purchased before I started this blog.  HPT was going to be announcing their earnings today, so I was thinking a lot about REITs when I ran across the Experiments in Finance article. As a value investor, something in that article caught my attention as a potential concern, so I decided to leave a comment.  Here’s what I wrote:

Hi Ricemut,

I’m glad to hear that you are considering adding some REITs to your portfolio. I added HPT to my portfolio a few months after 9/11 (yielding over 11 percent at the time) and I have loved it since.

However, REITs are getting pretty pricey now that everyone else is discovering them. I highly recommend that you read Ralph Block’s post at the Motley Fool at http://www.fool.com/community/pod/2006/061017.htm. Ralph wrote the book on REIT investing and is a real expert on the subject.

I would avoid buying a REIT index at this time and instead focus on identifying opportunities in the REIT sector that provide a margin of safety. International REITs may be the way to go right now if you really want to add REITs to portfolio in the near future. In addition, buying individual REITs helps reduce your costs buy avoiding the slightly higher fees associated with REIT index funds. I would also focus on identifying REITs that control important, hard to substitute pieces of property. Even REITs can have wide moats.

After I left this comment, I realized I really need to research REITs again soon and scope out the market for stocks with international real estate investments. After a quick search, the NAREIT International Forum looks like a good place to start learning about international opportunities.  NAREIT also has an interactive REITs Around the World guide. If you have been researching international REITs or other international real estate stocks, please share some of your thoughts in the comments section below.

What does this mean?  Nothing really, people just like to anchor to round numbers.  As a value investor, it just means that stocks are more expensive to buy.  It also makes finding wide moat stocks selling at a margin of safety all that much harder to find.

As I have mentioned previously, Ben Stein and Phil DeMuth’s website provides a nice set of graphs indicating the market’s valuation relative to 15-year moving averages. A new source of overall market valuation information is Morningstar’s Market Valuation Graph. The graph shows the ratio of price to Morningstar’s estimate of fair value for the median stock in Morningstar’s coverage universe of over 1,500 stocks.

Given the latest dip in the market, it appears the market is fairly close to fair value at this point. Any further corrections could lead to buying opportunities.

Three out of seven value indicators for the S&P 500 index indicated the market was undervalued at the end of September. This is relatively unchanged since we last looked in August.

The market seems to be in a holding pattern. My guess is that we will remain in this pattern at least until after the uncertainty of the presidential election is past us.

Three out of seven value indicators for the S&P 500 index indicated the market was undervalued at the end of July. Only two of the 15-year moving average indicators were showing that the market was cheap last month. With the recent declines in the market, it might be time to start looking for some high quality stocks that might begin to show up on the bargain rack.