A Letter To Investors
Saddle Peak is writing to investors to put the market’s valuation in a historical perspective. The Market is meaningfully below its intrinsic value and represents an outstanding point to compound capital. The accompanying spreadsheet shows the operating and reported earnings along with the market valuation for the S&P 500. The average operating earnings Price to Earnings ratio is 19.25. If we then multiple by the expected market operating earnings of $62 (Goldman Sachs and others number for 2009) we get a market valuation of 1190.
With the market selling at 71 cents on the dollar, Saddle Peak would recommend long term investors have a maximum weighting in the market. Such opportunities are seldom found. Likewise, a case can be made that normalized earnings are meaningfully above $62 and that the market is actually trading below 60 cents on the dollar. Please note given long term government interest rates the average multiple is also a conservative method of valuing the market.
