Vanguard Capital Markets Model - So Wrong for So Long

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happyjuice8000
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Vanguard Capital Markets Model - So Wrong for So Long

Post by happyjuice8000 »

I have been reading the Vanguard Capital Markets Model® (VCMM) white paper for many years, perhaps as long as they've been publishing them. https://vanguardinstitutionalblog.com/2 ... ectations/

Their Markets Model has been so wrong for so many years, always predicting non-US equities to vastly outperform US equities. Vanguard focuses heavily on the CAPE-ratio for these predictions, despite the fact that US-based public companies have for years been increasingly tech heavy, capital-light e.g. Googles of the world vs. the old-fashioned oil drillers and brick-and-mortar banks of non-US public companies. Vanguard finally relented and recently switched to a modified adjusted CAPE-ratio to adjust for things like low interest rates, which didn't improve the long-term usefulness of their market model. Year after year, it felt like they were still crunching numbers based on historical data despite rapidly changing fiscal, monetary, cultural, political, and technological changes that impacted US vs. non-US markets differently.

For example, if you went heavy into international equities after the financial crisis (first 30%, then 40%, and sometimes 50%) and lightened up on US equities and US fixed income, like their model suggested, you'd have missed out on massive gains in US equities and fixed income. People who bought EM based on these predictions just got their teeth kicked in by China's autocratic regime manipulating the markets and the corruption in Russia and Brazil, which make it very hard for US-based investors to earn an equitable profit. It's not just EM. In Japan, companies are not shareholder friendly. They skimp on dividends, frown on share buybacks, carry too much debt, and have a lot of deadweight in their staffing models.

Does it irk anyone else on this forum that Vanguard has failed to own up to their very poor predictions in their Vanguard Capital Markets Model (VCMM) based on outdated valuation models?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by UpperNwGuy »

Is this thread primarily about Vanguard or about international investing?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by reln »

happyjuice8000 wrote: Sat Sep 25, 2021 2:00 pm I have been reading the Vanguard Capital Markets Model® (VCMM) white paper for many years, perhaps as long as they've been publishing them. https://vanguardinstitutionalblog.com/2 ... ectations/

Their Markets Model has been so wrong for so many years, always predicting non-US equities to vastly outperform US equities. Vanguard focuses heavily on the CAPE-ratio for these predictions, despite the fact that US-based public companies have for years been increasingly tech heavy, capital-light e.g. Googles of the world vs. the old-fashioned oil drillers and brick-and-mortar banks of non-US public companies. Vanguard finally relented and recently switched to a modified adjusted CAPE-ratio to adjust for things like low interest rates, which didn't improve the long-term usefulness of their market model. Year after year, it felt like they were still crunching numbers based on historical data despite rapidly changing fiscal, monetary, cultural, political, and technological changes that impacted US vs. non-US markets differently.

For example, if you went heavy into international equities after the financial crisis (first 30%, then 40%, and sometimes 50%) and lightened up on US equities and US fixed income, like their model suggested, you'd have missed out on massive gains in US equities and fixed income. People who bought EM based on these predictions just got their teeth kicked in by China's autocratic regime manipulating the markets and the corruption in Russia and Brazil, which make it very hard for US-based investors to earn an equitable profit. It's not just EM. In Japan, companies are not shareholder friendly. They skimp on dividends, frown on share buybacks, carry too much debt, and have a lot of deadweight in their staffing models.

Does it irk anyone else on this forum that Vanguard has failed to own up to their very poor predictions in their Vanguard Capital Markets Model (VCMM) based on outdated valuation models?
Doesn't bother me.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by nedsaid »

What I would do is read the forecasts and try to learn something. Problem is that the economy and the markets are complex beyond what anyone could imagine, always something out there that can't be known and always the possibility of an unexpected event. For example, 9-11 was a big surprise to us. Another thing is that Vanguard could be right about International but right too early. This is all educated guesswork.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by livesoft »

All predictions are wrong, but every prediction is wrong in its own way.

Once you realize that, then you will be less concerned about predictions, especially the wrong predictions.
Last edited by livesoft on Sat Sep 25, 2021 2:19 pm, edited 2 times in total.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Taylor Larimore »

happyjuice8000:

I have been a Vanguard investor for 34 years. I, too, have been surprised to see Vanguard "always predicting non-US equities to vastly outperform US equities." They should be embarrassed.

Best wishes.
Taylor
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by tibbitts »

I don't think many Bogleheads pay much attention to forecasts generally, and I haven't read these papers, but I'd agree if they didn't address being wrong in the past then that would be unreasonable and surprising. However in their defense it doesn't always become obvious when a model stops working ahead of time. There was similar sentiment to what you're expressing in the late 1990s too - that forecasts need to change to reflect new valuation models - and while in retrospect you can come up with justification for "this time is different", forecasters then had had just as much evidence on their side, and that didn't end well.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by happyjuice8000 »

tibbitts wrote: Sat Sep 25, 2021 2:19 pm I don't think many Bogleheads pay much attention to forecasts generally, and I haven't read these papers, but I'd agree if they didn't address being wrong in the past then that would be unreasonable and surprising. However in their defense it doesn't always become obvious when a model stops working ahead of time. There was similar sentiment to what you're expressing in the late 1990s too - that forecasts need to change to reflect new valuation models - and while in retrospect you can come up with justification for "this time is different", forecasters then had had just as much evidence on their side, and that didn't end well.

This time is always different, but most things haven't changed. I just wish Vanguard would acknowledge them in their forecasts for non-US public companies: zombie workforces, lack of innovation, corruption, market manipulation, poor return on invested capital, and unfriendly policies towards "outside" investors. For example, look at what China just did to US investors who own Alibaba or Tencent ADR shares. Alibaba and Tencent are growing like crazy (faster than the FAANG companies), but they will never let US-based investors profit off of that growth. Shouldn't we demand a massive discount to invest in such regimes?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Nathan Drake »

Models are based on conservative expectations and on valuations. If the speculative return is far higher than anticipated (increase in valuations) of course it's going to look "wrong for so long". But if you look at the underlying fundamentals (earnings growth + dividend yield), it looks to be quite accurate. But the speculative rise in valuations dwarfed it and we now have CAPE10 of over 40.

