If Valuation doesn't matter, what does?

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Da5id
Posts: 5066
Joined: Fri Feb 26, 2016 7:20 am

Re: If Valuation doesn't matter, what does?

Post by Da5id »

CraigTester wrote: Tue May 17, 2022 7:42 am
HomerJ wrote: Tue May 17, 2022 4:48 am
Nathan Drake wrote: Tue May 17, 2022 12:13 am And if S&P falls to 2200 does that mean he’s right?
Nope, because anyone who rebalanced on the way up locked in some gains and would still be ahead.

Remember the goal here is to make more money than the buy and hold and rebalance crowd.

If he buys at 2200, he might be slightly ahead of the person who was 100% stocks this whole time and rode it all the way up and all the way down.

But will he buy at 2200? Won't CAPE still be pretty high?

And, of course, we're all kind of stubborn here... I'm sure we'll still argue about strategy vs. results in any case (just like the OP is arguing that his strategy is superior even though currently his results are terrible).

:)
Your rebalance (magic bullet) comment always strikes me as funny..... I'm never sure if you're betting that your BND leg will bail you out?....but if the SP500 falls while you have a 50% position in it, and interest rates are already at historic lows (and likely to increase per the Fed having no choice), it's hard to see a high probability scenario where you lock in gains....
I find discussing secret strategies kind of mystifying. What is the point? Reasons I can imagine to keep a strategy secret:

1) realization that one can't defend the strategy logically
2) belief that one could defend the strategy logically, but doesn't want to bother (totally fair, but why allude to it then?)
3) belief that disclosing the strategy would make everyone copy it and dilute its effectiveness (meh, but possible, and again why mention it?)
4) ????

I'm having trouble picturing *why* I'd refer to a secret superior strategy in a public forum if *I* had one under any assumptions I can imagine. If I were doing such a thing, I'd feel like *I* was taunting people. Obviously everyone has different motivations....
ValuationsMatter
Posts: 390
Joined: Mon Mar 09, 2020 2:12 am

Re: If Valuation doesn't matter, what does?

Post by ValuationsMatter »

HanSolo wrote: Tue May 17, 2022 12:41 am
CraigTester wrote: Mon May 16, 2022 7:36 pm
HanSolo wrote: Mon May 16, 2022 3:16 pm
CraigTester wrote: Mon May 16, 2022 10:20 am I don't want to have my powder reduced right when I want to use it....
(snip) What if 2022 is a 2018-like scenario and we're already at or near the bottom? How will that work out?
(snip) Not sure what you mean by 2018-like scenario, (snip)
I meant the S&P reaches somewhere around 20% below ATH and then heads back up into a raging bull market. In that case, your powder might not ever get put into equities. If I understand your response, that powder will remain in other investments (such as treasuries) and you don't mind that. Sounds fine to me.
So back to you.... what are you doing about high US valuations...?
One is that I tilt toward value-oriented equities (e.g., mutual funds with lower-than-average price-to-book, etc.). The other is that I adjust my equity allocation according to market valuation. Like you, I'm not going to declare my exact strategy, but "Equity Allocation = 65 minus Shiller PE" would be an approximation of what I'm doing (note that I tend toward conservative allocation). In reality, I look at not only Shiller PE but also the "Buffett indicator" (market-cap-to-GDP) and the market's price-to-book and price-to-sales.

In January, I commented about the above here in this thread and got all kinds of push-back. People assumed I was saying all kinds of things that I never said. So, in order to stave that off, I'll have to give a list of disclaimers.

Disclaimers:

1. I make no claims about what will happen in the future.

2. I make no claims that the above will outperform anything in particular (in fact, I'm certain that it'll underperform something or another).

3. I make no claims that the above is suitable for anyone (especially those with a growth objective; I have more of a bent toward capital preservation, but I make no claims about how this will work out for that purpose either).

4. I make no claims that the above will "work". I'm not trying to promote a strategy. I don't even recommend that anyone else do this. Actually, I don't care if anyone does or not. And I don't care if anyone thinks it's a good idea or a bad idea. In this case, I just stated what I'm doing because I was asked.

Just for fun, I'll quote my earlier comment in this thread:
HanSolo wrote: Mon Jan 10, 2022 7:03 pm There's a difference between saying "I have this strategy" vs. "this strategy will outperform." There appears to be a misunderstanding that the former implies the latter.
I got a little tired of the above not being understood. I repeat it so the same misunderstanding doesn't crop up again.
There are a number of us that get it. There are a group of folks who feel it's their duty, like white blood cells attacking what they perceive as outsiders, to make the requisite BS, I mean BH, counter-points. No need to defend your position. It can be tough, even with a thick skin, not to take their attacks personally. I see them start with questions, as though they're honestly trying to make conversation and critically think with you, only to follow that with intellectually dishonest mischaracterizations and straw manning. Can you tell I've had the same experiences, yet? In reality, most are just tee-ing up their tired 'wisdom'. It's not that it's wrong, so much as intolerant.
Last edited by ValuationsMatter on Tue May 17, 2022 9:15 am, edited 1 time in total.
Topic Author
CraigTester
Posts: 1488
Joined: Wed Aug 08, 2018 6:34 am

Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Mon May 16, 2022 11:25 pm
CraigTester wrote: Mon May 16, 2022 7:36 pmI don't seem to have the fear with the long side-line waiting scenario that others have voiced. I just firmly know that math always wins eventually.
You're not smart enough to know what the math is. I don't think anyone is.
Economics is extremely useful as a form of employment for economists.
- John Kenneth Galbraith

I believe that economists put decimal points in their forecasts to shw they have a sense of humor.
- William Gilmore Simms

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.
- Laurence J. Peter.

In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would "have decidedly advised against it" primarily because, "The Nobel Prize confers on an individual an authority which in economics no man ought to possess"

There are only three types of market forecasters: those that don't know where the market is going; those that don't know that they don't know where the market is going; and those that know they don't know, but get paid a lot of money to pretend that they do know.
- Larry Swedroe
Here's a quote from Shiller in 2014.
SP 500 had hit 2000 in 2014. Scary new high, with everything considered expensive!

Shiller expresses scepticism about the value of forecasting - particularly economic forecasting. He points out that in the past, attempts at forecasting were much more likely to be dismissed as mere opinion.

'One thing I've noticed about history, you can search on newspapers going back hundreds of years, search for "economic forecast", you don't find it. It would be very rare to find it,' he says.

'Why didn't newspapers publish economic forecasts? Well, I think that maybe they had the right attitude. Forecast sounds scientific, right? They used to think "well, it's a matter of opinion, you know". And they didn't tabulate the mean opinion of analysts because they would think, I'm guessing, "what's the point of that, they don't know, it's just opinions".'
Note that is Shiller, the man who formulated CAPE.

He also said this in his 1996 paper that predicted 0% real returns because valuations had hit 99% percentile (which turned out to be a poor forecast..)
The conclusion of this paper that the stock market is expected to decline over the next ten years and to earn a total return of just about nothing has to be interpreted with great caution.

Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.

It is also dangerous to assume that historical relations are necessarily applicable to the future. There could be fundamental structural changes occurring now that mean that the past of the stock market is no longer a guide to the future.
Shiller himself said "Be careful not to take this too seriously... It may not be right".

Yet, you think it's just math. Even with CAPE trending higher than the average for the 33 of the past 34 years. Tragic.

Governments and the Fed and Congress passing laws and HUMAN EMOTIONS are involved. It's not just math.

Imagine trying to put a rocket on the moon if investor SENTIMENT could change the gravitational constant every few minutes. It's not just math.

Again, the market may finally return to the mean going forward... You may be right going forward.

But since CAPE (valuations) was formulated in 1988, CAPE has been "high" 33 out of the 34 years. 99% of the time.

Before 1988, it was around 50/50 above the mean/below the mean.

It hasn't followed the "math" since the very moment it was formulated.

That is not uncommon in economics. Once a trend is described and formulated, it stops working. This has happened multiple times.

