If Valuation doesn't matter, what does?

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

Post by CraigTester »

Here's a guy that is trying to answer my question, He focuses exclusively on CAPE (probably for simplicity), but he sums things up pretty well, IMHO.

https://seekingalpha.com/article/447198 ... d#comments
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ruralfama
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Re: If Valuation doesn't matter, what does?

Post by ruralfama »

CraigTester wrote: Wed Jan 12, 2022 10:07 am Here's a guy that is trying to answer my question, He focuses exclusively on CAPE (probably for simplicity), but he sums things up pretty well, IMHO.

https://seekingalpha.com/article/447198 ... d#comments
Interest rates. It's all about interest rates.

https://youtu.be/KIslBZxp5zQ
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

ruralfama wrote: Wed Jan 12, 2022 10:18 am
CraigTester wrote: Wed Jan 12, 2022 10:07 am Here's a guy that is trying to answer my question, He focuses exclusively on CAPE (probably for simplicity), but he sums things up pretty well, IMHO.

https://seekingalpha.com/article/447198 ... d#comments
Interest rates. It's all about interest rates.

https://youtu.be/KIslBZxp5zQ
Yep, that's a great video... As one of the commenters below the video put it best, 500 points of IQ in 3 guys (that all agree)....

Yet, here we are two years later and US Stocks just keep going higher... We really are living through an extraordinary period right now....
abc132
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Re: If Valuation doesn't matter, what does?

Post by abc132 »

BogleFan510 wrote: Mon Jan 10, 2022 6:09 pm
abc132 wrote: Mon Jan 10, 2022 10:38 am
willthrill81 wrote: Mon Jan 10, 2022 10:15 am
Nathan Drake wrote: Mon Jan 10, 2022 10:13 amYou are taking risk off the table if the expected premiums aren’t high enough for the risk you are personally taking on
That's true, and that's at the core of why the BH philosophy eschews market timing; many believe that the ratio of risks to rewards is always the same or at the very least that the ratio isn't actionable.
Bogle certainly went through and Image. On average they lost after fees. I have yet to see any counter data showing pros actually timing the market on average making gains(net positive to investors) over long periods of time. So while one certainly can time the market and find individual instances of anything, the question is whether on average this is a net positive, net negative, or neutral activity.

Bogle showed us one way to look at future expectations so the idea that Bogleheads think risk is constant seems to be a strange one. We saw Bogle make a one-time move to bonds partly because of increased market risk relative to rewards. I doubt this idea of constant risk is representative of the people here. The lack of the pros being able to time in a net positive manner is the data that usually matters to Bogleheads.

On average people will fail at timing because they are not smarter than the pros. Some will get lucky and some actually are smarter than the pros. But on average, this is a losing game.
I think it is important to note that by 'the Pros' we are only comparing the results of passive vs active 'Fund Managers'. What we have is strong evidence that active fund managers tend to underperform passive funds, largely due to their higher expenses.

This should not lead one to dismiss valuation as a tool. I have personally observed many instances of well done equity evaluations driving successful acquisitions, private equity takeovers, and asset buys that generated great returns, but not necessarily to passive index funds. A classic example is a publicly traded advertising firm acquired for less than the value of one of its owned office buildings, held on the books at book value. The small building in Tokyo happended to be on land worth more than the market cap of the company. However, people smart enough to find these types of 'bargains' rarely want to share them with others, so they are mostly private equity or insider type deals.

So consider carefully how broadly one paints with the topic of valuations. The failure of stock pickers for the various active funds to find value does not mean that valuation models dont work, just that those with only public information do not generally outcompete other funds for public shares. Investors like Buffet with a vision of how to use a company and its assets to create superior value often buy and improve, just as a real estate investor can fix up and flip a house. It takes more work that the typical active fund manager puts in, but it is not uncommon. It also suggests that the markets are pretty good at setting values for companies that active traders cant easily find bargains to hold, unless they dig deaper and work hard to create value through new ideas or innovations. Just picking stocks is not good enough, as we agree that creates little incremental value. This supports the idea that public company shares are competitively priced, not the opposite.
Fair enough, but how does an individual put in more work than the typical active fund manager or gain non-public information?

The relevant question is not whether value matters, but how an individual investor actionably benefits from valuations.

Not related to your post, What is most interesting about these discussions is that the analysis almost always stops at what did work and that there is a general disinterest in looking at anything that might change the preconceived notion. One example is why would anyone look at how funds based on valuations actually performed if it doesn't fit their assumption that valuations matter? There seem to be few willing to use critical thinking - which is something that would actually strengthen ones conviction if their assumptions are indeed good. It is easy to see why so many individuals underperform the market - the more they research the more "winning" methods they find and the worse they are likely do. Individual knowledge becomes a certificate for behavioral errors.

A good decision maker invites criticism of a plan. That is a huge minority, despite the wealth of knowledge here.
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vanbogle59
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Re: If Valuation doesn't matter, what does?

Post by vanbogle59 »

CraigTester wrote: Wed Jan 12, 2022 10:07 am ... he sums things up pretty well, IMHO.
"the likely outcome for the S&P 500 is a major crash at some point in the next few years, or possibly a decade or so of stagnation."

So there you have it. Time to pee or get off the pot.
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Godot
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Re: If Valuation doesn't matter, what does?

Post by Godot »

vanbogle59 wrote: Wed Jan 12, 2022 4:11 pm
CraigTester wrote: Wed Jan 12, 2022 10:07 am ... he sums things up pretty well, IMHO.
"the likely outcome for the S&P 500 is a major crash at some point in the next few years, or possibly a decade or so of stagnation."

So there you have it. Time to pee or get off the pot.
So which one is peeing, selling or holding?
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BogleFan510
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Re: If Valuation doesn't matter, what does?

Post by BogleFan510 »

abc132 wrote: Wed Jan 12, 2022 4:00 pm
BogleFan510 wrote: Mon Jan 10, 2022 6:09 pm
abc132 wrote: Mon Jan 10, 2022 10:38 am
willthrill81 wrote: Mon Jan 10, 2022 10:15 am
Nathan Drake wrote: Mon Jan 10, 2022 10:13 amYou are taking risk off the table if the expected premiums aren’t high enough for the risk you are personally taking on
That's true, and that's at the core of why the BH philosophy eschews market timing; many believe that the ratio of risks to rewards is always the same or at the very least that the ratio isn't actionable.
Bogle certainly went through and Image. On average they lost after fees. I have yet to see any counter data showing pros actually timing the market on average making gains(net positive to investors) over long periods of time. So while one certainly can time the market and find individual instances of anything, the question is whether on average this is a net positive, net negative, or neutral activity.

Bogle showed us one way to look at future expectations so the idea that Bogleheads think risk is constant seems to be a strange one. We saw Bogle make a one-time move to bonds partly because of increased market risk relative to rewards. I doubt this idea of constant risk is representative of the people here. The lack of the pros being able to time in a net positive manner is the data that usually matters to Bogleheads.

On average people will fail at timing because they are not smarter than the pros. Some will get lucky and some actually are smarter than the pros. But on average, this is a losing game.
I think it is important to note that by 'the Pros' we are only comparing the results of passive vs active 'Fund Managers'. What we have is strong evidence that active fund managers tend to underperform passive funds, largely due to their higher expenses.

This should not lead one to dismiss valuation as a tool. I have personally observed many instances of well done equity evaluations driving successful acquisitions, private equity takeovers, and asset buys that generated great returns, but not necessarily to passive index funds. A classic example is a publicly traded advertising firm acquired for less than the value of one of its owned office buildings, held on the books at book value. The small building in Tokyo happended to be on land worth more than the market cap of the company. However, people smart enough to find these types of 'bargains' rarely want to share them with others, so they are mostly private equity or insider type deals.