There are only a handful of scenarios from where we are today:
  • 1. CAPE10 continues to rise for US TSM far more than any other market (i.e., Japan scenario). Fundamentals don't matter.
  • 2. CAPE10 remains at the same high level, at which point the underlying fundamentals drive your return. These underlying fundamentals would produce a very low return absent some dramatic increase in earnings growth or margins (which are already historically high).
  • 3. CAP10 mean reverts and you are left with underlying fundamentals + valuation contraction = recipe for an extended bear or flat market, likely negative adjusted for inflation
Take your pick on what you feel is more likely. The optics points to somewhere between 2 and 3 from my point of view, and in that scenario you would see diversifying asset classes to have far higher returns (exUS, EM, SCV, etc).

Vanguard is of course basing its expectations on a market that is always rational (it's not, but it's very efficient at pricing in all irrational participants). So that's why we have seen such an enormous rise in speculation driving US TSM indexes. They will one day be correct when the trade becomes too crowded and sentiment changes. There's nothing they should be ashamed about for putting out conservative estimates based upon reasonable market growth assumptions. You cannot rationally model speculative increases well, because they're often based on incorrect narratives and can go on for quite a while until the dance is over. But it will eventually be over.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by nisiprius »

Vanguard is just making similar forecasts to those of others, e.g. GMO.

Forecasters: so wrong for so long.

Except they aren't wrong, because if you look at Vanguard's error bounds, you will see that the full ranges, all overlap.

Image

There is actually not a single pair of assets on that chart for which Vanguard is actually forecasting that one will outperform the other. US Growth outperforming International Equity is within the range of their forecast.
Last edited by nisiprius on Sat Sep 25, 2021 3:48 pm, edited 1 time in total.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by beyou »

What is wrong is that Vanguard makes predictions at all.
They are supposed to be different, promoting cost control, diversification, not prognostication. Leave that to all the other charlatans in the industry.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by FrugalInvestor »

beyou wrote: Sat Sep 25, 2021 3:47 pm What is wrong is that Vanguard makes predictions at all.
I'll second that!

Thanks to Jack Bogle, Bogleheads know that "nobody knows nothing".

Listen to Jack here.....
https://www.youtube.com/watch?v=fLCfkmaqI6k

Sure do miss him but his passing didn't delete his wisdom. Thanks Jack.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Nathan Drake »

beyou wrote: Sat Sep 25, 2021 3:47 pm What is wrong is that Vanguard makes predictions at all.
They are supposed to be different, promoting cost control, diversification, not prognostication. Leave that to all the other charlatans in the industry.
It's not a prediction. It's setting expectations based upon where the market is right now. If someone is planning on US TSM to have the same decade it had this past one (15% annualized), and is using that as their forecast for financial planning, it can be devastating.If they actually hit that target (due to speculation growth), then no harm really. It exceeded the target greatly, but that wasn't a rational expectation.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Cheez-It Guy »

happyjuice8000 wrote: Sat Sep 25, 2021 3:00 pm
tibbitts wrote: Sat Sep 25, 2021 2:19 pm I don't think many Bogleheads pay much attention to forecasts generally, and I haven't read these papers, but I'd agree if they didn't address being wrong in the past then that would be unreasonable and surprising. However in their defense it doesn't always become obvious when a model stops working ahead of time. There was similar sentiment to what you're expressing in the late 1990s too - that forecasts need to change to reflect new valuation models - and while in retrospect you can come up with justification for "this time is different", forecasters then had had just as much evidence on their side, and that didn't end well.

This time is always different, but most things haven't changed. I just wish Vanguard would acknowledge them in their forecasts for non-US public companies: zombie workforces, lack of innovation, corruption, market manipulation, poor return on invested capital, and unfriendly policies towards "outside" investors. For example, look at what China just did to US investors who own Alibaba or Tencent ADR shares. Alibaba and Tencent are growing like crazy (faster than the FAANG companies), but they will never let US-based investors profit off of that growth. Shouldn't we demand a massive discount to invest in such regimes?
Or don't invest in such regimes.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by afan »

It is not only Vanguard that keeps issuing predictions while ignoring their past accuracy. I do not believe I have ever seen a forecaster review the reliability of its past predictions.

It would be far more interesting to simply review the long and well documented failure of prediction.

Then give an honest answer "we don't know".
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by stan1 »

Consider listening to the Bogleheads Podcast Episode 17 with Joe Davis, Vanguard's Chief Economist if you haven't. I still think it is one of the better podcasts in terms of information sharing along with those with other Vanguard executives.

https://www.bogleheads.org/blog/portfol ... -podcasts/

I sent the question up to Rick "who is your customer", Rick asked it, and Mr. Davis had a good answer. Hint: it is not individual investors.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Beensabu »

Taylor Larimore wrote: Sat Sep 25, 2021 2:18 pm They should be embarrassed.
They should be embarrassed for recommending that people plan around reasonable expectations for an unknown future rather than relying on past returns to continue indefinitely regardless of changing variables?

Or they should be embarrassed that exUS equity returns have not met their expectations and US equity returns have exceeded them (resulting in a global equities portfolio of 60/40 coming in above their 75th percentile expectations for either) over the last decade?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by nisiprius »

Beensabu wrote: Sat Sep 25, 2021 6:17 pm They should be embarrassed for recommending that people plan around reasonable expectations for an unknown future rather than relying on past returns to continue indefinitely regardless of changing variables?
There's an actual question in there, which could, in theory, be answered.

In the past, which has been more accurate: the persistence prediction, past returns will continue? Or the various model forecasts of firms like Vanguard and GMO?

We know that past performance is no sure predictor of future returns, but have Vanguard's models, or anyone else's, been any better?

And there's a practical issue, with real consequences. Which is a better choice for the future: staying the course in a fixed allocation, or investing according a tactical asset allocation model?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by 40 Years' Gatherin's »

This is why I always ignore the noise from the ex-US chest thumpers, and simply do what Bogle & Buffet suggest: VTSAX (or VFIAX) & chill.

