S&P 500 P/E Ratio, Earnings and Valuation Analysis
IS THE S&P 500 INDEX NOW A GOOD INVESTMENT?
What Return Can You Reasonably Expect From Investing in the S&P 500 Index?
This article is your One-Stop Page to Understand The S&P 500 Earnings and Dividend Yield and how these relate to The Fair Value of The S&P 500 Index.
This short article (which draws on Warren Buffett’s teachings1) provides:
- Calculations of the current fair value of the S&P 500 index based on several scenarios
- The Expected next 10-year average Return per Year from the S&P 500 based on earnings growth and terminal P/E Assumptions.
- The S&P 500 index P/E ratio (based on trailing and forward earnings)
- Earnings and earnings yield on the S&P 500 index (GAAP, operating and forward earnings)
- Dividend Yield on the S&P 500 index
- A link to the source for all the S&P 500 data on the the Standard and Poors web site
- The Exchange Traded Fund (ETF) symbols to use to invest in this S&P 500 index
Mathematically, the Fair Value of the S&P 500 Index depends on: the return that investors require, the current earnings level, the expected growth in earnings, and the probable P/E ratio that it can be expected to be sold for at the end of a reasonable holding period of say 10 years.
This article provides a range of values depending on the scenario chosen. I believe that the analysis indicates that a fair value for the S&P 500 Index is within the range of 1667 (for required expected return of 8%) to 1974 (for required expected return of 6%), with a midpoint estimate of 1820 (for required expected return of 7%). Our assumption for this estimate is that the S&P earnings and dividend will grow with GDP at about 5% per year (that is 5% nominal GDP growth such as 3% real growth and 2% inflation) and sell at its long-term average P/E of 17 in ten years.
You can compare our fair value estimate of 1820 to the current S&P 500 level which is available here.
This analysis is dated March 24, 2015. However the calculated fair value of the S&P 500 index is not affected by the precise date of the analysis and our fair value estimate of 1667 to 1974 with a mid-point of 1820 will not change until at least after the next set of quarterly earnings numbers becomes available, and even then will not change much. As of of March 24, 2015, the S&P 500 index at 2100 appeared to us to be about 15% over-valued, as a point estimate, based on a long-term investment and based on reasonably conservative (but not pessimistic) assumptions. However, if it is assumed that interest rates will remain very low and investors require only an expectation of a 6% (pre-tax, pre-costs) return from equities and that a P/E of about 19 will apply in ten years then the S&P 500 could be considered to be about fairly valued. But those are aggressive assumptions and I consider the S&P 500 index to be somewhat over-valued at this time.
Nevertheless, the analysis suggests that investing in the S&P 500 will provide a positive although small return over the next ten years under even the more pessimistic scenarios shown.
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A quick indication of whether or not the S&P 500 index is fairly valued is provided by simply looking at its P/E ratio. As of September 20, 2014, the S&P 500 was at 2100 and had a P/E ratio (based on actual reported earnings in the past year) of 20.5.
This is noticeably higher than the historical average P/E ratio of 15.9.However, today’s record low interest rates support a P/E ratio somewhat higher than the historic average. Still, the quick indication is that the S&P 500 index is overvalued at this time at 2100. However this might be jumping to conclusions. We have to consider whether the recent earnings level on the index are at a normal level and what the outlook is.
This article explores the question of the estimated fair value of the S&P 500 index in much more detail below.
Importantly, an analysis of the fair value of the S&P 500 index will not likely provide a short-term indicator of market direction but it should provide a long-term indicator of the expected return from investing in the S&P 500 index at this time.
The attractiveness of the S&P 500 index level can be judged by looking at the current level of earnings and dividends of the S&P 500 index stocks, projecting the future rate of earnings and dividend growth and by considering the minimum return required by investors. Analysts often apply valuation techniques to individual stocks. It is actually far easier to apply these calculations to a stock index since an index constitutes a portfolio and therefore eliminates much or most of the random noise of unexpected events through diversification. Still, many challenges remain in applying this analysis and its results while providing some indication for the long-term and offer no insight for the short-term. The index remains vulnerable to changes in interest rates and to growth in the economy but is usually largely insulated from the numerous random events that can impact an individual stock.