So consider carefully how broadly one paints with the topic of valuations. The failure of stock pickers for the various active funds to find value does not mean that valuation models dont work, just that those with only public information do not generally outcompete other funds for public shares. Investors like Buffet with a vision of how to use a company and its assets to create superior value often buy and improve, just as a real estate investor can fix up and flip a house. It takes more work that the typical active fund manager puts in, but it is not uncommon. It also suggests that the markets are pretty good at setting values for companies that active traders cant easily find bargains to hold, unless they dig deaper and work hard to create value through new ideas or innovations. Just picking stocks is not good enough, as we agree that creates little incremental value. This supports the idea that public company shares are competitively priced, not the opposite.
Fair enough, but how does an individual put in more work than the typical active fund manager or gain non-public information?

The relevant question is not whether value matters, but how an individual investor actionably benefits from valuations.

Not related to your post, What is most interesting about these discussions is that the analysis almost always stops at what did work and that there is a general disinterest in looking at anything that might change the preconceived notion. One example is why would anyone look at how funds based on valuations actually performed if it doesn't fit their assumption that valuations matter? There seem to be few willing to use critical thinking - which is something that would actually strengthen ones conviction if their assumptions are indeed good. It is easy to see why so many individuals underperform the market - the more they research the more "winning" methods they find and the worse they are likely do. Individual knowledge becomes a certificate for behavioral errors.

A good decision maker invites criticism of a plan. That is a huge minority, despite the wealth of knowledge here.
To answer your question, only the individual investors who are willing to assert and test a hypothesis to a fact based conclusion would 'potentially' benefit. However, this has a few problems.

1) Testing often takes time measured in years, and we need to invest now.
2) Backtesting with historic data may not appy fully, since trends change and the secret sauces of yesteryears have likely been discovered.
3) Any method must be kept secret, as once discovered the premium will be arbitraged away by other traders. This is a very strong force limiting premiums, as financial markets are highly traded.

The best situations exist in thinly traded markets, where information is imperfect. So I would suggest looking at acquiring small companies or real estate, areas where the opportunities are larger, rather than seeking to find value in highly traded and highly monitored S&P500 type companies.

For example, a family member needed to sell a growing business for a very low earnings multiple, because he was retiring and there were few buyers (required a professional license hard to obtain to operate, was worth millions, so few could afford it, and was in a sector perceived as losing out to big corporations, despite a track record of beating them competitively). The person who eventually bought and operated the business paid it off with earnings within 3-4 years. Likewise, that same person had bought a S&L branch building during the Regan Era financial crisis at 50% of construction costs, due to few bidders and a temporary excess supply.

IMHO, the lazy (like me) are better off indexing, while the ambitious, smart people are better off growing their own businesses or trading assets in less efficient markets like real estate, if they want to earn a fortune. Then once earned they tend to want to be lazy, so the cycle repeats. Likewise, most are better off spending their time being the top performer at their job, to earn more pay, then they are analyzing funds to squeek out a bit more annual return.
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Taylor Larimore
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Re: If Valuation doesn't matter, what does?

Post by Taylor Larimore »

Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again.”
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again.”
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
Nathan Drake
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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

CraigTester wrote: Thu Jan 13, 2022 12:36 pm
Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again.”
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Last edited by Nathan Drake on Thu Jan 13, 2022 12:44 pm, edited 1 time in total.
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Marseille07
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Thu Jan 13, 2022 12:36 pm The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
You might "care," but there isn't much you can do other than some market timing plays which likely *lower* your return.

Some posters here jump out of the pool when S&P500 breaches 200D MA. This by itself is not a terrible strategy, but it lowers your CAGR at the expense of dodging a big crash. If this is the route you want to go with, there's nothing wrong imo; just that you need to understand the tradeoffs you're making.
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Marseille07 wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
You might "care," but there isn't much you can do other than some market timing plays which likely *lower* your return.

Some posters here jump out of the pool when S&P500 breaches 200D MA. This by itself is not a terrible strategy, but it lowers your CAGR at the expense of dodging a big crash. If this is the route you want to go with, there's nothing wrong imo; just that you need to understand the tradeoffs you're making.
There are strategies to deal with an overpriced market for the OP, including a fixed portfolio that contains other asset classes (bonds, ex-US, SCV, whatever floats your boat) to balance into. That way you avoid the pitfalls of timing. When to get out, when to get back in, those both seem like problems without a solution for timing.