Again, I'm not saying the market won't correct. I'm saying we don't know if it will or when. There is no easy formula. There are a lot of people smarter than you, and they can't time the market either.
Ben Graham (in "Intelligent Investor") and others discussed using valuation ratios (where price is divided by inflation adjusted earnings), long before Shiller coined the term, CAPE.

But it is interesting to see your quote of him in 1996 saying he expected 0 real returns over the subsequent 10 years. He was almost right!, but he was off by a few years. The SP500's real return from 1996 to 2009, was in fact, zero.

Is this why you are so fixated on him?
ValuationsMatter
Posts: 390
Joined: Mon Mar 09, 2020 2:12 am

Re: If Valuation doesn't matter, what does?

Post by ValuationsMatter »

CraigTester wrote: Tue May 17, 2022 8:18 am
HomerJ wrote: Mon May 16, 2022 11:25 pm
CraigTester wrote: Mon May 16, 2022 7:36 pmI don't seem to have the fear with the long side-line waiting scenario that others have voiced. I just firmly know that math always wins eventually.
You're not smart enough to know what the math is. I don't think anyone is.
Economics is extremely useful as a form of employment for economists.
- John Kenneth Galbraith

I believe that economists put decimal points in their forecasts to shw they have a sense of humor.
- William Gilmore Simms

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.
- Laurence J. Peter.

In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would "have decidedly advised against it" primarily because, "The Nobel Prize confers on an individual an authority which in economics no man ought to possess"

There are only three types of market forecasters: those that don't know where the market is going; those that don't know that they don't know where the market is going; and those that know they don't know, but get paid a lot of money to pretend that they do know.
- Larry Swedroe
Here's a quote from Shiller in 2014.
SP 500 had hit 2000 in 2014. Scary new high, with everything considered expensive!

Shiller expresses scepticism about the value of forecasting - particularly economic forecasting. He points out that in the past, attempts at forecasting were much more likely to be dismissed as mere opinion.

'One thing I've noticed about history, you can search on newspapers going back hundreds of years, search for "economic forecast", you don't find it. It would be very rare to find it,' he says.

'Why didn't newspapers publish economic forecasts? Well, I think that maybe they had the right attitude. Forecast sounds scientific, right? They used to think "well, it's a matter of opinion, you know". And they didn't tabulate the mean opinion of analysts because they would think, I'm guessing, "what's the point of that, they don't know, it's just opinions".'
Note that is Shiller, the man who formulated CAPE.

He also said this in his 1996 paper that predicted 0% real returns because valuations had hit 99% percentile (which turned out to be a poor forecast..)
The conclusion of this paper that the stock market is expected to decline over the next ten years and to earn a total return of just about nothing has to be interpreted with great caution.

Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.

It is also dangerous to assume that historical relations are necessarily applicable to the future. There could be fundamental structural changes occurring now that mean that the past of the stock market is no longer a guide to the future.
Shiller himself said "Be careful not to take this too seriously... It may not be right".

Yet, you think it's just math. Even with CAPE trending higher than the average for the 33 of the past 34 years. Tragic.

Governments and the Fed and Congress passing laws and HUMAN EMOTIONS are involved. It's not just math.

Imagine trying to put a rocket on the moon if investor SENTIMENT could change the gravitational constant every few minutes. It's not just math.

Again, the market may finally return to the mean going forward... You may be right going forward.

But since CAPE (valuations) was formulated in 1988, CAPE has been "high" 33 out of the 34 years. 99% of the time.

Before 1988, it was around 50/50 above the mean/below the mean.

It hasn't followed the "math" since the very moment it was formulated.

That is not uncommon in economics. Once a trend is described and formulated, it stops working. This has happened multiple times.

Again, I'm not saying the market won't correct. I'm saying we don't know if it will or when. There is no easy formula. There are a lot of people smarter than you, and they can't time the market either.
Ben Graham (in "Intelligent Investor") and others discussed using valuation ratios (where price is divided by inflation adjusted earnings), long before Shiller coined the term, CAPE.

But it is interesting to see your quote of him in 1996 saying he expected 0 real returns over the subsequent 10 years. He was almost right!, but he was off by a few years. The SP500's real return from 1996 to 2009, was in fact, zero.

Is this why you are so fixated on him?
I tried that argument. It won't work because it wasn't exactly 10 years to the day. These guys require exact science, unless you're B&H indexing, in which case, bury your head in the sand because nobody knows nuttin'.

Also, I tried the return on treasuries argument with them, too.

My belief is that extremes can be a reasonable cause for action. Merely 'high' valuations leave too much room for fed and political intervention that keeps the party going.

Agreed on your point about CAPE being only 'a' metric/indicator. I'd like to find something better in international markets. Perhaps an adjustment to their metrics for US or world wide valuations.
Last edited by ValuationsMatter on Tue May 17, 2022 10:39 am, edited 1 time in total.
Topic Author
CraigTester
Posts: 1488
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Da5id wrote: Tue May 17, 2022 8:05 am
CraigTester wrote: Tue May 17, 2022 7:42 am
HomerJ wrote: Tue May 17, 2022 4:48 am
Nathan Drake wrote: Tue May 17, 2022 12:13 am And if S&P falls to 2200 does that mean he’s right?
Nope, because anyone who rebalanced on the way up locked in some gains and would still be ahead.

Remember the goal here is to make more money than the buy and hold and rebalance crowd.

If he buys at 2200, he might be slightly ahead of the person who was 100% stocks this whole time and rode it all the way up and all the way down.

But will he buy at 2200? Won't CAPE still be pretty high?

And, of course, we're all kind of stubborn here... I'm sure we'll still argue about strategy vs. results in any case (just like the OP is arguing that his strategy is superior even though currently his results are terrible).

:)
Your rebalance (magic bullet) comment always strikes me as funny..... I'm never sure if you're betting that your BND leg will bail you out?....but if the SP500 falls while you have a 50% position in it, and interest rates are already at historic lows (and likely to increase per the Fed having no choice), it's hard to see a high probability scenario where you lock in gains....
I find discussing secret strategies kind of mystifying. What is the point? Reasons I can imagine to keep a strategy secret:

1) realization that one can't defend the strategy logically
2) belief that one could defend the strategy logically, but doesn't want to bother (totally fair, but why allude to it then?)
3) belief that disclosing the strategy would make everyone copy it and dilute its effectiveness (meh, but possible, and again why mention it?)
4) ????

I'm having trouble picturing *why* I'd refer to a secret superior strategy in a public forum if *I* had one under any assumptions I can imagine. If I were doing such a thing, I'd feel like *I* was taunting people. Obviously everyone has different motivations....
David - Perhaps you’re right. I have actually asked myself the same question.


To replay the thread:

The premise is that US (equity AND bond) valuations are historically high. (Which I believe is generally agreed).

So the obvious next question "to me" is, why?

Has something actually changed? Are the high valuations justified/sustainable?


But there seems to be a group of people who would rather ask a different question, which is, “So what”.

To which I attempted to show that at least historically, markets get into trouble when valuations reach historical heights. (e.g. 20 year wait periods to re-establish high water marks, 80% losses, etc)

And this unintentionally compelled people to explain the merits of buy-n-hold, rebalance, etc

Which in turn compelled me to point out the deficiencies of buy-n-hold "when markets reach extremes".

Which in turn compelled some to explain that there is no other way….

To which I couldn’t resist explaining that there is…..

And in this debate, IMHO, it revealed that there is a LOT of misinformation out there….

So ironically, perhaps my original question has been answered…

But I still don't understand why this would be more true today than at other times....?

Why is Mr. Market feeling so much more generous today than at other times...?
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Tue May 17, 2022 7:23 am
HomerJ wrote: Tue May 17, 2022 5:09 am
HanSolo wrote: Tue May 17, 2022 4:58 am
HomerJ wrote: Tue May 17, 2022 4:48 am the OP is arguing that his strategy is superior
Please quote where the OP made that assertion.
CraigTester wrote: Mon May 16, 2022 7:36 pm I just firmly know that math always wins eventually.
Math does always win, at least in my world. And whether you realize it or not, you're betting that math will win with your strategy as well. You just have a different reference point.
Sure, but I'm smart enough to know that I don't know the equations. No one does.

