The first quarter of 2006 is more than. Now is an excellent time to reflect on stock prices and also the opportunities they present.

Bargains are scarce. Equities are pricey. In latest weeks, I’ve heard several fund managers say valuations are even now appealing. I really don’t agree. Generally speaking, valuations are unattractive. Returns on equity are greater than historical levels. A market-wide return on equity of 15% is unsustainable. Price-to-earnings ratios might not fully reflect how costly stocks are. Price-to-book ratios are more alarming.

You can find two extra concerns. Most discussions with the relative attractiveness of equities focus on the S&P 500 and forward earnings. The S&P 500 is not the most representative index. It might not be the best index to consider when looking at market-wide valuations.

Forward earnings are (necessarily) estimates. Where current returns on equity are unsustainable, projected earnings that use similar returns on equity may overstate the earnings power of equities in general. This can occur even where the estimates appear reasonable given current earnings. If you start with unsustainable base earnings, you are likely to overestimate future earnings even if you truly believe you are assuming very modest earnings growth.

Assets in general are pricey. Worth investors have few places to turn if they continue to insist upon a true margin of safety.

Bonds are unattractive. Long-term inflation risks make U.S. treasury, corporate, and municipal bonds a fool’s bet. There is little to gain and much to lose. The know-nothing investor who buys a top-quality bond today and holds it for decades may possibly very well find his purchasing power diminished.

There may be some select possibilities in foreign equities. But, these are difficult to evaluate. Foreign government obligations are also difficult to evaluate, but that isn’t much of a problem for worth investors, because most foreign government debt is priced to perfection. You’ll have to be willing to take a lot of uncompensated risks if you want to own such bonds.

Of course, you will find exceptions to every rule. There may possibly be a few bonds out there that are attractive. There certainly are a few appealing stocks out there. But, even those stocks that appear very appealing relative to their peers do not look nearly as attractive when compared to past bargains.

Value investors face a difficult choice. They can assume stock prices will return to historical levels, and hold cash until the correction comes. Or, they can accept the reality they currently face.

There is no logical reason stock rates must necessarily return to historical levels. During the twentieth century, real after-tax returns in diversified groups of common stocks were very high relative to other investment possibilities. There have been various reasons given for why this occurred. Many have said these returns were possible, because of the increased risks involved in holding equities. Above the long-term, risks were somewhat higher than today’s investors seem to remember, but they were hardly severe enough to justify the kind of performance spreads that existed during much of the twentieth century.

True, if you bought at inopportune times, it was possible to remain in a fairly deep hole for a fairly long time. But, if you gave no real consideration to the timing of your purchases or the prospects of the underlying enterprises, you did better than many bondholders who chose their investments with the utmost care.

This can be a disconcerting problem. It might be that most investors are overly sensitive to the risk of an immediate “paper” loss in nominal terms, and therefore overlook the much greater risk of a gradual loss of purchasing power. Issuing fixed dollar obligations may be the best bet for any business or government that seeks to swindle investors.

For the sake with the common stockholders, I hope many from the best businesses continue to issue such obligations when money is cheap. Corporate debt gets a bad name, because it tends to be overused by those who do not need it and shouldn’t want it (and, of course, by those businesses that do need it but won’t survive even if they get it) The businesses that would benefit the most from the use of debt usually appear to have much more cash than they could ever need. But, it’s best to think ahead. For truly high quality businesses, the cost of capital will fluctuate far a lot more wildly than the likely returns on capital.

If, during the last hundred years, stocks really were far cheaper than they should have been, is there any reason to believe stock rates will return to past levels? The past is often a pretty good predictor from the future – but, not always. It’s difficult to say whether, over the next few decades, valuations will, on average, be greater or lower than they are today. However, it isn’t all that difficult to say whether, at some point over the next few decades, valuations will be greater or lower than they are today. The answer to that question is almost certainly yes. They will be higher and they will be lower. Maybe for a few years or a few months. Maybe for a full decade. I don’t know.

What I do know is that value investors will have opportunities to make investments with a true margin of safety. But, should they wait?

That’s the most difficult question. Today, I am not finding possibilities that appear particularly attractive when compared to the best chances of past years. But, I am still able to find a few (in fact, a very few) situations where the expected annual rate of return is greater than 15%.

That will be much more than enough to beat the market. It will also likely be enough to provide a material increase in after-tax purchasing power. That’s not guaranteed, but it hardly seems holding cash would offer the better odds in this regard.

So, is an expected annual rate of return of 15% great enough? Is it reasonable to bet on the good opportunity that is currently available instead of waiting for the great opportunity that might yet become available?

I’ll leave that for you to decide.

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