It kind of just feels like perseverating at this point.
Marseille07
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

Da5id wrote: Thu Jan 13, 2022 12:46 pm There are strategies to deal with an overpriced market for the OP, including a fixed portfolio that contains other asset classes (bonds, ex-US, SCV, whatever floats your boat) to balance into. That way you avoid the pitfalls of timing. When to get out, when to get back in, those both seem like problems without a solution for timing.

It kind of just feels like perseverating at this point.
There are different kinds of timing. What you're saying is absolutely correct, there are value-based strategies. However, they are still timing in the sense that you're changing the exposure; maybe not as drastic as going from 100% to 0%, but changing from 60% to 40% because US CAPE is high is still timing in my book.
Da5id
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Marseille07 wrote: Thu Jan 13, 2022 12:56 pm
Da5id wrote: Thu Jan 13, 2022 12:46 pm There are strategies to deal with an overpriced market for the OP, including a fixed portfolio that contains other asset classes (bonds, ex-US, SCV, whatever floats your boat) to balance into. That way you avoid the pitfalls of timing. When to get out, when to get back in, those both seem like problems without a solution for timing.

It kind of just feels like perseverating at this point.
There are different kinds of timing. What you're saying is absolutely correct, there are value-based strategies. However, they are still timing in the sense that you're changing the exposure; maybe not as drastic as going from 100% to 0%, but changing from 60% to 40% because US CAPE is high is still timing in my book.
I'm not meaning changing the exposure in any way though. Just coming up with a portfolio that has other classes that you can balance into without changing your allocation. e.g. I have 50% bonds, 50% stocks. For the stocks, 40% are ex-US. Not planning on changing that based on perceptions about market valuation. So as US equities run up, money is balanced towards bonds and ex-US stocks.
Marseille07
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

Da5id wrote: Thu Jan 13, 2022 1:06 pm I'm not meaning changing the exposure in any way though. Just coming up with a portfolio that has other classes that you can balance into without changing your allocation. e.g. I have 50% bonds, 50% stocks. For the stocks, 40% are ex-US. Not planning on changing that based on perceptions about market valuation. So as US equities run up, money is balanced towards bonds and ex-US stocks.
Ah gotcha, yes. If you maintain the same allocation of US / ex-US / bonds then that's not timing :beer. And it might actually be a good suggestion for the OP as well, since they seem concerned about the US valuations.
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Re: If Valuation doesn't matter, what does?

Post by craigimass »

CraigTester wrote: Thu Jan 13, 2022 12:36 pm
But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
"end badly" can mean so many things.
I see some worrying about inflation....however, the bills must be paid and perhaps that is one way they will be!

Just as with social and political science, the largest odds favor "slow decline" rather than a shocking event. This would be an entirely different thread - trying to assign percentages to what is likely to happen to balance the US Books (the debt, the odds of the dollar not being King any longer, how crypto will mess with us all, etc.).

I'm no financial guru but I do dabble in futurism. The situation we are currently in is "no one wants the bills paid" because, of course, it doesn't benefit anyone in the short or medium terms. IF the Bills do get paid, they will be by a method that ends up costing us all much more than just inflation.

If someone asked me "is it possible that the US Dollar will simply be devalued by 50%?" - I've had to answer that it was.
OTOH, neither I nor many of us are going to be able to invest in such a fashion to come out on top in many of these scenarios.
We have to do "what is the worst that can happen?" calculations.

For those with a 3 million dollar IRA, the results will be a 1.5m IRA. Being as the devalued $ would likely be very solid (if it included paying back all the money and living within our means), this isn't the End of the World.

As a matter of historical interest I'd love to observe the next 200 years - but, alas, that one isn't going to happen. Being so, I have to think that nothing outside of what I have already been through (JFK, Vietnam, 1960's, Savings and Loan, Dot-Com Boom, Great Recession, COVID) is likely to occur.
abc132
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Re: If Valuation doesn't matter, what does?

Post by abc132 »

CraigTester wrote: Thu Jan 13, 2022 12:36 pm ...
The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....
And fortunately or unfortunately, I do care….a lot.
The question becomes whether our portfolio survival is at stake or whether this is a behavioral concern, which depends on our individual situation.