Your CAPE "equation" was formulated using limited data points, dozens of variables, human laws affect the results (which change over time - these aren't physical laws of nature), and even human emotions play a part.

And immediately after being put to use in the real world, the CAPE formula didn't match real-world results.

1880-1988, CAPE was above the median 55% of the time, and below 45% of the time... It was DERIVED from these data points, so of course, it matches them fairly well.

1988-today, CAPE was above the median 99% of the time, and below 1% of the time. It's predictions were way off.

Of course math wins, but you have to know the right equation.
Last edited by HomerJ on Tue May 17, 2022 11:09 am, edited 2 times in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Randolph Mortimer
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Re: If Valuation doesn't matter, what does?

Post by Randolph Mortimer »

ValuationsMatter wrote: Tue May 17, 2022 9:33 amI tried that argument. It won't work because it was exactly 10 years to the day. These guys require exact science, unless you're B&H indexing, in which case, bury your head in the sand because nobody knows nuttin'.

Also, I tried the return on treasuries argument with them, too.
This strikes me as needlessly inflammatory.

It's very simple. Just about anyone who had a diversified mix of stocks and fixed income (including bonds or whatever) in 1996, who was relatively young (say, under 40), working, and continuing to work and earn, and invest, and rebalance, over the next 13 years did ok. Yes, they could have timed the peaks and troughs and done better. But, they could have done worse. There was no apocalypse.

Now, if you were none of those things (young, advancing your career, continuing to accumulate), the question is then why were you even playing the game? Your time had come and gone. If you were on the verge of retirement in 1996 and had a very heavy stock allocation, then, well....

Also this fact seems to always get ignored (or not even understood) in these discussions:

No additional wealth in an economy is created my markets participants trading with each other. There's no law against participationg in the arbitrage game but to suggest that's what everyone should be doing at times of "market extremes" doesn't solve that problem. There will be winners and losers, many at the extremes on both ends. The losers wind up yelling at clouds, mad because the market didn't cooperate with their thoughts regarding what the market "should do." Those who are resigned to take what the market gives are more likely to win out in the long term. It's basic math, right?
Young Boglehead
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Re: If Valuation doesn't matter, what does?

Post by Young Boglehead »

Just on its face, using CAPE seems way too simple to actually work. And I’ve asked this several times before - I simply don’t understand why there’s some belief that because historically CAPE was x, that means that only numbers near x are reasonable, as though it’s some law of nature and that there must be eventually be a reversion to the mean. I really don’t think that it’s like active mutual funds where you really do see a reversion to the mean because “the mean” refers to matching the US market, which by definition is a static measuring point.

Maybe I’m wrong thinking about it this way, but deciding you’re not going to invest until CAPE is “reasonable” like the good old days, or like it is in other countries, almost reminds me of looking at the price of a sandwich and saying “you know, historically a sandwich was 3 bucks, and in Mexico it’s 20 cents. This price is completely ridiculous, I’ll just wait until we leave the stratosphere.”
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Tue May 17, 2022 7:42 am
HomerJ wrote: Tue May 17, 2022 4:48 am
Nathan Drake wrote: Tue May 17, 2022 12:13 am And if S&P falls to 2200 does that mean he’s right?
Nope, because anyone who rebalanced on the way up locked in some gains and would still be ahead.

Remember the goal here is to make more money than the buy and hold and rebalance crowd.

If he buys at 2200, he might be slightly ahead of the person who was 100% stocks this whole time and rode it all the way up and all the way down.

But will he buy at 2200? Won't CAPE still be pretty high?

And, of course, we're all kind of stubborn here... I'm sure we'll still argue about strategy vs. results in any case (just like the OP is arguing that his strategy is superior even though currently his results are terrible).

:)
Your rebalance (magic bullet) comment always strikes me as funny..... I'm never sure if you're betting that your BND leg will bail you out?....but if the SP500 falls while you have a 50% position in it, and interest rates are already at historic lows (and likely to increase per the Fed having no choice), it's hard to see a high probability scenario where you lock in gains....
I have access to whatever fixed-income returns you state you have. I have indeed talked about BND in the past, but our 401ks do not offer it, so I have used stable-value funds there instead, which have not dropped. I have a good chunk in IBonds, which have done well. I have plenty in cash and CDs, because I'm retiring soon.

For the theory we are talking about, whatever you are 100% in fixed-income, you could have been in that 50% instead and 50% in stocks.

There is no "probability" where I lock in gains. I already did it all the way up to 4800 while you got completely out in the mid 2000s.

The stock market went up 100% while you were on the sidelines and a 50/50 would have locked in 50% gains if rebalanced at the top, and still around 30% if rebalanced gradually on the way up.

Those are gains that remain even as the market drops. It will have to drop FAR below your old selling point for you to make more money with your strategy.

These are the real world results of your strategy.

You would be far ahead right now if you had been 50/50 the last 4 years instead of 0/100. This should be humbling, and give you pause that maybe, just maybe, market-timing with valuations, is not as easy in real-time as it is when looking at charts of 1929.
Last edited by HomerJ on Tue May 17, 2022 10:42 am, edited 1 time in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
alluringreality
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Re: If Valuation doesn't matter, what does?

Post by alluringreality »

CraigTester wrote: Tue May 17, 2022 9:57 am Why is Mr. Market feeling so much more generous today than at other times...?
2009 was specifically mentioned in the question on the first page. I think it's reasonable to generalize some 2009 Treasury rates as being higher than today, especially real rates. I remember an impression of more stock market fear in 2009, which seems to be supported by average VIX closing price. Generally when prices go up people may expect the trend to continue, regardless if it makes sense or not. Likewise when prices go down that can become an expectation. I might tend to summarize 2009 as both higher alternative rates and more fear of stocks due to recent losses.

Inflation adjusted, it looks like the Fed balance sheet was roughly 1/3 the current level in 2009, so the exact effects of Quantitative Easing may be debatable to some extent. Unmentionable Topic started around 2009, and that market is sitting over a trillion value today. Median housing prices appear to have exceeded inflation. It looks like wage growth was negative in 2009 and has recently hit highs. Presuming there's a wealth effect, I suppose being willing to pay higher stock prices might be possibly part of it.

I think it's safe to say that David Swensen, Bill Bernstein, and Jack Bogle might all be open to the idea that stock outlook in 2009 was probably better than today, due to lower valuation. On some level discussions tend to devolve into opinion regarding what to do with current information. My opinions have turned out wrong enough times that I tend to cover my worst case and defer to opinions similar to Jack Bogle's.
Last edited by alluringreality on Tue May 17, 2022 1:06 pm, edited 6 times in total.
45% US Indexes, 25% Ex-US Indexes, 30% Fixed Income - Buy & Hold
secondopinion
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Re: If Valuation doesn't matter, what does?

Post by secondopinion »

ValuationsMatter wrote: Tue May 17, 2022 9:33 am
CraigTester wrote: Tue May 17, 2022 8:18 am
HomerJ wrote: Mon May 16, 2022 11:25 pm
CraigTester wrote: Mon May 16, 2022 7:36 pmI don't seem to have the fear with the long side-line waiting scenario that others have voiced. I just firmly know that math always wins eventually.
You're not smart enough to know what the math is. I don't think anyone is.
Economics is extremely useful as a form of employment for economists.
- John Kenneth Galbraith

I believe that economists put decimal points in their forecasts to shw they have a sense of humor.
- William Gilmore Simms

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today.
- Laurence J. Peter.