What is the Earnings and P/E ratio on the S&P 500 index right now? (March 24, 2014 with the index at 2100)
Data from Standards and Poors itself provides no less than five quite different answers to the above question based on different views of the earnings on the S&P 500 index.
|S&P 500 Index Earnings Type||Annual Earnings on Index||P/E Ratio at S&P index 2100||Earnings Yield|
|Actual latest year (trailing four quarters to June 2014) GAAP earnings||$102.29||20.5||4.9%|
|Latest year “operating” earnings (removes “unusual” items)||$113.04||18.6||5.4%|
|Forecast forward GAAP earnings for the next year (next four quarters)||$110.47||19.0||5.3%|
|Forecast forward operating earnings for the next year (estimates summed by individual company)||$118.28||17.8||5.6%|
|Forecast forward operating earnings for the next year (estimate for the group of companies)||No longer available|
|For Comparison here are the S&P 500 Earnings in prior years:||Earnings||Historical P/E||Historical Earnings Yield|
|2014 Actual GAAP Earnings, S&P ended at 2059||$102.29||20.5||4.9%|
|2013 Actual GAAP Earnings, S&P ended at 1848||$100.20||18.4||5.4%|
|2012 Actual GAAP Earnings, S&P ended at 1426||$86.51||16.5||6.1%|
|2011 Actual GAAP Earnings, S&P ended at 1258||$86.95||14.5||6.9%|
|2010 Actual GAAP Earnings, S&P ended at 1258||$77.35||16.3||6.1%|
|2009 Actual GAAP Earnings, S&P ended at 1115||$50.97||21.9||4.6%|
|2008 Actual GAAP Earnings, S&P ended at 903||$14.88||60.7||1.6%|
|2007 Actual GAAP Earnings, S&P ended at 1468||$66.18||22.2||4.5%|
|2006 Actual GAAP Earnings, S&P ended at 1418||$81.51||17.4||5.7%|
|2005 Actual GAAP Earnings, S&P ended at 1248||$69.93||17.8||5.6%|
|2004 Actual GAAP Earnings, S&P ended at 1212||$58.55||20.7||4.8%|
|2003 Actual GAAP Earnings, S&P ended at 1112||$48.74||22.8||4.4%|
|2002 Actual GAAP Earnings, S&P ended at 880||$27.59||31.9||3.1%|
|2001 Actual GAAP Earnings, S&P ended at 1148||$24.69||46.1||2.2%|
|2000 Actual GAAP Earnings, S&P ended at 1320||$50.00||26.4||3.8%|
|1999 Actual GAAP Earnings, S&P ended at 1469||$48.17||30.5||3.3%|
|1998 Actual GAAP Earnings, S&P ended at 1229||$37.71||32.6||3.1%|
When you ask the “simple” question of “what is the earnings on the S&P 500?” index or “what is its P/E ratio?” you are given a number of quite different answers. We can help you fully understand the different answers.
Standard and Poors itself in its “The Outlook” publication focuses on the forecast year (called forward) operating earnings scenario, summed by individual company which is usually the highest earnings number and lowest P/E forecast. I find that to be overly aggressive as it ignores unusual losses. (Surely on a group of 500 companies a certain amount of so-called “unusual” losses is to be expected and should not be ignored). Also these company-by-company forecast operating earnings are usually higher than the forecast for the group of companies as a whole and this indicates an upward bias in the earnings forecast.
As of March 24, 2015, the S&P 500 index was at 2100 and had a trailing Price Earnings Ratio (“P/E”) of 20.5 (the historical average is 15.9) based on actual trailing reported earnings and had a current Dividend yield of 1.99% The trailing P/E based on the past 12 months operating earnings (eliminates unusual one-time items) was moderately more attractive at 18.6. The forward S&P 500 P/E ratio based on projected reported actual accounting GAAP earnings in the next 12 months was at 19.0. The forward P/E based on forecast or forward operating earnings in the next 12 months (eliminates unusual one-time items) was at 17.8 (based on the weighted sum of individual company forecasts).
Most analysts might focus on forecast operating earnings for the index (P/E of 17.8) as the best estimate since it eliminates unusual gains and losses and is future oriented.