I think those attempting to confront concerns can make small changes over time:
1) doing something removes much or at least some of the angst
2) doing it slowly over time limits behavioral error

Let's say you had the theory that US was too expensive and you felt the need to act on that 2 years ago, and so you have been putting all new contributions towards international for the last 2 years. (10x expense portfolio with 0.20x expenses contributions). While that thesis has been wrong in the short term, the result of being wrong is much the same as rebalancing into international with a set AA.

Limiting yourself to what you do with new contributions is very powerful. I have been buying >80% bonds and I have added ~5 years worth of expenses into my bonds. 10 years expenses feels a lot safer with regards to a stock decline than 5 years. And yet with great stock returns, my AA has not changed, sitting at around 73/27 stocks/bonds.

If I expect a stock crash,
A) focusing on years in bonds and higher net worth gives me the correct measure of a more survivable portfolio.
B) Focusing on AA changes leads me to believe that I have even more money to lose with the same AA

Method B is a poor measure of the risk my portfolio is actually taking, as I should feel better with more resources and more of what I believe to be safer assets with respect to stock declines.

Focusing on accumulation of what we believe to be safer may give a better measure of achieving financial goals. We should feel safer if we have more of something we believe to be safe, and also a higher net worth. If our assumption about safety is correct, both of these help us reach our financial goals.

In decumulation, we can approximate this in reverse. Preferentially sell US for yearly expenses, reallocate dividends, etc.

All of the above options would be to prevent bigger behavioral mistakes. The key issue is that the way people view risk (how much can I lose?) is not the measure of reaching financial goals. The above is a behavioral trick for those who view risk as the number of $$ they can lose.


Lastly, If we have no safer feeling option, then increasing savings or cutting expenses is all that is left.
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Nathan Drake wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm
Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again.”
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Thanks Nathan Drake

I think we are kindred souls in some ways… seeming to have both come to the same conclusion about the extremes of the US equity market… and reducing exposure….despite lots of pushback….

And as you say, the next question is now what?

Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…

However, I’m viewing the lion’s share of my portfolio as an “option" to purchase VTI at better prices…(I think Buffett appears to be doing the same thing on a much bigger scale with his $146B in cash)

P.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations….other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….

Best of luck to you…, Craig Tester
Nathan Drake
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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

CraigTester wrote: Thu Jan 13, 2022 1:55 pm
Nathan Drake wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm
Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I would say, go into the casino, which is what Wall Street is today. Bet on the entire stock market and then get out of the casino and never show yourself there again.”
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Thanks Nathan Drake

I think we are kindred souls in some ways… seeming to have both come to the same conclusion about the extremes of the US equity market… and reducing exposure….despite lots of pushback….

And as you say, the next question is now what?

Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…

However, I’m viewing the lion’s share of my portfolio as an “option" to purchase VTI at better prices…(I think Buffett appears to be doing the same thing on a much bigger scale with his $146B in cash)

P.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations….other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….

Best of luck to you…, Craig Tester
My portfolio won’t prevent a crash from hitting everything hard. Covariance (long term dispersions) are far more important. And exUS still has wide long term dispersions despite short term correlations.

However, short term crashes don’t bother me. Most fully recover by a few years

What worries me the most about overvaluation is the potential for long term poor returns - Japan after the 80s or US from 1966-1984

Diversification works fantastically against overvalued markets over the long term to produce reliably robust returns

I would hesitate to sit on the sidelines in cash waiting for a big U.S. correction and then buying into that US correction. It may not come. Returns may just be low and valuations correct slowly over time. Additionally, corrections can cause negative momentum in markets leading to very poor returns for a very long time because that market is deemed “at risk”. I feel that’s the way exUS is viewed at present. But eventually that too will have a positive change of course.
Last edited by Nathan Drake on Thu Jan 13, 2022 2:11 pm, edited 2 times in total.
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Topic Author
CraigTester
Posts: 1488
Joined: Wed Aug 08, 2018 6:34 am

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

Post by CraigTester »

craigimass wrote: Thu Jan 13, 2022 1:14 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm
But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
"end badly" can mean so many things.
I see some worrying about inflation....however, the bills must be paid and perhaps that is one way they will be!

Just as with social and political science, the largest odds favor "slow decline" rather than a shocking event. This would be an entirely different thread - trying to assign percentages to what is likely to happen to balance the US Books (the debt, the odds of the dollar not being King any longer, how crypto will mess with us all, etc.).

I'm no financial guru but I do dabble in futurism. The situation we are currently in is "no one wants the bills paid" because, of course, it doesn't benefit anyone in the short or medium terms. IF the Bills do get paid, they will be by a method that ends up costing us all much more than just inflation.

If someone asked me "is it possible that the US Dollar will simply be devalued by 50%?" - I've had to answer that it was.
OTOH, neither I nor many of us are going to be able to invest in such a fashion to come out on top in many of these scenarios.
We have to do "what is the worst that can happen?" calculations.

For those with a 3 million dollar IRA, the results will be a 1.5m IRA. Being as the devalued $ would likely be very solid (if it included paying back all the money and living within our means), this isn't the End of the World.

As a matter of historical interest I'd love to observe the next 200 years - but, alas, that one isn't going to happen. Being so, I have to think that nothing outside of what I have already been through (JFK, Vietnam, 1960's, Savings and Loan, Dot-Com Boom, Great Recession, COVID) is likely to occur.
Thanks Craigimass -- I think you are very correct in explaining why no one wants the bills paid....But if we get inflation, I don't think it will be on purpose....Below is an excerpt that I found very enlightening on this topic...

Fed chairman Ben Bernanke sat before the Joint Economic Committee, which asked him point blank about inflating away debt. His answer gets to the heart of the matter: "Given the structure of our debt, [inflation] wouldn't even help reduce the debt ... given that so many of our obligations are indexed."
asif408
Posts: 2616
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Location: Florida

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

Post by asif408 »

CraigTester wrote: Thu Jan 13, 2022 1:55 pm Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…
Craig,

What you say is generally true, but don't forget that speed and magnitude can vary. Take the case of EM and EM value vs US stocks from March 2000-2004 (a five year period): https://www.portfoliovisualizer.com/bac ... ion3_3=100. In 2000 EM valuations were significantly lower than US markets, and EM value ever moreso.

Basically you are right that if the US market falls 30-40% or more other diversified international funds will not be going up, even if their valuations are lower, and they may go down further and faster. But, as shown in the chart above, EM and EM value had shorter total drawdown periods and recovered much more quickly. That is about the best you can hope to experience with international diversification, IMO, not correlation turning negative or even zero when the US market craters. EM stocks fell more in 2007-2009, but their valuations were also higher than in the US.

If you want to own something that might give a lower positive or even potentially negative correlation to the next US market crash, the best hope is to look for a sector or segment of a market that has underperformed considerably in the past few years and/or had negative returns, sort of like REITs and SCV did in the years leading up to 2000: https://www.portfoliovisualizer.com/bac ... ion3_3=100

These performed very well from 2000-2002: https://www.portfoliovisualizer.com/bac ... ion3_3=100 You could throw something like precious metals equities and energy equities in there as another example of something that made money in the 2000-2002 bear market, but that was after recent poor performance, and in the case of precious metals poor performance for almost two decades. All of them, though, had the common experience of very poor performance leading up to the peak.

There are also some examples of individual countries, like Australia, which basically treaded water from 2000-2002, and South Korea, which fell rapidly at the beginning but gave you a positive return over the next few years: https://www.portfoliovisualizer.com/bac ... ion3_3=100

Looking at the current environment, there doesn't appear to be any major sector that has declined significantly relative to the US market since March 2020, though energy and US SCV fit into those categories in March 2020 when looking back. They've both gone up over 150% since then and have outperformed both the US stock market and the tech sector (QQQ) since then.

About the only somewhat interesting potential diversifier as far as sectors go currently might be silver and/or gold miners. They have been in a bear market since Aug 2020, both down around 30%. Of course, they regularly experience 50% drops, so 30% might not be the end. On the individual country level, Brazil, Turkey, Chile have all experienced similar drops in value over the last year, but again these markets regularly experience 50% declines, so they may have more room to fall.
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Thu Jan 13, 2022 1:55 pmP.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations…
You thought the exact same thing in 2018, and missed out on 75% gains since then. So you thought then, it was a 1% time, but it turned out to be one of the 99% foolish times.

Did you learn anything from that experience? Why do you still think you can tell the 1% times from the 99% times?

Maybe you should revisit your old thread and try to remember how sure you were back then.

viewtopic.php?f=10&t=255972
other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….
It's not "I don't care", it's "I don't know when".

We all know there will be a period of low returns and/or a crash in the future. Maybe even starting tomorrow. Or maybe not for another 4 years.

But no one knows when.

Just like you didn't know in 2018, even though you thought it was "very clear" at the time. Just like it seems very clear to you now.

But here's the thing.

The long-term 9%-10% nominal annual return of the U.S. stock market, so far, has INCLUDED the crashes and the periods of low returns.

Read that again. In the past, you didn't have to avoid the crashes, and period of low returns for your money to have very good average returns and make you wealthy.

Sure, if you can avoid the bad years, and only invest in the good years, that would be great, and you'd be even richer! But if you guess wrong, like you did in 2018, you could end up poorer.

Trying to avoid bad returns, you missed out on good returns, and now your long-term average is likely to be lower than if you had just bought and held all the way through. I mean the market could crash 30%-40%, and it would still be at a higher point than it was in 2018.
Last edited by HomerJ on Thu Jan 13, 2022 4:00 pm, edited 2 times in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Candor
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Re: If Valuation doesn't matter, what does?

Post by Candor »

This is just a rehash of the OP's thread in 2018 and he has come to the same conclusion. Posts from the 2018 thread.
I wanted to understand if people on this forum were making their investment decisions based on some assessment of intrinsic value; or were rather just following a script.
It just doesn't seem terribly intelligent to invest ANY of my dollars at a point in time when valuations are at their second highest level in history.
And I've yet to hear a compelling argument why anyone would possibly invest in the SP500 at today's valuation level.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
Topic Author
CraigTester
Posts: 1488
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Nathan Drake wrote: Thu Jan 13, 2022 2:04 pm
CraigTester wrote: Thu Jan 13, 2022 1:55 pm
Nathan Drake wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm
Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Thanks Nathan Drake

I think we are kindred souls in some ways… seeming to have both come to the same conclusion about the extremes of the US equity market… and reducing exposure….despite lots of pushback….

And as you say, the next question is now what?

Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…

However, I’m viewing the lion’s share of my portfolio as an “option" to purchase VTI at better prices…(I think Buffett appears to be doing the same thing on a much bigger scale with his $146B in cash)

P.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations….other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….

Best of luck to you…, Craig Tester
My portfolio won’t prevent a crash from hitting everything hard. Covariance (long term dispersions) are far more important. And exUS still has wide long term dispersions despite short term correlations.

However, short term crashes don’t bother me. Most fully recover by a few years

What worries me the most about overvaluation is the potential for long term poor returns - Japan after the 80s or US from 1966-1984

Diversification works fantastically against overvalued markets over the long term to produce reliably robust returns

I would hesitate to sit on the sidelines in cash waiting for a big U.S. correction and then buying into that US correction. It may not come. Returns may just be low and valuations correct slowly over time. Additionally, corrections can cause negative momentum in markets leading to very poor returns for a very long time because that market is deemed “at risk”. I feel that’s the way exUS is viewed at present. But eventually that too will have a positive change of course.
Yes, long term poor returns are the arch enemy…

As I’m sure you know, beyond Japan there were actually 4 “lost” periods in the US spanning:

20 yrs. May 1901-Aug 1921
20 yrs. Aug 1929–May 1949
15 yrs. Nov 1968-Mar 1983
13 yrs. Mar 2000- Jan 2013

Those are some long waits just to break-even…

So I’ve decided to do my waiting on the sidelines for the bulk of my portfolio at the moment….Not a popular decision around here…..

