Warren Buffett says buy. Jeremy Grantham says it will get worse. Both are celebrated value investors. Who is right? It all depends upon your view of the third derivative of investing. Today we look at valuations in the stock market. This is the second part of a speech I have given in the past few weeks in California and Stockholm. I am updating the numbers, as the target keeps moving. While from one perspective things look rather difficult, from another there is a ray of hope. What can you expect to earn from stocks over the next five years? It should make for an interesting letter. Note: this will be a little longer than usual, but part of it is there are a LOT of charts.

I should note that I am rewriting this on Monday. For the first time in over 8 years, I missed my Friday night deadline (see below). Last week's title for the letter was "The Economic Blue Screen of Death." By that I referred to the old "blue screen of death" that we used to get on early versions of Microsoft MS-DOS and Windows. You could be working away and suddenly, for no apparent reason, the computer would freeze up and you would get a blue screen. The only thing you could do was unplug the computer and hit the reset button - losing everything that was not saved when the computer crashed.

I likened this to the economic situation we are in now. With consumer spending "resetting" to a new lower level, we are going to have to hit the reset button on many business plans, and thus investments, as consumers are going to spend less and save more. Is that level 3% less? 5%? More? No one knows, but since we have not had a consumer-led recession since 1982, too many businesses assumed that the US consumer, like Superman, was bulletproof.

What will be the eventual savings rate? Will we get back to 7-9% from less than 1%? Maybe, because people are going to realize that savings today are the key to a happy retirement. That would put the new level of consumer spending a good deal lower than it has been. Thankfully, that climb in savings will not happen all at once but will play out over more than a few years. I think we will look back in the middle of the next decade and be quite amazed at how much US personal savings have increased. However, this is the Paradox of Thrift: what is good for the individual is hard on the economy, as by definition increased savings reduces consumer spending.

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months." - Dr. Irving Fisher, Professor of Economics at Yale University, one of the most important US economists of his day, speaking on October 17, 1929, a few weeks before the Great Crash.

"What," more than a few readers ask, "do you think of the new highs on the Dow? Don't you have to admit we are not in a secular bear market? Can't you just enjoy the new bull?" If it were a matter of just admitting I'm wrong, that would be the easy part. I have been wrong lots of times and will be wrong again. But the data keeps telling me that there is more to the story. This week we look at earnings and investor expectations. In the man bites dog category, we visit with a very mainstream analyst who says earnings will fall next year. But companies are going to trumpet much higher earnings. There is a coming dissonance that suggests a problem in future valuations.

This week I let you peek over my shoulder while I try to find some new money managers. Like the old army ad, I am looking for a few good men and women who have figured out some part of the investment world. How does one go about the task of finding and sorting? How can we figure out who deserves to get our money and who we should set aside? It's not as easy as you would think.

But first, a follow-up to my letters of the past few weeks. I think it is looking less and less like the Fed will raise rates at the September 20 meeting, even though recent speeches by Fed governors would suggest they are still thinking that way. The calls from all quarters for a one meeting pause to assess the damage from Katrina are quite loud, and the bond market is certainly indicating they expect the pause.

This week we look at how to make you a top 20% investor, think about some of the mistakes we all make and much more. I am writing today in Florida and will finish up in Texas tonight before taking off for Philadelphia. Because of the time constraint on my usual research, I am going to borrow a few pages from Bull's Eye Investing and some letters written last year and add a few thoughts. I think this letter contains some very important points that are worth repeating. If you would like more on this line, you can go to chapters 15 and 17 in Bull's Eye Investing (see below how to get a 32% discount.)

I should note that I have just finished a new (free) Accredited Investor E-letter which will be sent out within a few weeks. It has been some time since I have written one, but I am now committed to getting one a month out. I apologize to those who have signed up for the letter and have not gotten one for months. No more apologies, just copy will be my future motto.

This week we re-visit one of my favorite themes: Why Investors Fail. I am doing the final edits on my book, Bull's Eye Investing, and when I came to the chapters on the psychological hard-wiring we have as humans, which causes us to make the same investment mistakes over and over, it just reminded me how important it is to understand why we do the things we do, and then stop doing them!

The end of this week's e-letter will be Part Two of "Why P/E Ratios Will Not Rise As They Normally Do After a Recession." The whole piece will be a chapter in my new book, Absolute Returns. Of course, I will have to think of a snappier chapter title. But snappy or not, it is important you understand the dynamics that are working to hold down P/E ratios today, and why this means the long term secular bear market now in session will remain so for several years to come.

As I leave the country today, headed for Mexico's beaches, I can't help but notice the stock market seems to be stuck in neutral, where it has been since the first of the year. So far, at least, my Muddle Through Market prediction at the beginning of the year seems to be the right one.

Like all the children from Lake Wobegon, I am sure all my readers are above average investors. But I am also sure you have friends who are not, so today we will look at the reasons why they fail at investing. Maybe this week's e-letter will give you some ways to help them. And as we conclude, I will show you a simple way to put yourself in the top 20% of investors. This should make it easier to go to family reunions and listen to your brother-in-law's stories.