In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would "have decidedly advised against it" primarily because, "The Nobel Prize confers on an individual an authority which in economics no man ought to possess"

There are only three types of market forecasters: those that don't know where the market is going; those that don't know that they don't know where the market is going; and those that know they don't know, but get paid a lot of money to pretend that they do know.
- Larry Swedroe
Here's a quote from Shiller in 2014.
SP 500 had hit 2000 in 2014. Scary new high, with everything considered expensive!

Shiller expresses scepticism about the value of forecasting - particularly economic forecasting. He points out that in the past, attempts at forecasting were much more likely to be dismissed as mere opinion.

'One thing I've noticed about history, you can search on newspapers going back hundreds of years, search for "economic forecast", you don't find it. It would be very rare to find it,' he says.

'Why didn't newspapers publish economic forecasts? Well, I think that maybe they had the right attitude. Forecast sounds scientific, right? They used to think "well, it's a matter of opinion, you know". And they didn't tabulate the mean opinion of analysts because they would think, I'm guessing, "what's the point of that, they don't know, it's just opinions".'
Note that is Shiller, the man who formulated CAPE.

He also said this in his 1996 paper that predicted 0% real returns because valuations had hit 99% percentile (which turned out to be a poor forecast..)
The conclusion of this paper that the stock market is expected to decline over the next ten years and to earn a total return of just about nothing has to be interpreted with great caution.

Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.

It is also dangerous to assume that historical relations are necessarily applicable to the future. There could be fundamental structural changes occurring now that mean that the past of the stock market is no longer a guide to the future.
Shiller himself said "Be careful not to take this too seriously... It may not be right".

Yet, you think it's just math. Even with CAPE trending higher than the average for the 33 of the past 34 years. Tragic.

Governments and the Fed and Congress passing laws and HUMAN EMOTIONS are involved. It's not just math.

Imagine trying to put a rocket on the moon if investor SENTIMENT could change the gravitational constant every few minutes. It's not just math.

Again, the market may finally return to the mean going forward... You may be right going forward.

But since CAPE (valuations) was formulated in 1988, CAPE has been "high" 33 out of the 34 years. 99% of the time.

Before 1988, it was around 50/50 above the mean/below the mean.

It hasn't followed the "math" since the very moment it was formulated.

That is not uncommon in economics. Once a trend is described and formulated, it stops working. This has happened multiple times.

Again, I'm not saying the market won't correct. I'm saying we don't know if it will or when. There is no easy formula. There are a lot of people smarter than you, and they can't time the market either.
Ben Graham (in "Intelligent Investor") and others discussed using valuation ratios (where price is divided by inflation adjusted earnings), long before Shiller coined the term, CAPE.

But it is interesting to see your quote of him in 1996 saying he expected 0 real returns over the subsequent 10 years. He was almost right!, but he was off by a few years. The SP500's real return from 1996 to 2009, was in fact, zero.

Is this why you are so fixated on him?
I tried that argument. It won't work because it wasn't exactly 10 years to the day. These guys require exact science, unless you're B&H indexing, in which case, bury your head in the sand because nobody knows nuttin'.

Also, I tried the return on treasuries argument with them, too.

My belief is that extremes can be a reasonable cause for action. Merely 'high' valuations leave too much room for fed and political intervention that keeps the party going.

Agreed on your point about CAPE being only 'a' metric/indicator. I'd like to find something better in international markets. Perhaps an adjustment to their metrics for US or world wide valuations.
Seeing this continuing thread, I can only say to take risk when one needs to and cut it back when they do not. These high valuations normally require me to cut back risk because that normally means I got great gains and the need of taking risk has dropped. Concavity is a wonderful thing; I can "bury [my] head in the sand" and respect valuations at the same time indirectly.
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Tue May 17, 2022 8:18 am But it is interesting to see your quote of him in 1996 saying he expected 0 real returns over the subsequent 10 years. He was almost right!, but he was off by a few years. The SP500's real return from 1996 to 2009, was in fact, zero.
Almost right = wrong when talking about market-timing. You have to get the "timing" right for market-timing to work.

And he didn't foresee the housing crash and sub-prime mortgages.

He forecast the 2000 crash. 4 years too early... which didn't drop as low as 1996. Market went up 120% first before dropping 40%. You could have gone to treasuries and then got back in around 2003 (at a higher stock market point than 1996, but the treasuries would have made it about even).

But that's not any great market-timing win. And CAPE was still "high" in 2003... still 23 or so. So would one have gotten back in just to break even? Or waited longer for the market to crash farther to actually beat the returns of buy and hold?

1996, 99% percentile valuations, turned out be a good time to buy stocks (Just like 2017-2018, with 95%+ percentile valuations turned out to be a good time to buy stocks).

The next near equal chance to buy back in at the same level as 1996 was a couple of months in spring 2009 when stocks dropped to 1996 levels.. Because of treasury returns over the years, this could have been a real win (after 13 years). But only for a very small window... If you thought the rally in March was a sucker's rally, and you were waiting for valuations to actually go "low" instead of just "average", it could have been easy to miss.

By the end of 2009, the market had bounced back so quickly that 1996-2009 annual returns were actually 6.3% a year over that entire period. (around 4% in real terms). Very close to 10-year Treasury returns over the same period.

So completely ignoring valuations and buying and holding through TWO stock market crashes paid off just fine.

And if you were waiting for the CAPE to go "low", you're STILL waiting 26 years later.
Last edited by HomerJ on Tue May 17, 2022 11:29 am, edited 5 times in total.
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

secondopinion wrote: Tue May 17, 2022 10:45 am Seeing this continuing thread, I can only say to take risk when one needs to and cut it back when they do not. These high valuations normally require me to cut back risk because that normally means I got great gains and the need of taking risk has dropped. Concavity is a wonderful thing; I can "bury [my] head in the sand" and respect valuations at the same time indirectly.
This is a good point. :)
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

HomerJ wrote: Tue May 17, 2022 10:39 am
You would be far ahead right now if you had been 50/50 the last 4 years instead of 0/100. This should be humbling, and give you pause that maybe, just maybe, market-timing with valuations, is not as easy in real-time as it is when looking at charts of 1929.
HomerJ,

And, OP could had achieved the same goal with

A) 50% stock and 50% cash.

B) 50% stock and 50% cash with only one way rebalance by selling stock. Hence, he locked in the gain with cash. If the market crash later, he still left with the cash.

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Re: If Valuation doesn't matter, what does?

Post by ValuationsMatter »

secondopinion wrote: Tue May 17, 2022 10:45 am
Seeing this continuing thread, I can only say to take risk when one needs to and cut it back when they do not. These high valuations normally require me to cut back risk because that normally means I got great gains and the need of taking risk has dropped. Concavity is a wonderful thing; I can "bury [my] head in the sand" and respect valuations at the same time indirectly.
I can appreciate that approach.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Tue May 17, 2022 10:39 am
CraigTester wrote: Tue May 17, 2022 7:42 am
HomerJ wrote: Tue May 17, 2022 4:48 am
Nathan Drake wrote: Tue May 17, 2022 12:13 am And if S&P falls to 2200 does that mean he’s right?
Nope, because anyone who rebalanced on the way up locked in some gains and would still be ahead.

Remember the goal here is to make more money than the buy and hold and rebalance crowd.

If he buys at 2200, he might be slightly ahead of the person who was 100% stocks this whole time and rode it all the way up and all the way down.

But will he buy at 2200? Won't CAPE still be pretty high?

And, of course, we're all kind of stubborn here... I'm sure we'll still argue about strategy vs. results in any case (just like the OP is arguing that his strategy is superior even though currently his results are terrible).

:)
Your rebalance (magic bullet) comment always strikes me as funny..... I'm never sure if you're betting that your BND leg will bail you out?....but if the SP500 falls while you have a 50% position in it, and interest rates are already at historic lows (and likely to increase per the Fed having no choice), it's hard to see a high probability scenario where you lock in gains....
I have access to whatever fixed-income returns you state you have. I have indeed talked about BND in the past, but our 401ks do not offer it, so I have used stable-value funds there instead, which have not dropped. I have a good chunk in IBonds, which have done well. I have plenty in cash and CDs, because I'm retiring soon.

For the theory we are talking about, whatever you are 100% in fixed-income, you could have been in that 50% instead and 50% in stocks.

There is no "probability" where I lock in gains. I already did it all the way up to 4800 while you got completely out in the mid 2000s.

The stock market went up 100% while you were on the sidelines and a 50/50 would have locked in 50% gains if rebalanced at the top, and still around 30% if rebalanced gradually on the way up.

Those are gains that remain even as the market drops. It will have to drop FAR below your old selling point for you to make more money with your strategy.

These are the real world results of your strategy.

You would be far ahead right now if you had been 50/50 the last 4 years instead of 0/100. This should be humbling, and give you pause that maybe, just maybe, market-timing with valuations, is not as easy in real-time as it is when looking at charts of 1929.
Homer - I literally almost cut and pasted my earlier responses because I feel that is what you’re doing, but please humor me with a multiple choice question:

Do you have any thoughts on why Mr. Market is feeling so generous right now?

a) I don’t think the market is expensive right now because Shiller is an economist.
b) Who cares, because if you had gotten out in 1996 you would have missed gains, etc, etc…
c) Who cares because rebalancing is awesome
d) I don’t want to admit that there really doesn’t appear to be any rationale reason for it.
e) other (please explain)
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Re: If Valuation doesn't matter, what does?

Post by patrick »

CraigTester wrote: Tue May 17, 2022 9:57 am To replay the thread:

The premise is that US (equity AND bond) valuations are historically high. (Which I believe is generally agreed).
We should all agree that stock valuations are historically high by some metrics. But historically they were always high by some metrics, though not always the same ones. Historically high valuations are the historical norm.
So the obvious next question "to me" is, why?

Has something actually changed? Are the high valuations justified/sustainable?
Assuming that the right valuation metric is one that is high right now, there are many obvious reasons one could give why it is justifiable. There are also many obvious reasons one could give for the reverse.
Which in turn compelled some to explain that there is no other way….

To which I couldn’t resist explaining that there is…..
There is no denying that many market timing strategies exist, and some will turn out to have good results. The hard part is picking in advance which of them that will be. I do not really believe it is impossible, but only that those who wrongly claim they can time the market correctly vastly outnumber those who really can.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

alluringreality wrote: Tue May 17, 2022 10:42 am
CraigTester wrote: Tue May 17, 2022 9:57 am Why is Mr. Market feeling so much more generous today than at other times...?
2009 was specifically mentioned in the question on the first page. I think it's reasonable to generalize some 2009 Treasury rates as being higher than today, especially real rates. I remember an impression of more stock market fear in 2009, which seems to be supported by average VIX closing price. Generally when prices go up people may expect the trend to continue, regardless if it makes sense or not. Likewise when prices go down that can become an expectation. I might tend to summarize 2009 as both higher alternative rates and more fear of stocks due to recent losses.

Inflation adjusted, it looks like the Fed balance sheet was roughly 1/3 the current level in 2009, so the exact effects of Quantitative Easing may be debatable to some extent. Unmentionable Topic started around 2009, and that market is sitting over a trillion value today. Median housing prices appear to have exceeded inflation. It looks like wage growth was negative in 2009 and has recently hit highs. Presuming there's a wealth effect, I suppose being willing to pay higher stock prices might be possibly part of it.

I think it's safe to say that David Swensen, Bill Bernstein, and Jack Bogle might all be open to the idea that stock outlook in 2009 was probably better than today, due to lower valuation. On some level discussions tend to devolve into opinion regarding what to do with current information. My opinions have turned out wrong enough times that I tend to cover my worst case and defer to opinions similar to Jack Bogle's.
Thanks for that well thought out answer. You seem to have reached a perfectly logical reason for defaulting to buy-n-hold, independent of valuation. And if you stick to it long enough, it should work out fine…..

But assuming EMT is at least directionally right, someone out there apparently believes US stocks and bonds are fairly valued right now, and I’d love to hear their “logical reason”.

PS. This is the “blind spot” I’m open to finding. IMHO, I believe with great confidence that inflation adjusted returns (dividends reinvested) of the SP500 will be negative over the next 10 years. This is based purely on the assumption that historical valuation relationships to intrinsic value will normalize.

I’m not looking for advice on what to do about, but rather I am looking for insights on why anyone logically believes US stocks and bonds are “reasonably” valued right now.

Respect, CraigTester
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Re: If Valuation doesn't matter, what does?

Post by Tellurius »

Haven’t stock buybacks over the last 20-30 years changed the denominator of P/E?
As E is earnings per share
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Re: If Valuation doesn't matter, what does?

Post by CuriousTacos »

Tellurius wrote: Wed May 18, 2022 11:44 am Haven’t stock buybacks over the last 20-30 years changed the denominator of P/E?
As E is earnings per share
All else equal, buybacks shouldn't "change" the P/E any more than dividends would.

With dividends, the price should increase over time as the company accumulates profits, then decrease when the company pays out that cash. With buybacks, the price should increase over time as the company accumulates profits, then remain the same when the company buys back shares.

So relative to the dividend company, the buyback company now has a higher E (per share), but also a proportionally higher P (per share), so the same P/E.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

CuriousTacos wrote: Wed May 18, 2022 12:05 pm
Tellurius wrote: Wed May 18, 2022 11:44 am Haven’t stock buybacks over the last 20-30 years changed the denominator of P/E?
As E is earnings per share
All else equal, buybacks shouldn't "change" the P/E any more than dividends would.

With dividends, the price should increase over time as the company accumulates profits, then decrease when the company pays out that cash. With buybacks, the price should increase over time as the company accumulates profits, then remain the same when the company buys back shares.

So relative to the dividend company, the buyback company now has a higher E (per share), but also a proportionally higher P (per share), so the same P/E.
Well said, (ignoring a little tax asymmetry, of course)

And note that it's not just the metrics with an "E" in them that are at historical highs.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Here is another way of getting to the question, I'm attempting to ask:

If you somehow "magically" knew that inflation adjusted returns of the SP500 would be negative over the next 10 years, I assume even the most die-hard BH would, at a minimum, just wait out their time in a ten year TIP (e.g. 10 yr TIPs offer a guaranteed positive inflation adjusted return).

Accordingly, anyone buying/holding the SP500 right now must believe there is a reasonable chance that it's 10 year inflation adjusted returns will exceed Zero.

Now taken a step further, given that we're sitting in the upper percentiles of valuation, what is it that people must believe about the prospects for future returns, that causes the collective investment community to maintain upper percentile pricing in the face of 8.4% inflation, a stuck Fed, etc

I asked similar questions in 1996, 97, 98.... And back then, the clear answer always came back that the internet will change things in a way that can't be quantified.....And at that moment, it was actually something you could hang your hopes on.....

But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....

Does this not strike anyone else as odd....?
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Wed May 18, 2022 1:27 pmNow taken a step further, given that we're sitting in the upper percentiles of valuation, what is it that people must believe about the prospects for future returns
The answer is that we've been in the upper quartile of valuations pretty much since 1992 and the 10-year returns have mostly all been decent, close to the historical average.

So there doesn't appear to be any reason to think that high valuations have any predictive powers over 10-year returns.

That's the answer to your question. We don't know what the next 10 year returns will be... They could be decent, they could be low, they could be negative. We don't know.

The fact that valuations are high doesn't shed any more light on this.

Valuations have been high for 30 years, and we've had mostly decent 10-year return periods. Who knows what the next 10 years will bring?

Another important point, almost all of us are investing at least some of our money for longer than 10 years...
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

HomerJ wrote: Wed May 18, 2022 1:43 pm
CraigTester wrote: Wed May 18, 2022 1:27 pmNow taken a step further, given that we're sitting in the upper percentiles of valuation, what is it that people must believe about the prospects for future returns
The answer is that we've been in the upper quartile of valuations pretty much since 1992 and the 10-year returns have mostly all been decent, close to the historical average.

So there doesn't appear to be any reason to think that high valuations have any predictive powers over 10-year returns.

That's the answer to your question. We don't know what the next 10 year returns will be... They could be decent, they could be low, they could be negative. We don't know.

The fact that valuations are high doesn't shed any more light on this.

Valuations have been high for 30 years, and we've had mostly decent 10-year return periods. Who knows what the next 10 years will bring?

Another important point, almost all of us are investing at least some of our money for longer than 10 years...
I think better questions remain:

"in order to market time, what must one believe about the tactical usefulness of market valuations"?

Or more simply "what is the overall success rate of investors who attempt to time equity markets"?
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Re: If Valuation doesn't matter, what does?

Post by Young Boglehead »

CraigTester wrote: Wed May 18, 2022 1:27 pm Here is another way of getting to the question, I'm attempting to ask:

If you somehow "magically" knew that inflation adjusted returns of the SP500 would be negative over the next 10 years, I assume even the most die-hard BH would, at a minimum, just wait out their time in a ten year TIP (e.g. 10 yr TIPs offer a guaranteed positive inflation adjusted return).

Accordingly, anyone buying/holding the SP500 right now must believe there is a reasonable chance that it's 10 year inflation adjusted returns will exceed Zero.

Now taken a step further, given that we're sitting in the upper percentiles of valuation, what is it that people must believe about the prospects for future returns, that causes the collective investment community to maintain upper percentile pricing in the face of 8.4% inflation, a stuck Fed, etc

I asked similar questions in 1996, 97, 98.... And back then, the clear answer always came back that the internet will change things in a way that can't be quantified.....And at that moment, it was actually something you could hang your hopes on.....

But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....

Does this not strike anyone else as odd....?
If today's upper percentile valuation levels are tomorrow's (or 30 years from now) reasonable or low valuation levels, then your whole argument falls apart right?

If so, can you explain how you would be confident that valuations will not continue to increase, as they have in recent history?
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Re: If Valuation doesn't matter, what does?

Post by alluringreality »

CraigTester wrote: Wed May 18, 2022 11:07 am But assuming EMT is at least directionally right, someone out there apparently believes US stocks and bonds are fairly valued right now, and I’d love to hear their “logical reason”.
My opinion tilts towards behavioral finance, so my take is more practical or normal than logical. To me Efficient Market Hypothesis seems to lean heavily on Random Walk Theory. I personally can't agree with the strong form of EMH, because I consider both ideas to be merely models with real-world flaws. I can tend to consider some implications of weak or semi-strong EMH plausible, even if I don't agree completely with the models.

My take from Fed watching is that monetary policy was generally intended to encourage spending and business growth in roughly the past couple years, in addition to providing bond market liquidity in 2020. That basically meant holding down cash and bond rates, initially to avoid the talk of an deflationary recession in 2020. Of course the more recent communication is to expect rate increases. The main question now is if that actually plays out, or if course ends up being stopped or reversed. In the near-term, if rates continue up it generally benefits cash-equivalent holders, and if higher rates are unsustainable then that might benefit marketable bond holders.

Personally I tend to view investments in terms of alternatives. Generally all financial alternatives have some risk or other, including tradeoffs for cash-equivalents. Now that savings bonds no longer have a clear advantage for my own concerns, I'm not sure if there's one asset that is necessarily preferable to others in the current market. That's entirely up for debate, and in the future various assets will prove superior to others over particular timeframes. Some people clearly are questioning marketable bonds at this time, yet a reversal like 2018 could change current sentiment. I tend to expect that I value cash-equivalents more than the general forum, yet I'm not really convinced that more might benefit me.
CraigTester wrote: Wed May 18, 2022 1:27 pm Accordingly, anyone buying/holding the SP500 right now must believe there is a reasonable chance that it's 10 year inflation adjusted returns will exceed Zero.
Honestly my own planning presumes around zero real returns for many assets at this time. I presume potentially negative real returns for cash-equivalents, mainly from recency bias. I'm fairly ambivalent about planning to hold funds in cash for future stock investment, mainly because there were clearly times in my own investment history where it was a questionable choice in hindsight. Essentially I figure that it still probably makes sense for me to invest in risk assets, even if the expected payoff is questionable relative to history. Basically I'd expect to give back gains by going cash, so if needed, I figure I'll just continue buying on the way down with stocks.
Last edited by alluringreality on Wed May 18, 2022 2:51 pm, edited 3 times in total.
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Re: If Valuation doesn't matter, what does?

Post by gmaynardkrebs »

CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
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Re: If Valuation doesn't matter, what does?

Post by lane7068 »

Apologies if this has been asked but I've been wonder about valuations myself.

If stocks are valued too high, its not wise to invest in them (don't want to overpay and returns may be less). If that is the case, why invest in index funds if the valuations are also high and returns may be less.

I understand the risk with individual stocks, but why wouldn't a person pick a business they believe will outperform the index over the long run and just DCA into it each month just like an index fund, whether the price is bargain basement low or sky high?

It seems its wise to buy businesses when they are cheap and not wise to buy businesses when they are expensive. Why is it generally ok to buy index funds at any time?
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Re: If Valuation doesn't matter, what does?

Post by alluringreality »

lane7068 wrote: Wed May 18, 2022 2:26 pm why wouldn't a person pick a business they believe will outperform the index over the long run and just DCA into it each month just like an index fund, whether the price is bargain basement low or sky high?
Generally index investing means taking on "market risk", while this sort of plan hinges on what is usually labeled specific or "idiosyncratic risk". Different people seem to tend to prefer one over the other, and some people report preferences potentially changing depending on experience or influence.
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Re: If Valuation doesn't matter, what does?

Post by Morik »

lane7068 wrote: Wed May 18, 2022 2:26 pm Apologies if this has been asked but I've been wonder about valuations myself.

If stocks are valued too high, its not wise to invest in them (don't want to overpay and returns may be less). If that is the case, why invest in index funds if the valuations are also high and returns may be less.

I understand the risk with individual stocks, but why wouldn't a person pick a business they believe will outperform the index over the long run and just DCA into it each month just like an index fund, whether the price is bargain basement low or sky high?

It seems its wise to buy businesses when they are cheap and not wise to buy businesses when they are expensive. Why is it generally ok to buy index funds at any time?
- The market price is essentially the aggregate opinion of all market participants as to the value of the asset.
- Your opinion is that the market price is too high/too low.
- You are asking why you shouldn't go with your idea that the asset is over/under valued in order to arbitrage the difference (between the 'real' valuation and the market's valuation).

Sure, if you are correct that your opinion on the underlying value is more accurate than the market's opinion of the underlying value you could maybe make more money. Let's even assume you are correct that the market is over-valuing some set of assets. Didn't this exact thing happen in 2005-2008 (or whatever the correct dates are) with the guy who shorted things and almost went broke because the market's incorrect valuation persisted for a few years?

So it seems to me you have two problems:
1) How confident are you that your opinion on valuations is more accurate than the aggregate market opinion on valuations?
2) Even if you are 100% confident, that doesn't necessarily translate into making more money as the market could remain inaccurate in its valuation for a long time during which you miss out on gains/etc.
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

lane7068 wrote: Wed May 18, 2022 2:26 pmI understand the risk with individual stocks, but why wouldn't a person pick a business they believe will outperform the index over the long run and just DCA into it each month just like an index fund
Because what if the business doesn't out-perform? Or goes bankrupt? Index won't go to zero. Individual stocks can.

If it was easy to just "pick a business that will do better than the index", then yes that is what people should do.

It's not easy. It's actually very hard.
Why is it generally ok to buy index funds at any time?
Because you are investing for the long-term. Even investing at the very highest valuations in U.S. history, at the very top of the dot-com bubble, the SP500 still returned almost 7% a year over the next 20 years. Sure, it lost money in the short-term, even over 10 years (with two separate crashes) it was barely even... But in the long-run you still got a very good return.

And that was the WORST 20-year return of all the years in the past 40 years.

Remember, the SP500 is not static.. Businesses that do poorly fall out of the SP500, and new companies that are doing great get added.
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

lane7068 wrote: Wed May 18, 2022 2:26 pm
It seems its wise to buy businesses when they are cheap and not wise to buy businesses when they are expensive. Why is it generally ok to buy index funds at any time?
lane7068,

Unless you are 100% US stock, why would you buy US stock when they are expensive?

The 3 funds: US Stock Index, International Stock Index, US Bond.

If you are 60/40 with US/Int/Bond at fixed percent allocation of 40/20/40, why would you buy US stock when US stock is expensive? You would buy International Stock or US bond instead.

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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

HomerJ wrote: Wed May 18, 2022 2:40 pm
lane7068 wrote: Wed May 18, 2022 2:26 pmI understand the risk with individual stocks, but why wouldn't a person pick a business they believe will outperform the index over the long run and just DCA into it each month just like an index fund
Because what if the business doesn't out-perform? Or goes bankrupt? Index won't go to zero. Individual stocks can.

If it was easy to just "pick a business that will do better than the index", then yes that is what people should do.

It's not easy. It's actually very hard.
Why is it generally ok to buy index funds at any time?
Because you are investing for the long-term. Even investing at the very highest valuations in U.S. history, at the very top of the dot-com bubble, the SP500 still returned almost 7% a year over the next 20 years. Sure, it lost money in the short-term, even over 10 years (with two separate crashes) it was barely even... But in the long-run you still got a very good return.

And that was the WORST 20-year return of all the years in the past 40 years.

Remember, the SP500 is not static.. Businesses that do poorly fall out of the SP500, and new companies that are doing great get added.
Japanese index fund investors didn’t fair as well with high valuations

Let’s not base “worst case” outcomes to “best case” countries
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Re: If Valuation doesn't matter, what does?

Post by Tellurius »

What about Italy, UK, Germany, France?

Does anyone have any info on the long-term total return? Except for the paper the total return on everything
Some kind of graph we can post here
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Re: If Valuation doesn't matter, what does?

Post by alluringreality »

Tellurius wrote: Wed May 18, 2022 4:48 pm What about Italy, UK, Germany, France?
It may not exactly be the sort of formatting you wanted, but there are articles that include some history for countries outside the US in the following. It looks like Dimson-Marsh-Staunton (DMS) is listed as the data set in the second link.
https://blog.iese.edu/jestrada/files/2022/02/SGWS.pdf
https://blog.iese.edu/jestrada/files/20 ... RTvLTR.pdf
https://blog.iese.edu/jestrada/research/
Last edited by alluringreality on Thu May 19, 2022 6:55 am, edited 1 time in total.
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Re: If Valuation doesn't matter, what does?

Post by Morik »

Tellurius wrote: Wed May 18, 2022 4:48 pm What about Italy, UK, Germany, France?

Does anyone have any info on the long-term total return? Except for the paper the total return on everything
Some kind of graph we can post here
See the series 50 Years of Investing in the World by Siamond on the Bogleheads blog: https://www.bogleheads.org/blog/2020/03 ... ld-part-1/

It doesn't have long term total returns for various countries (at least that I recall; I read it a while ago and just skimmed it again now), but it does give a variety of other statistics.

E.g., % of market share of 22 countries over time:
Image

Or volatility vs annualized return of a 100/0 all domestic stock portfolio (left) vs a 100/0 all global stock portfolio (right). This is for 1970-2019.
Image

If you wanted to know more you could look into the data sources discussed at the start of the article.
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Re: If Valuation doesn't matter, what does?

Post by HanSolo »

CraigTester wrote: Wed May 18, 2022 1:27 pm Now taken a step further, given that we're sitting in the upper percentiles of valuation, what is it that people must believe about the prospects for future returns, that causes the collective investment community to maintain upper percentile pricing in the face of 8.4% inflation, a stuck Fed, etc
The above seems to be the kind of question that Jeremy Grantham has ruminated on quite a bit, including in his 1q2017 letter titled "This time seems very, very different" (available online here). As I recall, one of his points was that corporate profit margins escalated in the mid-90s, and they could eventually mean-revert, but that could take a while (even decades).

I think another factor is that the mid-90s was when it became "common sense" that ordinary people should invest in stocks. Around that time, low-cost mutual funds, including index funds, were on the move toward being widely embraced. Consider that, a mere 15 years earlier, the widespread attitude was a quite a bit different ("death of equities" and all), so a major perceptional shift about the stock market was underway. Another thing is that the mid-90s was when the "Fed put" became a thing, and the investment community quickly understood the benefit of that to stock investments. Specifically, prices were bid up because they understood that stocks weren't as risky as they were before.

Perhaps another factor is how much debt there is in existence (both public and private). It seems to have escalated quite a bit in the past several decades. Maybe that's another thing that affects equity valuations.

The above is why I think the 21st century is a different animal from the 20th, in terms of equity valuations. In that case, my suggestion is that valuation still matters, but the 20th century norms are not necessarily applicable. That being said, I also believe that "trees don't grow to the sky". In my understanding, it's an established fact that asset bubbles sometimes happen, and they do collapse. Therefore, if the usual valuation metrics (Shiller PE, "Buffett indicator", etc.) went to double, triple, or quadruple their current levels, I'd be in the camp that says it'll portend lousy future returns. I would not be in the camp that just shrugs it off.

I'm not saying anyone else should think what I think or do what I do. I'm just sharing my personal view on the matter.
Last edited by HanSolo on Thu May 19, 2022 6:06 am, edited 1 time in total.
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Re: If Valuation doesn't matter, what does?

Post by InvestInPasta »

alluringreality wrote: Tue May 17, 2022 10:42 am My opinions have turned out wrong enough times that I tend to cover my worst case and defer to opinions similar to Jack Bogle's.
My ones too
But when I invest I would like to have at least an idea of what range of returns to expect and their probability. I think it's in the meaning of the word "invest" itself.
Can we say that someone is investing If he just buys and holds at any price without looking at valuations at all? :confused

In 2019-2021 I sat in cash because bonds (i.e. $Treasury and €Bund) had crazy valuations with almost zero to negative expected nominal returns. Buying Treasuries with a 10 years yield of less than 2.5% gross nominal is absolute nonsense to me. I could have end up wrong, if the FED/ECB lowered even more the interest rates, but it doesn't matter.
I know that valuing equity is definitely more difficult that valuing bonds, but I still believe there must be a range of P/E (TTM/Forward) that should flash a warning.
If someone buys equity when its Forward P/E is 100x the probability to lose a huge amount of money are too high unless he really believes in extremly high earning growth rate for the next 10 years.
I think being able to value equity would also help me to stay the course, as being able to value bonds (simple math) helped me to follow my strategy and sit in cash instead of holding 10Y bonds even when bonds price were going up (negative yields) due to the madness of the crowd.
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

InvestInPasta wrote: Thu May 19, 2022 4:36 am
alluringreality wrote: Tue May 17, 2022 10:42 am My opinions have turned out wrong enough times that I tend to cover my worst case and defer to opinions similar to Jack Bogle's.
My ones too
But when I invest I would like to have at least an idea of what range of returns to expect and their probability. I think it's in the meaning of the word "invest" itself.
Can we say that someone is investing If he just buys and holds at any price without looking at valuations at all? :confused

In 2019-2021 I sat in cash because bonds (i.e. $Treasury and €Bund) had crazy valuations with almost zero to negative expected nominal returns. Buying Treasuries with a 10 years yield of less than 2.5% gross nominal is absolute nonsense to me. I could have end up wrong, if the FED/ECB lowered even more the interest rates, but it doesn't matter.
I know that valuing equity is definitely more difficult that valuing bonds, but I still believe there must be a range of P/E (TTM/Forward) that should flash a warning.
If someone buys equity when its Forward P/E is 100x the probability to lose a huge amount of money are too high unless he really believes in extremly high earning growth rate for the next 10 years.
I think being able to value equity would also help me to stay the course, as being able to value bonds (simple math) helped me to follow my strategy and sit in cash instead of holding 10Y bonds even when bonds price were going up (negative yields) due to the madness of the crowd.
Have you compared your strategy with a simple fixed percentage allocation to stock, bond, and cash? Then, buy, hold, and rebalancing.

It would have achieved the same goal of not buying the stock when it is over valued.

I made money from my REIT index fund. I sold some of them before 2008/2009 GFC. That happened because of 5/25 rebalancing. The REIT had exceeded the 10% allocation.

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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm
CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?

And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
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Re: If Valuation doesn't matter, what does?

Post by alluringreality »

InvestInPasta wrote: Thu May 19, 2022 4:36 am
alluringreality wrote: Tue May 17, 2022 10:42 am My opinions have turned out wrong enough times that I tend to cover my worst case and defer to opinions similar to Jack Bogle's.
My ones too
But when I invest I would like to have at least an idea of what range of returns to expect and their probability. I think it's in the meaning of the word "invest" itself.
Can we say that someone is investing If he just buys and holds at any price without looking at valuations at all? :confused
My take is simply that the recent system appears arranged to encourage risk, and it's always possible that may not be ideal for an individual. The general idea of savings becomes a bit blurred when policy effectively reduces real value of many cash-equivalents through market rates below inflation. In such an environment, technically the Oxford "material result" definition for investment could still be met through the encouragement of risk taking, although on a personal level taking risk is of course debatable and may be worth avoiding.
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Re: If Valuation doesn't matter, what does?

Post by gmaynardkrebs »

CraigTester wrote: Thu May 19, 2022 7:16 am
gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm
CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?

And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
I should have made it clearer, I was just answering how it could make sense to someone. It could be the "Lost Decade" for stocks as WSJ suggested the other day.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

gmaynardkrebs wrote: Thu May 19, 2022 7:53 am
CraigTester wrote: Thu May 19, 2022 7:16 am
gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm
CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?

And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
I should have made it clearer, I was just answering how it could make sense to someone. It could be the "Lost Decade" for stocks as WSJ suggested the other day.
Got it. And thanks for pointing me to the lost-decade article. (attached link below for others).

So what do you think, (independent of what you might do about it), has the Fed-Put been the only “excuse” this time for BTFD… or is there something else going on….?

https://www.wsj.com/articles/this-could ... 1652871781
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Re: If Valuation doesn't matter, what does?

Post by gmaynardkrebs »

CraigTester wrote: Thu May 19, 2022 9:02 am
gmaynardkrebs wrote: Thu May 19, 2022 7:53 am
CraigTester wrote: Thu May 19, 2022 7:16 am
gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm
CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?

And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
I should have made it clearer, I was just answering how it could make sense to someone. It could be the "Lost Decade" for stocks as WSJ suggested the other day.
Got it. And thanks for pointing me to the lost-decade article. (attached link below for others).

So what do you think, (independent of what you might do about it), has the Fed-Put been the only “excuse” this time for BTFD… or is there something else going on….?

https://www.wsj.com/articles/this-could ... 1652871781
It's broader than the Fed Put alone. The "Stocks for the Long Run" narrative has become so deeply embedded in the minds of of 401K/passive investors that they don't pay attention to valuations anymore.
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Re: If Valuation doesn't matter, what does?

Post by patrick »

CraigTester wrote: Thu May 19, 2022 7:16 am Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?
There is of course no guarantee stocks will go up, regardless of what they did in the past.

People have been saying stock prices were too high for a very long time, probably going back to the frist day any stock market opened. A strategy that avoids stocks whenever someone says they are too high is simply a strategy to never buy stocks. So far that strategy has done much worse than buying stocks regardless of what people say about valuation.

if you only look at some forecasters or some valuation metrics rather than all, then you might have strategy of buying stocks at some times but not others. But which one? Às already noted, PE10 has not worked well so far.
And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
There are several obvious answers, and I have posted some on other threads. I am hestitant to repeat any of them here lest you claim I had admitted that an "excuse" is needed
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Re: If Valuation doesn't matter, what does?

Post by AlohaBill »

Rob Bennett. Passion Savings. Does that ring a bell?
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Thu May 19, 2022 7:16 am
gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm
CraigTester wrote: Wed May 18, 2022 1:27 pm But this time, there doesn't appear to be any reason that people can point to for why buying the SP500 (at upper percentile valuation levels) makes any sense..... Yet, as a world investment community, we're doing it anyway....
Does this not strike anyone else as odd....?
Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?
The market goes up in the long-run because it's not a closed system. A couple billion people go to work every day, and minerals are pulled from the ground, and energy pulled from the sun, and the wind, etc, and all that work makes the entire system more valuable over time.
But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?
So far, every great bubble has burst, and the stock market recovered and went on to new heights, and the long-term returns were still good, even riding the crash all the way down and back up again.

Stock market investing is a long-term endeavor. Because there WILL be a crash. We just don't know when.
And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….
Maybe outside this message board. Other people may be looking for an excuse that says why the market will never crash, but not Bogleheads. We don't have a keep a straight face while saying something stupid like "This market will keep going up because..."

Because we're not saying something that stupid. I don't know why you think we believe that, and have some "excuse" to justify it in our heads.
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Re: If Valuation doesn't matter, what does?

Post by ValuationsMatter »

HomerJ wrote: Thu May 19, 2022 10:26 am
Maybe outside this message board. Other people may be looking for an excuse that says why the market will never crash, but not Bogleheads. We don't have a keep a straight face while saying something stupid like "This market will keep going up because..."
Yet, there is no other rational explanation for investing at all-time high valuations. Time and again, you, HomerJ, point at the worst periods in history to justify your actions.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

gmaynardkrebs wrote: Thu May 19, 2022 9:36 am
CraigTester wrote: Thu May 19, 2022 9:02 am
gmaynardkrebs wrote: Thu May 19, 2022 7:53 am
CraigTester wrote: Thu May 19, 2022 7:16 am
gmaynardkrebs wrote: Wed May 18, 2022 2:05 pm Not odd at all: "This too shall pass..." Said by either King Solomon or Salomon Brothers, can't remember. Shorthand for BTFD.
Are you saying the market will go up simply because the market “has” gone up?

But haven’t we seen that this only works until it doesn’t, in all the great bubbles in the past?

And isn’t there always a plausible “excuse” that allows people to keep a straight face?

It’s this “excuse” that I’m searching for….

A simple answer as discussed by some above, is that the excuse has been the “Fed Put”.

But we’ve seen spiking inflation for over a year….Why is it taking this long to understand the Fed has no choice?

Is there another excuse hiding out there?
I should have made it clearer, I was just answering how it could make sense to someone. It could be the "Lost Decade" for stocks as WSJ suggested the other day.
Got it. And thanks for pointing me to the lost-decade article. (attached link below for others).

So what do you think, (independent of what you might do about it), has the Fed-Put been the only “excuse” this time for BTFD… or is there something else going on….?

https://www.wsj.com/articles/this-could ... 1652871781
It's broader than the Fed Put alone. The "Stocks for the Long Run" narrative has become so deeply embedded in the minds of of 401K/passive investors that they don't pay attention to valuations anymore.
Does this blurb from Wikipedia describe what you're saying?

"Despite all the economic warning signs and the market breaks in March and May 1929, stocks resumed their advance in June and the gains continued almost unabated until early September 1929 (the Dow Jones average gained more than 20% between June and September).

The market had been on a nine-year run that saw the Dow Jones Industrial Average increase in value tenfold, peaking at 381.17 on September 3, 1929."
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Re: If Valuation doesn't matter, what does?

Post by ignition »

In 2015 when I started investing people were also whining that the market was overvalued. CAPE was about 27. Yet the part of my money invested in US stocks more than doubled. Good I didn't listen to them.
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