That is all.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by retired@50 »

happyjuice8000 wrote: Sat Sep 25, 2021 2:00 pm I have been reading the Vanguard Capital Markets Model® (VCMM) white paper for many years, perhaps as long as they've been publishing them.
One solution would be to stop wasting your time with worthless reading material... :shock:

Regards,
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Nathan Drake »

nisiprius wrote: Sat Sep 25, 2021 6:28 pm
Beensabu wrote: Sat Sep 25, 2021 6:17 pm They should be embarrassed for recommending that people plan around reasonable expectations for an unknown future rather than relying on past returns to continue indefinitely regardless of changing variables?
There's an actual question in there, which could, in theory, be answered.

In the past, which has been more accurate: the persistence prediction, past returns will continue? Or the various model forecasts of firms like Vanguard and GMO?

We know that past performance is no sure predictor of future returns, but have Vanguard's models, or anyone else's, been any better?

And there's a practical issue, with real consequences. Which is a better choice for the future: staying the course in a fixed allocation, or investing according a tactical asset allocation model?
Vanguard has never told investors to change their AA based on their models or expectations. But their suggested recommendations are 40% exUS. So if somebody is greatly underdiversified, maybe it would give them pause as to why that might not be a great idea.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Beensabu »

nisiprius wrote: Sat Sep 25, 2021 6:28 pm
Beensabu wrote: Sat Sep 25, 2021 6:17 pm They should be embarrassed for recommending that people plan around reasonable expectations for an unknown future rather than relying on past returns to continue indefinitely regardless of changing variables?
There's an actual question in there, which could, in theory, be answered.
There are many questions:

- What makes expectations reasonable?
- What makes the future unknown?
- Is "reliance" dependence or trust?
- Does "indefinitely" mean unlimited or unspecified?
- Are variables changing? Which ones?
- What is implied by a particular variable changing in a certain way?
In the past, which has been more accurate: the persistence prediction, past returns will continue? Or the various model forecasts of firms like Vanguard and GMO?
Neither.
We know that past performance is no sure predictor of future returns, but have Vanguard's models, or anyone else's, been any better?
Nope.
And there's a practical issue, with real consequences. Which is a better choice for the future: staying the course in a fixed allocation, or investing according a tactical asset allocation model?
Tactical asset allocation is hard (near impossible?) to get right. Strategic asset allocation is hard to stick to. Strategic asset allocation is more likely to work out over the very long-term (as long as you have that), if actually adhered to.

Some might call Vanguard's global equity recommendation tactical asset allocation because they have been increasing the % exUS recommendation over time. Some might say they are approaching (or have settled on) the strategic allocation they intend to stick to from here on out. We can't know for sure, since they just stopped changing it relatively recently.

It's a different situation for those who determined their strategic/fixed asset allocation prior to changes in Vanguard's recommendation vs. those who determined it during the changing recommendations vs. those determining it now that the recommendation appears to be fixed. It's not a terrible idea to consider the perspective of those advocating for a particular US/exUS allocation in light of the particular time (in history and in their investment lifetime) at which they determined that allocation.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Thesaints »

I don’t think too many here truly understand the output of the VCMM…
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by ClevrChico »

Here's Morningstar's (2020) explanation of why US has outperformed International:

https://www.morningstar.com/articles/96 ... ave-lagged

It's not FAANG or currency. It's US companies out-performed post Global Financial Crisis. I think Morningstar experts were even surprised and having some buyer's remorse on International. (I know I do too.)
Last edited by ClevrChico on Sun Sep 26, 2021 10:25 am, edited 1 time in total.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by texasfight »

It's all about who can print more.

Long USD, long US equities, long US treasuries, and long commodities has not let me down yet.

International and emerging will get obliderated in the next correction, even US will sell off, but the USD soaring is going to create 5 more venezuelas over the next year.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

ClevrChico wrote: Sun Sep 26, 2021 10:17 am Here's Morningstar's (2020) explanation of why US has outperformed International:

https://www.morningstar.com/articles/96 ... ave-lagged

It's not FAANG or currency. It's US companies out-performed post Global Financial Crisis. I think Morningstar experts were even surprised and having some buyer's remorse on International. (I know I do too.)
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by burritoLover »

The outperformance of US stocks post-GFC is primarily because they have got more expensive relative to ex-US. But markets with a large P/E expansions should continue to outperform forever right?

Image
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by stan1 »

texasfight wrote: Sun Sep 26, 2021 10:23 am It's all about who can print more.
This part of the equation gets under analyzed especially by the world market cap proponents, and I tend to agree the US has at least a few more cycles of being able to do so if some other underlying assumptions don't change a lot. Doesn't drive me to 0% international but for me does justify a US tilt. Easy to get into prohibited topics on this forum and that's part of the reason the international threads go off the rails so quickly because the real assumptions can't be addressed within forum policies.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by ClevrChico »

burritoLover wrote: Sun Sep 26, 2021 11:04 am The outperformance of US stocks post-GFC is primarily because they have got more expensive relative to ex-US. But markets with a large P/E expansions should continue to outperform forever right?

Image
If read the Morningstar article correctly, it's earnings that are the main driver.

"It was really at the end of the day U.S. companies were just growing their earnings and their fundamentals much more stronger than the overseas companies were."

https://www.morningstar.com/articles/96 ... ave-lagged
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Beehave »

Regarding the value of looking at the past,

(a) based on my personal experience I don't really need any fire or auto insurance
(b) based on observation of things in general (i.e., that stuff happens), it's prudent to keep my insurance policies.

The fact is, I'd be better off financially to-date if I had minimized to the legal or contractual minimum possible every insurance policy I have ever had. In view of this, do I regret carrying the insurance I have carried? Not for a minute.

Now, substitute "foreign equities" for "insurance" above. For me, foreign holdings are a diversifier and, consequently, a form of insurance.
,I know that I cannot optimize my investment results. What I can do is behave prudently in a way that to the best of my knowledge will enable financial security. Many reasonable people think that the time for foreign equities (or some subset) to shine is imminent. Others disagree. For each side, their feelings are based on their judgments of the relative probabilities of various events. They are doing inductive reasoning. Asking for deductive results (i.e., certainty) is, to mix metaphors, not asking for a bridge-too-far but for a bridge in the wrong ballpark.

Investing is, in large part, a reflection of the hope that human talent will produce continuing improvements. We do not know where these will come from - - which societies will by policy or luck produce and sustain winners. We can make educated guesses and provide justifications. Whether an educated guess is wrong or right can only be known in hindsight. Whether someone needs to apologize for their guess is, for me, a different issue than right or wrong. It is an issue of whether the guess was appropriately thought-out and explained. If Vanguard used CAPE ratios or whatever as a justification for a prediction of outperformance, then the question of apology should not be whether that was wrong to do, but whether or not it was the rational thing to do.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by burritoLover »

ClevrChico wrote: Sun Sep 26, 2021 11:13 am
burritoLover wrote: Sun Sep 26, 2021 11:04 am The outperformance of US stocks post-GFC is primarily because they have got more expensive relative to ex-US. But markets with a large P/E expansions should continue to outperform forever right?

Image
If read the Morningstar article correctly, it's earnings that are the main driver.

"It was really at the end of the day U.S. companies were just growing their earnings and their fundamentals much more stronger than the overseas companies were."

https://www.morningstar.com/articles/96 ... ave-lagged
It matters what you pay for those earnings - if earnings growth is high but price continues to outpace it relative to those earnings, it puts things in context. You can't look at earnings in isolation.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Nathan Drake »

ClevrChico wrote: Sun Sep 26, 2021 11:13 am
burritoLover wrote: Sun Sep 26, 2021 11:04 am The outperformance of US stocks post-GFC is primarily because they have got more expensive relative to ex-US. But markets with a large P/E expansions should continue to outperform forever right?

Image
If read the Morningstar article correctly, it's earnings that are the main driver.

"It was really at the end of the day U.S. companies were just growing their earnings and their fundamentals much more stronger than the overseas companies were."

https://www.morningstar.com/articles/96 ... ave-lagged
This Morningstar article looks to be incorrect and light on any actual data, wouldn’t be the first time.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by ClevrChico »

Nathan Drake wrote: Sun Sep 26, 2021 12:41 pm
This Morningstar article looks to be incorrect and light on any actual data, wouldn’t be the first time.
Personally, I'll be staying the course with a market-cap weighted international asset allocation. No need to chase returns.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Nathan Drake »

ClevrChico wrote: Sun Sep 26, 2021 12:49 pm
Nathan Drake wrote: Sun Sep 26, 2021 12:41 pm
This Morningstar article looks to be incorrect and light on any actual data, wouldn’t be the first time.
Personally, I'll be staying the course with a market-cap weighted international asset allocation. No need to chase returns.
Sound move, in my view. I read the morninstar article and it says companies grew earnings at 10% per year and that valuation expansion between US and exUS was the same. This doesn't add up. Earnings growth wasn't that high. I don't know if they are strictly looking at the top companies NOW and what THEIR earnings growth was for the entire decade rather than what they should be doing which is comparing the aggregate earnings then and now. Any S&P 500 earnings chart doesn't show earnings growing anywhere near that rate.


https://www.aqr.com/Insights/Perspectiv ... ing-to-You
It’s still a 1.1% victory (my first obvious guess for why would be some real earnings outperformance in the USA)
but a significantly smaller (1.1% vs. 4.4% or 75% smaller) victory then just looking at simple returns, and even
though it’s over thirty years it’s not quite a statistically significant outperformance. The USA has won over the last
thirty years mostly (75% in our estimate) on a revaluation from the late 1980s Japanese bubble and ending at the
richest USA vs. world valuations we’ve seen. Building in an expectation that that will repeat, i.e., shunning
international stocks because of the thirty-year drought everyone knows shows they stink, seems ill advised to say
the least.


Basically, if you were estimating long-term expected returns going forward, would you want to build in CAPE
appreciation going on forever at the rate in the graph above, or would you remove that effect and look at the
intercept? I think the answer is obviously the latter and hope by now you agree! This has real implications for
asset allocators where the “removing the effects of massive changes in valuation” method argues for much more
non-USA exposure than one would get just looking at simple realized returns and assuming they are a fair sample
for the future (and this is without assuming any mean reversion from the historic high valuations of USA vs.
EAFE). Basically, those who’ve changed their portfolio, selling their international stocks and putting it in the USA,
because of the 30 years of USA outperformance, are kind of building in the assumption that relative CAPEs,
which have gone up 2-3x for the USA vs. EAFE, do so again in perpetuity. Good luck.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Horton »

John C. Bogle made “judgments” about the future too. He often referenced the Gordon Equation.
“I can’t forecast the future, let’s be honest about that. But I can make judgments using reasonable expectations about the future and it seems to me the handwriting is on the wall for lower returns than we’ve had historically.”
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by redbarn »

Echoing Horton, this is not really a Vanguard vs. Bogle thing. Bogle routinely referenced a rule-of-thumb for calculating reasonable return expectations and his method would tells us the same story currently as Vanguard's and other methods.

It is said that one should wait a generation after an event takes place before one can write a meaningful history of the event. I don't know if that's true of history but something similar seems to be true when it comes to the assessment of methods to estimate future stock returns. For example, valuation-based models would have made reasonable medium/long-term predictions in the run up to the dot com bubble but would have appeared foolishly wrong for many years if they were being assessed contemporaneously.

My reading of the evidence is that in the historical data, models (or informal rules) based on valuation do reasonably well in predicting medium/long-term returns, certainly better than naïve extrapolation. Though to be fair there are some significant data issues that affect the interpretation of these results, as discussed in past threads.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Phyneas »

Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
By this reasoning, you should only buy the most expensive stocks in the US market and hold them rather than the TSM/S&P 500. Why would the same investors be able to accurately value US vs ex-US stocks but not US vs other US stocks? The cheaper US stocks mustn't be worth investing in, right?

I really find this entire argument bizarre. Why does anyone think that the efficient market hypothesis suddenly ends at the borders of the US stock market? The whole point of buying everything and holding it forever is because you can no more guess what is an 'expensive or cheap' stock on the S&P 500, than you can a stock in America vs a stock in France. Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.

Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by nisiprius »

Beehave wrote: Sun Sep 26, 2021 11:35 am...Now, substitute "foreign equities" for "insurance" above. For me, foreign holdings are a diversifier and, consequently, a form of insurance...
Many investments are loosely touted by enthusiasts as "insurance." But "insurance" usually means a legal contract to pay you specified amounts of money when specified things happen.

Alleged behavior of investment categories is just a loosey-goosey "tends-to" kind of thing. And if the event happens and the stuff that someone called "insurance" doesn't pay off, there is nobody to complain to, let alone sue. In fact you won't even get as much as a sincere apology from whomever was boosting the investment, just alibis and intricate hand-waving pseudo economic explanations of why each one of these situations was special, the stuff that crashed performed "exactly as expected," and and that particular failure shouldn't count.

In 2000-2003 international stocks (blue) plunged a little deeper than US stocks (red). Not much deeper, but deeper.

They didn't act as "insurance" at all.

Ditto in 2008-2009.

Ditto in 2020.

Certainly an international stock investor could say "but 2003-2008 made 2000-2003, 2008-2009, and 2020 worth it." But that's quite different from thinking that international stocks will perform an "insurance" function.

It's not that they made things much worse, it's mostly that they were just irrelevant. It didn't matter much one way or the other if you were 100% US or globally cap-weighted or anything in between.

During 2008-2009 I often said "O thank goodness for my bonds." I never said "O thank goodness for my international stocks."

International diversification is fine--I personally, for no good reason, invest about 20% of my stocks internationally. But don't think of them as providing "insurance." At the very best what I expect of them is that they might provide a small, statistical improvement of some kind that might show up over long periods of time. Or then again maybe not.

Source

Image

Image

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Last edited by nisiprius on Mon Sep 27, 2021 7:05 am, edited 6 times in total.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Beehave »

Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them?
How have the fire and flood insurance I've bought for the last 40 years worked out for me? I've never once made a claim on either one of them.

Diversification for me is a form of insurance. It is not aimed at optimization. If I wanted to shoot for max possible financial performance I'd be market timing and buying individual stocks and options with 100% stocks, no bonds, and no emergency stash of cash.

The US market has tanked very badly a couple of times in recent memory and the economy has needed needed massive government interventions to stave off depression or worse.

The above are some of reasons for which I think international stock investments make sense as part of an asset allocation strategy.

Regarding Vanguard's role in all this, Vanguard continually advocates for diversification. Within that context it warns investors profusely, when setting their asset allocations, that non-US markets have all the risk issues cited by the OP and others in this thread as if they were new news or something being concealed by Vanguard. In this, and in so many other things, Vanguard has been so right for so long - - far longer, far more consistently, and with far more concern for the benefit of its clientele than any alternative. How about that for the title of a thread for a change?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

Beehave wrote: Mon Sep 27, 2021 6:39 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them?
How have the fire and flood insurance I've bought for the last 40 years worked out for me? I've never once made a claim on either one of them.

Diversification for me is a form of insurance. It is not aimed at optimization. If I wanted to shoot for max possible financial performance I'd be market timing and buying individual stocks and options with 100% stocks, no bonds, and no emergency stash of cash.

The US market has tanked very badly a couple of times in recent memory and the economy has needed needed massive government interventions to stave off depression or worse.

The above are some of reasons for which I think international stock investments make sense as part of an asset allocation strategy.

Regarding Vanguard's role in all this, Vanguard continually advocates for diversification. Within that context it warns investors profusely, when setting their asset allocations, that non-US markets have all the risk issues cited by the OP and others in this thread as if they were new news or something being concealed by Vanguard. In this, and in so many other things, Vanguard has been so right for so long - - far longer, far more consistently, and with far more concern for the benefit of its clientele than any alternative. How about that for the title of a thread for a change?
See the post above in response to the insurance analogy, that poster explained it beautifully. International and US are highly correlated and when the US plunges, so does international. That’s a crappy insurance plan.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Phyneas »

Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.
You could just as easily ask how has it worked out for people to diversify into VTI instead of just buying Apple 10 years ago. The answer is the same - it doesn't matter. How good of an investing decision you've made is based on your ability to collect and process the information you have available to you at the time, not in hindsight. Everyone's trades are perfect in hindsight. But since we can't see into the future, you can't know which decision will be better, except to use as much data as possible, and the data over the last 65 years says adding international stocks improves risk-adjusted returns. If you genuinely don't believe in the efficient market hypothesis, why bother owning VTI, or even VOO? Why not just 5-10 stocks that you think will outperform for x, y and z reasons, the same as why you think US will outperform international?
Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
My point is that if you are willing to pick 3,700 stocks out of the 13,000 available worldwide, why not use your powers of foresight to pick out the best-performing 37 stocks out of the 3700, and based on your argument, to do so simply by selecting the most expensive? You quoted Jack Bogle saying that international equities are cheaper for a reason, so if cheap stocks aren't worth owning in France, why are they worth owning in the US? Why is there is an arbitrary limit there? There are US stocks that have the same forward P/E as stocks in Argentina, China and Scotland, so what is the reason to only own the cheap US stocks and not the cheap ex-US ones?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

Phyneas wrote: Mon Sep 27, 2021 7:14 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.
You could just as easily ask how has it worked out for people to diversify into VTI instead of just buying Apple 10 years ago. The answer is the same - it doesn't matter. How good of an investing decision you've made is based on your ability to collect and process the information you have available to you at the time, not in hindsight. Everyone's trades are perfect in hindsight. But since we can't see into the future, you can't know which decision will be better, except to use as much data as possible, and the data over the last 65 years says adding international stocks improves risk-adjusted returns. If you genuinely don't believe in the efficient market hypothesis, why bother owning VTI, or even VOO? Why not just 5-10 stocks that you think will outperform for x, y and z reasons, the same as why you think US will outperform international?
Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
My point is that if you are willing to pick 3,700 stocks out of the 13,000 available worldwide, why not use your powers of foresight to pick out the best-performing 37 stocks out of the 3700, and based on your argument, to do so simply by selecting the most expensive? You quoted Jack Bogle saying that international equities are cheaper for a reason, so if cheap stocks aren't worth owning in France, why are they worth owning in the US? Why is there is an arbitrary limit there? There are US stocks that have the same forward P/E as stocks in Argentina, China and Scotland, so what is the reason to only own the cheap US stocks and not the cheap ex-US ones?
Many false equivalents in your argument, again, so let's start with the first -- investing only in Apple is the same as investing only in total US? So Apple is the same as 3700 companies across multiple sectors, of varying maturities? I guess I learned something new today. Tim Cook must be a lot busier than any of us could have ever imagined!

And yes, as far as indexing, I'd rather own cheap stocks in the US than another country. Yes, you have that assumption correct. When France, Argentina, China, or Scotland mature to the point of matching the US's long history of being capitalistically friendly, stability, the world's reserve, and tax friendly, sure I will consider investing in them. And lets say a country like France does eclipse the US and becomes the de facto place to invest, if you hold market weight, it's going to take a might long time for that to have any appreciable impact on your portfolio and performance. The US will one day lose dominance, sure, but likely not in our life times or lose enough to really make a big difference in returns.

Until then, I am perfectly content investing 100% in the US, and it has served me extremely well over the years and I am glad I never listened to the noise the talking heads and investment firms that are selling their products trying to convince me US is doomed and to buy costlier international instruments. Good day :beer
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Phyneas »

Rikaku wrote: Mon Sep 27, 2021 7:31 am
Phyneas wrote: Mon Sep 27, 2021 7:14 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.
You could just as easily ask how has it worked out for people to diversify into VTI instead of just buying Apple 10 years ago. The answer is the same - it doesn't matter. How good of an investing decision you've made is based on your ability to collect and process the information you have available to you at the time, not in hindsight. Everyone's trades are perfect in hindsight. But since we can't see into the future, you can't know which decision will be better, except to use as much data as possible, and the data over the last 65 years says adding international stocks improves risk-adjusted returns. If you genuinely don't believe in the efficient market hypothesis, why bother owning VTI, or even VOO? Why not just 5-10 stocks that you think will outperform for x, y and z reasons, the same as why you think US will outperform international?
Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
My point is that if you are willing to pick 3,700 stocks out of the 13,000 available worldwide, why not use your powers of foresight to pick out the best-performing 37 stocks out of the 3700, and based on your argument, to do so simply by selecting the most expensive? You quoted Jack Bogle saying that international equities are cheaper for a reason, so if cheap stocks aren't worth owning in France, why are they worth owning in the US? Why is there is an arbitrary limit there? There are US stocks that have the same forward P/E as stocks in Argentina, China and Scotland, so what is the reason to only own the cheap US stocks and not the cheap ex-US ones?
Many false equivalents in your argument, again, so let's start with the first -- investing only in Apple is the same as investing only in total US? So Apple is the same as 3700 companies across multiple sectors, of varying maturities? I guess I learned something new today. Tim Cook must be a lot busier than any of us could have ever imagined!

And yes, as far as indexing, I'd rather own cheap stocks in the US than another country. Yes, you have that assumption correct. When France, Argentina, China, or Scotland mature to the point of matching the US's long history of being capitalistically friendly, stability, the world's reserve, and tax friendly, sure I will consider investing in them. And lets say a country like France does eclipse the US and becomes the de facto place to invest, if you hold market weight, it's going to take a might long time for that to have any appreciable impact on your portfolio and performance. The US will one day lose dominance, sure, but likely not in our life times or lose enough to really make a big difference in returns.

Until then, I am perfectly content investing 100% in the US, and it has served me extremely well over the years and I am glad I never listened to the noise the talking heads and investment firms that are selling their products trying to convince me US is doomed and to buy costlier international instruments. Good day :beer
It isn't a false equivalency, you just don't understand the point that I'm making. Either you can predict the future or you can't. If you can, you can predict it just as well inside the US market as you can between the US market and ex-US markets, so why own the cheap US stocks as well as the expensive ones? If you can't, then owning cheap US stocks instead of owning cheap ex-US stocks is arbitrary. Individual companies in the US do not succeed or fail for the same reasons, they all operate differently and the totality of their individual operations is the US market. If these companies are cheap in America, why do you think they are cheap for substantially different reasons than why certain stocks are cheap in France? What is the actual underlying reasoning for coming to that conclusion?
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

Phyneas wrote: Mon Sep 27, 2021 7:45 am
Rikaku wrote: Mon Sep 27, 2021 7:31 am
Phyneas wrote: Mon Sep 27, 2021 7:14 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am

Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.
You could just as easily ask how has it worked out for people to diversify into VTI instead of just buying Apple 10 years ago. The answer is the same - it doesn't matter. How good of an investing decision you've made is based on your ability to collect and process the information you have available to you at the time, not in hindsight. Everyone's trades are perfect in hindsight. But since we can't see into the future, you can't know which decision will be better, except to use as much data as possible, and the data over the last 65 years says adding international stocks improves risk-adjusted returns. If you genuinely don't believe in the efficient market hypothesis, why bother owning VTI, or even VOO? Why not just 5-10 stocks that you think will outperform for x, y and z reasons, the same as why you think US will outperform international?
Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
My point is that if you are willing to pick 3,700 stocks out of the 13,000 available worldwide, why not use your powers of foresight to pick out the best-performing 37 stocks out of the 3700, and based on your argument, to do so simply by selecting the most expensive? You quoted Jack Bogle saying that international equities are cheaper for a reason, so if cheap stocks aren't worth owning in France, why are they worth owning in the US? Why is there is an arbitrary limit there? There are US stocks that have the same forward P/E as stocks in Argentina, China and Scotland, so what is the reason to only own the cheap US stocks and not the cheap ex-US ones?
Many false equivalents in your argument, again, so let's start with the first -- investing only in Apple is the same as investing only in total US? So Apple is the same as 3700 companies across multiple sectors, of varying maturities? I guess I learned something new today. Tim Cook must be a lot busier than any of us could have ever imagined!

And yes, as far as indexing, I'd rather own cheap stocks in the US than another country. Yes, you have that assumption correct. When France, Argentina, China, or Scotland mature to the point of matching the US's long history of being capitalistically friendly, stability, the world's reserve, and tax friendly, sure I will consider investing in them. And lets say a country like France does eclipse the US and becomes the de facto place to invest, if you hold market weight, it's going to take a might long time for that to have any appreciable impact on your portfolio and performance. The US will one day lose dominance, sure, but likely not in our life times or lose enough to really make a big difference in returns.

Until then, I am perfectly content investing 100% in the US, and it has served me extremely well over the years and I am glad I never listened to the noise the talking heads and investment firms that are selling their products trying to convince me US is doomed and to buy costlier international instruments. Good day :beer
It isn't a false equivalency, you just don't understand the point that I'm making. Either you can predict the future or you can't. If you can, you can predict it just as well inside the US market as you can between the US market and ex-US markets, so why own the cheap US stocks as well as the expensive ones? If you can't, then owning cheap US stocks instead of owning cheap ex-US stocks is arbitrary. Individual companies in the US do not succeed or fail for the same reasons, they all operate differently and the totality of their individual operations is the US market. If these companies are cheap in America, why do you think they are cheap for substantially different reasons than why certain stocks are cheap in France? What is the actual underlying reasoning for coming to that conclusion?
You comparing owning Apple to owning VTSAX actually is the very definition of what a false equivalent is. And my reasons for not owning ex US were listed and are not arbitrary. You just don't understand the point I'm making. Either that or you are trying to ignore cognitive dissonance and rationalize why your portfolio that includes ex US has lagged US for about 30 years :wink:
Last edited by Rikaku on Mon Sep 27, 2021 7:57 am, edited 1 time in total.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by nisiprius »

Phyneas wrote: Mon Sep 27, 2021 7:45 am... Either you can predict the future or you can't...
If you roll a pair of dice each of which contains two sixes and no ones, you cannot predict the future in the sense of knowing what the next roll will be. Nevertheless...
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by reln »

Taylor Larimore wrote: Sat Sep 25, 2021 2:18 pm happyjuice8000:

I have been a Vanguard investor for 34 years. I, too, have been surprised to see Vanguard "always predicting non-US equities to vastly outperform US equities." They should be embarrassed.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom (2018): "I'm inclined to stick by my earlier conclusion that holdings of non-U.S. stocks should be limited to no more than 20% of equities."
US outperformance is an anomaly based mostly on multiple expansion, not US companies having better fundamentals. Betting this outperformance will persist indefinitely is betting on some anomalous combination of continued multiple expansion and US companies' unexpected positive fundamental surprises.
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Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Beehave »

Rikaku wrote: Mon Sep 27, 2021 7:03 am
Beehave wrote: Mon Sep 27, 2021 6:39 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am
Rikaku wrote: Sun Sep 26, 2021 10:36 am
Excellent article, and really invalidates many of the “US is expensive, buy international because it’s cheaper” arguments. As Jack said , international is “cheaper” for a reason.
Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them?
How have the fire and flood insurance I've bought for the last 40 years worked out for me? I've never once made a claim on either one of them.

Diversification for me is a form of insurance. It is not aimed at optimization. If I wanted to shoot for max possible financial performance I'd be market timing and buying individual stocks and options with 100% stocks, no bonds, and no emergency stash of cash.

The US market has tanked very badly a couple of times in recent memory and the economy has needed needed massive government interventions to stave off depression or worse.

The above are some of reasons for which I think international stock investments make sense as part of an asset allocation strategy.

Regarding Vanguard's role in all this, Vanguard continually advocates for diversification. Within that context it warns investors profusely, when setting their asset allocations, that non-US markets have all the risk issues cited by the OP and others in this thread as if they were new news or something being concealed by Vanguard. In this, and in so many other things, Vanguard has been so right for so long - - far longer, far more consistently, and with far more concern for the benefit of its clientele than any alternative. How about that for the title of a thread for a change?
See the post above in response to the insurance analogy, that poster explained it beautifully. International and US are highly correlated and when the US plunges, so does international. That’s a crappy insurance plan.
That poster explained the following:

"Alleged behavior of investment categories is just a loosey-goosey "tends-to" kind of thing. "

Exactly.

In the post below, you refer to "false equivalents."

Seems there's a mismatch between the exactness you want in an analogy (which is not what analogies are even about) and the argument allegedly destroying the "insurance" verbiage.

Here's something both of these replies miss. They rely on past behavior (2001 and 2009) in this loosey goosey probabilistic environment as if it were deductive certainty. Maybe some of the more experienced Bogleheads will recall Louis Rukeyser's elves. One was named Elizabeth Dater. For about two years prior to the 2001 crash her model, unlike all the giddy others, predicted a crash. Rukeyser booted her off the show (well, she magically disappeared) shortly before the crash. The appearance was that her stodgy CAPE ratio or whatever analyses were spoiling the dog-walker.com billion dollar investing sure-money fun. Maybe there's a lesson there worth taking. The world is indeed loosey goosey, and diversification is a form of insurance. Obviously, it is not a contract. If you want a contract, buy an annuity - which by the way is not a bad idea either for many people as a way of trying to mitigate against all the risk that is really out there.
Rikaku
Posts: 44
Joined: Fri Apr 02, 2021 10:12 am

Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Rikaku »

Beehave wrote: Mon Sep 27, 2021 7:58 am
Rikaku wrote: Mon Sep 27, 2021 7:03 am
Beehave wrote: Mon Sep 27, 2021 6:39 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am
Phyneas wrote: Mon Sep 27, 2021 3:02 am

Why is 40% of the world's equity money in ex-US stocks if it's so obvious that their growth potential is perpetually lower than US stocks? Are they all just hedging? Are they all just ... *gasp* ... diversifying?
And how has that diversification worked out for them?
How have the fire and flood insurance I've bought for the last 40 years worked out for me? I've never once made a claim on either one of them.

Diversification for me is a form of insurance. It is not aimed at optimization. If I wanted to shoot for max possible financial performance I'd be market timing and buying individual stocks and options with 100% stocks, no bonds, and no emergency stash of cash.

The US market has tanked very badly a couple of times in recent memory and the economy has needed needed massive government interventions to stave off depression or worse.

The above are some of reasons for which I think international stock investments make sense as part of an asset allocation strategy.

Regarding Vanguard's role in all this, Vanguard continually advocates for diversification. Within that context it warns investors profusely, when setting their asset allocations, that non-US markets have all the risk issues cited by the OP and others in this thread as if they were new news or something being concealed by Vanguard. In this, and in so many other things, Vanguard has been so right for so long - - far longer, far more consistently, and with far more concern for the benefit of its clientele than any alternative. How about that for the title of a thread for a change?
See the post above in response to the insurance analogy, that poster explained it beautifully. International and US are highly correlated and when the US plunges, so does international. That’s a crappy insurance plan.
That poster explained the following:

"Alleged behavior of investment categories is just a loosey-goosey "tends-to" kind of thing. "

Exactly.

In the post below, you refer to "false equivalents."

Seems there's a mismatch between the exactness you want in an analogy (which is not what analogies are even about) and the argument allegedly destroying the "insurance" verbiage.

Here's something both of these replies miss. They rely on past behavior (2001 and 2009) in this loosey goosey probabilistic environment as if it were deductive certainty. Maybe some of the more experienced Bogleheads will recall Louis Rukeyser's elves. One was named Elizabeth Dater. For about two years prior to the 2001 crash her model, unlike all the giddy others, predicted a crash. Rukeyser booted her off the show (well, she magically disappeared) shortly before the crash. The appearance was that her stodgy CAPE ratio or whatever analyses were spoiling the dog-walker.com billion dollar investing sure-money fun. Maybe there's a lesson there worth taking. The world is indeed loosey goosey, and diversification is a form of insurance. Obviously, it is not a contract. If you want a contract, buy an annuity - which by the way is not a bad idea either for many people as a way of trying to mitigate against all the risk that is really out there.
I see a lot of words but not a lot of …coherence? Elves? What?

And an analogy is not exact but should at least contain some semblance of sameness if you are using one to make a point. 1 = 3700 will not work for any point one is trying to prove.
Phyneas
Posts: 336
Joined: Tue Apr 27, 2021 9:10 pm

Re: Vanguard Capital Markets Model - So Wrong for So Long

Post by Phyneas »

Rikaku wrote: Mon Sep 27, 2021 7:50 am
Phyneas wrote: Mon Sep 27, 2021 7:45 am
Rikaku wrote: Mon Sep 27, 2021 7:31 am
Phyneas wrote: Mon Sep 27, 2021 7:14 am
Rikaku wrote: Mon Sep 27, 2021 5:29 am

And how has that diversification worked out for them? I’m sure you’ll get creative with the start dates and retort with some backtest to show a period of time where international had a minuscule higher return than US, and I’m sure that helps you sleep better at night holding onto an asset class that drags you down for decades but has its day it the sun every 10-20 years and somehow that proves your point. But for the rest of us, holding 3700 US stocks works out just fine in the long run.
You could just as easily ask how has it worked out for people to diversify into VTI instead of just buying Apple 10 years ago. The answer is the same - it doesn't matter. How good of an investing decision you've made is based on your ability to collect and process the information you have available to you at the time, not in hindsight. Everyone's trades are perfect in hindsight. But since we can't see into the future, you can't know which decision will be better, except to use as much data as possible, and the data over the last 65 years says adding international stocks improves risk-adjusted returns. If you genuinely don't believe in the efficient market hypothesis, why bother owning VTI, or even VOO? Why not just 5-10 stocks that you think will outperform for x, y and z reasons, the same as why you think US will outperform international?
Also, your argument isn’t making a lot of sense, I clearly stated total US, so where are you getting this argument of cherry picking within the S&P 500? Total US has cheap and expensive stocks, I buy them all, and if I felt the top ones were too expensive I simply buy more of the cheap ones — problem solved without investing in total ex US and introducing those laggards into my portfolio :beer
My point is that if you are willing to pick 3,700 stocks out of the 13,000 available worldwide, why not use your powers of foresight to pick out the best-performing 37 stocks out of the 3700, and based on your argument, to do so simply by selecting the most expensive? You quoted Jack Bogle saying that international equities are cheaper for a reason, so if cheap stocks aren't worth owning in France, why are they worth owning in the US? Why is there is an arbitrary limit there? There are US stocks that have the same forward P/E as stocks in Argentina, China and Scotland, so what is the reason to only own the cheap US stocks and not the cheap ex-US ones?
Many false equivalents in your argument, again, so let's start with the first -- investing only in Apple is the same as investing only in total US? So Apple is the same as 3700 companies across multiple sectors, of varying maturities? I guess I learned something new today. Tim Cook must be a lot busier than any of us could have ever imagined!

And yes, as far as indexing, I'd rather own cheap stocks in the US than another country. Yes, you have that assumption correct. When France, Argentina, China, or Scotland mature to the point of matching the US's long history of being capitalistically friendly, stability, the world's reserve, and tax friendly, sure I will consider investing in them. And lets say a country like France does eclipse the US and becomes the de facto place to invest, if you hold market weight, it's going to take a might long time for that to have any appreciable impact on your portfolio and performance. The US will one day lose dominance, sure, but likely not in our life times or lose enough to really make a big difference in returns.

Until then, I am perfectly content investing 100% in the US, and it has served me extremely well over the years and I am glad I never listened to the noise the talking heads and investment firms that are selling their products trying to convince me US is doomed and to buy costlier international instruments. Good day :beer
It isn't a false equivalency, you just don't understand the point that I'm making. Either you can predict the future or you can't. If you can, you can predict it just as well inside the US market as you can between the US market and ex-US markets, so why own the cheap US stocks as well as the expensive ones? If you can't, then owning cheap US stocks instead of owning cheap ex-US stocks is arbitrary. Individual companies in the US do not succeed or fail for the same reasons, they all operate differently and the totality of their individual operations is the US market. If these companies are cheap in America, why do you think they are cheap for substantially different reasons than why certain stocks are cheap in France? What is the actual underlying reasoning for coming to that conclusion?
You comparing owning Apple to owning VTSAX actually is the very definition of what a false equivalent is. And my reasons for not owning ex US were listed and are not arbitrary. You just don't understand the point I'm making. Either that or you are trying to ignore cognitive dissonance and rationalize why your portfolio that includes ex US has lagged US for about 30 years :wink:
I'll boil it down for you. In your original comment you implied, quoting Jack Bogle, that ex-US stocks aren't worth owning because they're cheaper, which is an indicator of their 'quality' I guess. If cheap ex-US stocks aren't worth owning when you can own more expensive US stocks in aggregate, why are cheap US stocks even worth owning, when you could also only own even more expensive US stocks. Why buy VTi which is full of cheap stocks, when you can just buy Chewy and Tesla and Amazon?
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