Given that projected earnings tend to be optimistic and to ignore “unusual” losses, I normally prefer to use the actual trailing P/E, or equivalently the actual trailing GAAP earnings level. This figure is $102.29, for a P/E of 20.5. It is important to understand that this starting earnings level is a very major determinant in our calculation of the fair value of the S&P 500 index and that it can be a difficult number to estimate if the actual trailing earnings is not judged to be at a “normal” level. Currently I would judge the trailing GAAP earnings to be representative of a normalized level. (Or at least I have no reason to believe that the total S&P 500 GAPP earnings in 2014 were unduly affected by unusual items.)
The S&P 500 index therefore represents a portfolio of 500 stocks. For each $2100 (the index value) purchased, the underlying companies in the portfolio are earning $102.29 and currently pay an annualized dividend of $2100 * 0.0199 = $41.80.
When we buy the S&P 500 index, we can therefore think of it as being an investment or “stock” that (as of March 24, 2015) costs $2100and currently earns $102 per year and pays a current dividend of $41.80 per year. It is worth thinking about whether or not this “stock” or “business” is a good investment at or around its recent level of $2100.
We know that the S&P 500 index was at 2100 on March 24,2015. We can estimate what the S&P theoretically “should” be trading at based on the value of its current earnings and dividends and the projected growth in those earnings and dividends. This intrinsic value approach calculates the value of the projected earnings and dividends for a ten year period and then assumes that the index is sold at some projected future P/E ratio.
In addition to the beginning earnings and dividend level, three additional factors are required to calculate the fair value at which the S&P 500 should be trading at. These are, 1. The forecast average annual growth rate in earnings and dividends over the next ten years. 2. The forecast P/E ratio at which the S&P index will be trading in ten years time. 3. The estimated rate of return required by investors.
The S&P 500 portfolio average earnings should (in the longer term) grow at a rate close to the growth rate of the U.S. economy in nominal (after inflation) terms. I believe a prudent estimate for this nominal growth rate is 4% to 6% and I would focus on 5%. (Although a good case could also be made for 4%.) This 4 to 6% nominal GDP could occur with real GDP growth of 2 to 3% and inflation of 2 to 3%. We have a short article that both explains why (quoting Warren Buffett) and also demonstrates that earnings have tended to grow at about the same rate as nominal GDP growth in the long run.
The following graph illustrates that S&P 500 earnings have trended up at about the same rate as GDP growth (although slightly lower) over the long-term, although certainly with substantial volatility around the trend in individual years and over short periods of years.
This graph also clearly illustrates that the U.S. GDP (In nominal dollars, not inflation adjusted dollars) has trended up steadily and has never failed to grow over say a three year period, except in the case of the 1930’s depression.
Note that we use a logarithmic scale on this chart. Logarithmic scales should always be used, on data that grows over time, when the time period is more than about 30 years because otherwise the lines will rise up exponentially. Note that the left and right scales are consistent in that each rises exactly 10,000 fold from bottom to top and each point on the right GDP scale is exactly 100 times higher than the corresponding point on the left S&P earnings scale. Many analysts improperly present data with inconsistent scales.
The next chart presents the same data but starting in 1984 and using a regular arithmetic scale so that we can more closely examine the graph over more recent years.
The S&P 500 earnings (the red line) plunged in 2007 and 2008 after reaching a peak in 2006. But there has now been more than a total earnings recovery since the bottom in 2008. There was a small decline in S&P 500 earnings in 2012 on an as reported basis but growth recovered sharply in 2013 followed by modest growth in 2014.
The GDP figure is showing a small dip in 2009 with a full recovery by 2010 and continued growth through 2014. Note that the GDP figures here are in nominal dollars, whereas reports of GDP growth usually refer to real, inflation-adjusted dollars.
This chart shows that while U.S. GDP rose fairly steadily since 1984, the S&P 500 earnings growth significantly lagged the GDP growth from 1983 bottoming with the recession in 1992. Thereafter the S&P 500 earnings rose at about the same rate as GDP or a bit higher before plunging after 2006 and then recovering strongly in 2009 through 2011. S&P earnings did not grow in 2012 but grew very strongly in 2013.
The trailing GAAP earnings value of $102 noted above is somewhat above the S&P 500 earnings trend since 1992.
Having determined and discussed the earnings level on the S&P 500 index we also need to make an assumption about the P/E level that is likely to apply to the index in the longer term.
