David Poppe: How To Earn Good Returns When You Get Market Sentiment Wrong

In his recent presentation at the Ben Graham VIII Annual Conference, David Poppe explains how you can still generate good returns over a longer time-frame, even if you get market sentiment wrong. Here’s an excerpt from the presentation:

On the other hand a person with a five-year time horizon has a different driver of success, which is earnings growth.

If that person finds a business that can grow earnings by 10% annually over five years and the P/E over the holding period falls from 16 times to 15 times, the five year return on investment is a little under 9%, more or less in line with the earnings growth.

If the P/E falls from 16 times to 14 times you still earn seven and a half percent annually. And that incidentally you would still own a nice asset trading for a pretty attractive price after five years.

The point is you could get market sentiment wrong and still earn a reasonable return when you get earnings right.

So it’s simplistic but true that over short periods of time it’s striking how little stock-market performance can mirror earnings progress. But over long periods of time stock performance and earnings progress are usually the same  thing.

We extricate ourselves from the problem of the manic depressive Mr Market and we start playing a different game where we think in terms of long-term earnings growth.

You can watch the entire presentation here: