In a recent article in the Wall Street Journal (WSJ) by Jason Zweig, titled *The Simple, Best Way To Predict The Market*, we see some very fundamental concepts being preached.

Citing a *Journal of Portfolio Management* article written by John C. Bogle, three factors are mentioned that account for all stock returns dating back to 1915, plus the future. What are these three factors: (1) the current dividend yield of the stock, (2) earnings growth of the company, and a speculative premium (i.e., herd mentality factor, measured by the P/E ratio) for the company (perhaps industry driven).

What does this look like then as an equation:

r_{Future} = D_{Future, Annualized Future}/P_{0} + g_{Earnings, Annualized Future} + g_{(P/E), Annualized Future}

The only new concept here is to add the P/E speculative premium to the DDM model. Note that this model is based on some major assumptions, which may take a crystal ball to foresee, such as the future growth of the company’s earnings, and future growth of the company’s P/E ratio. This seemingly easy equation looks simpler than it is.

This same article quotes the best predictor of bonds to be their current Yield to Maturity (YTM). To state that YTM is the best predictor of bonds could not be truer, but this assumes that all bonds are held to maturity, otherwise one may want to account for duration and convexity, because the price/interest rate risk of the bond could be very high, resulting in large losses if the bond is sold before it reaches maturity.