Jason Stipp: We just got them at 10 years, where the equity market basically did zero for investor. Very little in a broad sense, so I think that investors are looking at that, and they're wondering is this the place to be for the long term because 10 years seems like a long time horizon. So when you're thinking about equities, how do you think about time horizon given that you can have these long stretches?
Ron Muhlenkamp: We think through a business cycle, and that's gotten a little longer than it used to be. For the 10 years, we've done 4% a year for 10 years. Now that's not great, but we said in '98 that we thought that going forward the returns should be on the order of 7 to 8, down from what they had been earlier.
In the past any time stocks had done that poorly versus bonds or almost anything else, it was a great buying opportunity. We're seeing great – today inflation is nominal, treasuries are what 3.5%, corporate are 4 to 5, we're finding very good companies with free cash flow of 8% to 10%. So we're seeing better values than we've seen in a long time. We own things like Cisco and Hewlett-Packard and Oracle, which I've never owned because they were never at prices I could justify. So we're seeing the Cadillacs are selling cheaper than the Chevys these days. There Cadillacs are also the kinds of things that may be owned by European banks, and so they really haven't done much yet.
But when we look at it we're finding great companies selling at cheap prices, and historically that's always – that's what we've made a career finding good companies at cheap prices kind of no matter where they were. In 2000, which is of course the base for this 10 year period, you found a lot of those companies that tended to be small – anything but tech, sold cheaply, so – and what's interesting of course is guys like me, who looked pretty good in the 2001-2003 period because we didn't play tech, had great – that very bit of whenever you find good companies selling cheaply go buy them bagged us in '08. In '08, good companies/bad companies, cheap/expensive didn't matter.
The forced selling going on. So 30 years ago, we'd see things periodically the paper would run a thing says for the last 10 years the ranking of returns was Chinese ceramics, and then it was gold, and then it was this, and then it was real estate and stocks, and you look at those and the implication was, gee, these things have done poorly – or some things on top have well, some things on the bottom have done poorly. I said, gee, I wonder what that ranking would have been 10 years earlier. What's amazing how often those things flip flop over a 10 year period, which is why to us long-term is minimal of three years. I think somewhere between 5 and 10 becomes a period, but today see what's fascinating and I just came out of a short presentation by Rob Arnott, and he pointed out that the zero return is if you're cap weighted.
And also the fact that today if treasuries are 3.5% people expect that return going forward. With stock price – the stocks, they always extrapolate the returns that they have seen. They look at the past 10 years and extrapolate it going forward, because they don't quite know how to value companies. So instead of saying, it looks like they are priced to give us an 8% return, they're saying, gee, it did zero, and can we extrapolate that. With bonds when the returns have been good it means the yields are low and they extrapolate the yield going forward. They're forward looking, but stocks are backward looking.
Well, if you do a forward looking value on stocks, it looks like they are priced to do 7% or 8%, which if inflation is 1% or 2%, and interest rates are 3% to 5%, 5% probably are, let's say, single or double A corporate, 7% or 8% is worth being in the game. So that's what we see going forward. Our reservations are a little bit that they may be changing the rules in a macro level in terms of tax rules, in terms of incentives and all that kind of stuff. In the 1970s, we had a top tax rate of 70%, it didn't pay to hire people, and in my opinion that's why we had high unemployment in the '70s, and we're at the crux of either repeating that or not, so my reservations are on that side.