BJJ_GUY wrote: ↑Thu Jul 22, 2021 5:10 pmValuations simply give you information about how much you are paying today (PV) in relation to the (best estimation of) long-term value you'll receive far into the future (FV). That's it. Pretty basic math can solve the equation for expected returns over a give time period and based on whatever inputs you use for an approximation for fair value (crude proxy: median valuation, and maybe adjust GDP/revenues and margins to also revert to historical norms).
I see a lot of "best estimates" and "approximation" of multiple variables above.
The pretty basic math is not so basic after all.
For the past 30 years, the "expected" returns have been way off.
We're not talking the expected return is 4.5% plus or minus 8% (which is a HUGE error band), and we actually got 6% real or even 8% real.
The "expected" 10-year return in 2011 was 4.5% with 2 standard deviations up 12.5%, and instead we got 13.5% real over those 10 years. Possible, yes. We could have just hit the 1% chance. But that shouldn't assure anyone that the model has no flaws.
The pretty basic math has not worked. If you have a model that predicts a 1 in a 100 year flood at a certain level, and you get a flood that high three times in 15 years, it's reasonable to wonder, if maybe, just maybe, the model has a flaw or if a variable has changed.
I don't understand why this is so hard. Look at past "expected" return calculations that were made at the time, and see how wrong valuations predictions have been since 1992.
DON'T read some article from 2020 that has all the past data, has made a new line, with new expected returns that fit the data from the past 30 years. That proves nothing.
Look at predictions made in 1996 with 1900-1995 data, Look at predictions made in 2007 with 1900-2006 data. Look at predictions made in 2011 with 1900-2010 data... They were wildly off.
Not a little bit off... Wildly off. Valuations proponents can say "Well, it's a been a weird time with the Internet and investor sentiment and Fed interference in the markets". I could accept those reasonings as why valuations as a prediction tool has failed for the past 30 years, and maybe it will work again in the future.
What they CANNOT say is "Oh valuations have totally worked as a prediction tool for the past 30 years."
That's what makes me mad. Valuations as a theory makes total sense to me. But I've lived through the past 30 years, seen the predictions in real-time, watched them fail, and then, infuriatingly, the proponents just make new models with the new data, wave their hands, and proclaim, "Oh valuations have totally worked all this time".
NONE of this is to say that a crash won't happen soon. It absolutely could. I predict nothing. I have no idea what will happen next. I'm not saying valuations predictions are wrong. I'm saying valuations have failed over and over as a prediction tool for the past 30 years so don't put too much stock in them. Don't make large changes to your Asset Allocation based on them.
Risk management is important. Always be prepared for long bear market starting tomorrow. Because it might happen. This is always true. Regardless of valuations.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59