The average for the S&P 500 P/E ratio since 1936 is 15.9 (this eliminates from the average any P/E greater than 50 which only occurred in Q4 2008 through Q3 2009 when the earnings plunged to abnormally low levels). But the average (on the same basis) since 1988 has been 22.1. However the Justifiable P/E changes with earnings expectations and the market’s required return on equities.
The article states “I have conservatively calculated that the current Justifiable P/E is about 14.3 assuming that with today’s low interest rates investors require about a 7% expected return and assuming that competition will drive available returns down to the required 7% level.” The article also indicates that if companies can deliver in perpetuity an 8% ROE when investors only require 7% (perhaps due to a lack of corporate competition) then a P/E of 21.4 can be justified but we considered that to violate equilibrium conditions. However, it does appear that companies have been able to earn ROEs higher than the required return and to do so consistently which does justify a higher P/E. The long-run P/E range used in our table below is 14 to 18. Given today’s low interest rates, it is perhaps reasonable to focus on the higher end of this range.
I would estimate that a minimum (pre-tax) expected return required by stock investors (given today’s historically low interest rates) is in the range of 6% to 8%. The higher return required by investors then the lower the price or level that investors should be willing to pay for the index today, all else being equal.
The following table calculates the value that the S&P 500 will be at in ten years given various forecasts for the earnings growth and given various scenarios for the forecast P/E ratio that will apply at that time. The second last column of the table then shows the fair or present value that we should be willing to pay today for the cash flows that would result from ten years of dividends plus the assumed cash from selling the index in ten years time. The present value is calculated based on various scenarios for the required return or discount rate.
The last column in the table indicates the average annual return that would be made if the S&P 500 is purchased at its recent level of 2010 and if earnings and dividends grow at the indicated rate and the index trades at the indicated P/E ratio in ten years time.
|S&P 500 Current Annual Earnings Estimate||S&P 500 Current Annual Dividends||Earnings and Dividend Growth forecast||S&P 500 P/E forecast in 10 years||Resulting S&P 500 index in 10 years||Required Return||Resulting S&P 500 index Fair Value Today||Resulting Fair P/E today||Return per Year Buying at S&P 2100|
|$ 102||$ 41.80||4.0%||15||2,265||6%||1,642||16.1||3.1%|
|$ 102||$ 41.80||4.0%||17||2,567||6%||1,810||17.7||4.3%|
|$ 102||$ 41.80||4.0%||19||2,869||6%||1,979||19.4||5.3%|
|$ 102||$ 41.80||4.0%||15||2,265||8%||1,391||13.6||3.1%|
|$ 102||$ 41.80||4.0%||17||2,567||8%||1,531||15.0||4.3%|
|$ 102||$ 41.80||4.0%||19||2,869||8%||1,670||16.4||5.3%|
|$ 102||$ 41.80||5.0%||15||2,492||6%||1,789||17.5||4.1%|
|$ 102||$ 41.80||5.0%||17||2,825||6%||1,974||19.4||5.3%|
|$ 102||$ 41.80||5.0%||19||3,157||6%||2,160||21.2||6.3%|
|$ 102||$ 41.80||5.0%||15||2,492||8%||1,514||14.8||4.1%|
|$ 102||$ 41.80||5.0%||17||2,825||8%||1,667||16.3||5.3%|
|$ 102||$ 41.80||5.0%||19||3,157||8%||1,821||17.9||6.3%|
|$ 102||$ 41.80||6.0%||15||2,740||6%||1,948||19.1||5.1%|
|$ 102||$ 41.80||6.0%||17||3,105||6%||2,152||21.1||6.3%|
|$ 102||$ 41.80||6.0%||19||3,471||6%||2,356||23.1||7.3%|
|$ 102||$ 41.80||6.0%||15||2,740||8%||1,647||16.1||5.1%|
|$ 102||$ 41.80||6.0%||17||3,105||8%||1,816||17.8||6.3%|
|$ 102||$ 41.80||6.0%||19||3,471||8%||1,985||19.5||7.3%|
Given the current earnings level of $102 and the current dividend of $41.80, by changing the expected earnings growth rate, the return required by investors and the assumed P/E ratio that will apply in ten years I can calculate that today’s S&P 500 index should be anywhere from 1391 (assumes that our starting earnings level of $102 is reflective of a normal starting point, that the market P/E falls to 15, earnings grow at only 4% annually and equity investors require an expectation of making 8%) to 2,356 (assumes our starting normalized earnings level of $102 is a normalized earnings level, a terminal market P/E of 19 will apply in ten years, earnings grow at 6% per year and investors only require an expectation of earning 6% on equities).
My own fair-value point estimate is 1820. This assumes that equity investors require a minimum 7% expected return, that the S&P earnings and dividend will grow at 5% (3% GDP growth plus 2.0% inflation) and that the long run S&P 500 P/E ratio is 17. This is the average of the two highlighted rows in the table. Higher S&P 500 index values are implicitly assuming that the current normalized starting earnings level is higher than $102, that earnings growth will exceed 5% annually, that the justifiable long-run P/E exceeds 17, and/or that investors require less than a 7% (pre-tax) return.
Our range of investor required expected returns of 6% to 8%, although low by historic standards, is very attractive indeed compared to the recent 10-year U.S. government bond yield of about 1.9%. It’s also attractive compared to long-term A rated corporate bond yields which we understand are about 3.5%.
The last column in the table shows that under the indicated assumptions, if money is invested today in the S&P 500 and held for ten years and if the earnings and dividends grow at the rate indicated and the P/E ratio in ten years is as indicated then the average returns per year would range from 3.1% to 7.3% per year. With the 10-year treasury bond currently yielding about 1.9% some of these estimated returns are attractive. Of course the earnings growth on the S&P 500 could be lower than an average 4% per year and the terminal P/E ratio could be lower than 15, in which cases a lower return would result. One can always come up with losing scenarios, but based on historical earnings growth and P/E ratios it would appear that over this next ten year holding period, stocks are likely to significantly out-perform government bonds but are also not going to provide highly attractive returns.
The overall conclusion is that a fair value of the S&P 500 index based on estimated normalized annual earnings is probably about 1820. Since this is based on many estimated numbers it should be taken as a rough indication and certainly not as an exact determination.
My estimate in the two high-lighted rows is that the S&P 500 in ten years (the year 2025) will be at about 2825 (assumes 5% annual earnings growth from $102 and a P/E ratio of 17). Buying the S&P 500 index when it is at about 2010 (the level when this article was written) should be expected (but certainly not guaranteed) to result in a forecast return of about 5.3% per year if held for the next 10 years. This is based on about 3.0% per year capital gains to get to 2825 plus about 2.3% for dividends. The expected standard deviation around this expected 5.3% is also large so that the actual return over the next 10 years might be expected to fall within a range of about 3.3% to 7.3% per year with some chance of being outside that range. And that return includes dividends and is before trading costs and taxes. And in any given year, the return will range wildly and should definitely be expected to be negative in some years.
It is impossible to predict where the S&P 500 index will go in the next year. But it is possible to estimate its fair value and therefore whether or not it is currently over-valued based on reasonable growth expectations and a reasonable expectation around the initial earnings (or equivalently the initial P/E level) and around the terminal P/E ratio. Caution is warranted because the S&P 500 can sometimes spend years in an over-valued or an under-valued-state. But ultimately, as we have seen in the early 2000’s crash, and the crash of 2008 and early 2009, valuation does correct itself. (And sometimes over-corrects to the downside).
You can easily invest in the S&P 500 index by buying the ishares S&P 500 index Exchange Traded Fund under symbol IVV on the New York Stock Exchange. And if you are really bullish you can buy the double bull Proshares Ultra S&P 500 symbol SSO. Or if you are bearish there is the single bear ETF, Proshares short S&P 500 symbol SH, or the double bear Proshares Ultrashort S&P 500 symbol SDS. Be cautious and understand what you are buying.
Shawn C. Allen, CFA, CMA, MBA, P.Eng.
President, InvestorsFriend Inc.
Updated March 24, 2015
Past Results from this Analysis.
Before placing any weight on the analysis above, you may be interested to review a summary of the fair values that we calculated in the past and whether or not our long-term analysis provided any hint of the market crash (Arguably the June 1, 2008 analysis provided some hint, especially for investors that felt that a 9% return was required for which we indicated a fair value of the S&P 500 index was 982 in that case and the index was sitting at 1400).
Keep in mind that with the past analysis we also provided a range of valuations and readers were free to select a different fair valuation from our table above.
The table below shows that our analysis appears to have been directionally correct. Based on where the S&P 500 index is today we were correct that it was over-valued from 2004 through to October 2008. (There was one exception, we were wrong to see the market as fairly valued in February 2008). Our analysis correctly saw the market as under-valued in the Spring and Summer of 2009.
The ONLY time our analysis saw the S&P 500 as undervalued in the past eight years was near its major low in the Spring of 2009. And indeed, based on today’s S&P 500 level that was a time where an investor buying the S&P 500 has made an abnormally high return.
In general, based on where the S&P 500 is today, this past analysis looks like it has been too cautious. It usually found the market to be over-valued when in fact investing at the dates indicated until today has provided a decent return in almost all cases. Investing and holding at the dates shown from 2004 through 2008 has, as of now, provided acceptable but unspectacular returns. Investing and holding at any of the times shown since 2009 has, as of now, provided exceptionally good returns. (This is due, in part, to the S&P 500 currently having a high P/E of 20.5 which is considerably higher than expected when we did the past analysis.)
|Date of prior calculations||S&P Level at that Date||Fair Value we Calculated||Market appears:||Average Capital Gain Per Year (annualized)||Apparent Performance as of March 24, ’15 with the Index at 2100 (and note that this was meant to be a long-term tool not short-term)|
|5-Apr-14||1865||1676||over-valued||13.1%||In the very early going, it appears we were too conservative|
|14-Nov-13||1791||1513||over-valued||12.5%||In the very early going, it appears we were too conservative|
|18-May-13||1667||1396||over-valued||13.3%||In the very early going, it appears we were too conservative|
|24-Feb-13||1557||1396||over-valued||15.5%||In the very early going, it appears we were too conservative|
|8-Sep-12||1438||1387||about fair-valued||16.1%||In the very early going, it appears we were too conservative|
|25-Feb-12||1366||1340||about fair-valued||15.0%||In the very early going, it appears we were too conservative|
|25-Aug-11||1159||1188||about fair-valued||18.1%||In the early going, it appears we were too conservative|
|26-Feb-11||1320||1165||over-valued||12.1%||In the early going, it appears we were too pessimistic|
|15-May-10||1136||944||over-valued||13.5%||It appears we were wrong.|
|5-Aug-09||1003||886||over-valued||14.0%||It appears we were wrong.|
|20-Feb-09||770||896||under-valued||17.9%||It appears we were correct, the index was very much under-valued on Feb 20, 2009|
|5-Oct-08||1099||991||over-valued||10.5%||It appears we were wrong the market has delivered a reasonable return to those buying in October 2008|
|1-Jun-08||1400||1158||over-valued||6.1%||It appears that we were moderately too conservative|
|25-Mar-08||1358||1221||over-valued||6.4%||It appears that we were too conservative|
|10-Feb-08||1331||1388||about fair-valued||6.6%||It appears that we were too conservative|
|19-Aug-07||1446||1373||over-valued||5.0%||It appears we were directionally correct that the index was over valued|
|10-Feb-07||1438||1295||over-valued||4.8%||It appears we were directionally correct that the index was over valued|
|9-Sep-06||1299||1189||over-valued||5.8%||It appears that we were moderately too conservative|
|7-Apr-06||1295||1215||over-valued||5.5%||It appears that we were too conservative|
|28-Feb-05||1191||925||over-valued||5.8%||It appears that we were too conservative|
|4-Sep-04||1104||961||over-valued||6.3%||It appears that we were too conservative|
This analysis attempts to look forward ten years. That’s always difficult to do and subject to much error. More than ten years have passed since our September 2004 analysis. At that time we were projecting that the S&P 500 index in September 2014 would be at 1537 based on a P/E of 16 and that its earnings would grow 5% per year from $59 to $96 and that the dividend would grow from $20 to $33. The projection was intended to be reasonably conservative. The index ended September 2014 at 1972 which was 28% higher than our projection. The earnings at about $100 turned out be reasonably close while the dividend was then running about 21% higher than predicted. The P/E ratio at 19.5 was 22% higher than our base projection of 16 and higher than the top end of our projection which was a P/E of 18. If the P/E was at the long-term average if about 16 then our S&P 500 projection would have been quite close.
1. See Warren Buffett in Fortune Magazine, November 22, 1999, and his updated article of December 10, 2001. The same linking of stock index growth to GDP (or GNP) was made in Buffett’s October 9, 1969 letter to his partners.