I appreciate your approach to trying to solve the riddle with international diversification….Also not the most popular of topics at the moment, at least on this board, but if I had to place one more dollar in equities right now, it would be either VEA or VXUS….
fisher0815
Posts: 155
Joined: Tue Jun 08, 2021 3:10 am

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

Post by fisher0815 »

Valuation does matter. But comparing today's valuations with valuations from the past is a dangerous way.

From Prof. Damodaran's recent blog post:
Mean Reversion works, until it does not: Much of investing over the last century in the US has been built on betting on mean reversion, i.e. that things revert back to historical norms, sooner rather than later. After all, the key driver of investment success from investing in low PE ratio stocks comes from their reverting back towards the average PE, and the biggest driver of the Shiller PE as a market timing device is the idea that there is a normal range for PE ratios. While mean reversion is a strong force in stable markets, as the US was for much of the last century, it breaks down when there are structural changes in markets and economies, as I argued in this post.
Source
The link in the article is broken, but I think he means this blog post.

If you want to learn more about "valuation" you should check out Prof. Damodaran. Wall Street calls him "The Dean of Valuation".
id_afstand
Posts: 205
Joined: Sun Nov 14, 2021 5:11 pm
Location: The Netherlands

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

Post by id_afstand »

Nathan Drake wrote: Thu Jan 13, 2022 2:04 pm
CraigTester wrote: Thu Jan 13, 2022 1:55 pm
Nathan Drake wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm
Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Thanks Nathan Drake

I think we are kindred souls in some ways… seeming to have both come to the same conclusion about the extremes of the US equity market… and reducing exposure….despite lots of pushback….

And as you say, the next question is now what?

Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…

However, I’m viewing the lion’s share of my portfolio as an “option" to purchase VTI at better prices…(I think Buffett appears to be doing the same thing on a much bigger scale with his $146B in cash)

P.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations….other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….

Best of luck to you…, Craig Tester
My portfolio won’t prevent a crash from hitting everything hard. Covariance (long term dispersions) are far more important. And exUS still has wide long term dispersions despite short term correlations.

However, short term crashes don’t bother me. Most fully recover by a few years

What worries me the most about overvaluation is the potential for long term poor returns - Japan after the 80s or US from 1966-1984

Diversification works fantastically against overvalued markets over the long term to produce reliably robust returns

I would hesitate to sit on the sidelines in cash waiting for a big U.S. correction and then buying into that US correction. It may not come. Returns may just be low and valuations correct slowly over time. Additionally, corrections can cause negative momentum in markets leading to very poor returns for a very long time because that market is deemed “at risk”. I feel that’s the way exUS is viewed at present. But eventually that too will have a positive change of course.
Fascinating topic!

As for a Europe-based investor, I don’t have access to the interesting factor products like those of Avantis. I am doing plain vanilla all world, something like the VT, so my stock allocation is roughly 60%, 30% developed exUS and 10% Emerging.
Over the recent years the valuations of the US part have grown way higher than those of exUS, and expected long-term returns for the US and exUS started to diverge. At least Vanguard thinks so https://personal.vanguard.com/pdf/ISGVE ... online.pdf

I ‘ve been thinking about overweighting the developed exUS part of my portfolio for a number of years. In the absence of good factor products, such a tilt can be seen, to a degree indeed, as a substitute for the factoring. What stopped me up until now was the complexity and no clear condition when to remove the tilt.

@Nathan Drake you are a proponent of tilting towards international. Did you think about conditions when such a tilt does not make sense anymore? As I understand the history, the US market tends on average to have higher valuations and a higher real growth. The valuation gaps is excessive now, but it will probably not be at this level forever. So if a tilting towards international makes sense, say with a horizon of several years up to a decade or two, it’s a good idea to think about exit conditions, to formalize them to avoid behavior mistakes. I wonder if someone though about such conditions and is willing to share them.
fisher0815
Posts: 155
Joined: Tue Jun 08, 2021 3:10 am

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

Post by fisher0815 »

Nathan Drake wrote: Mon Jan 10, 2022 9:05 pm By that definition the S&P 500 is market timing when it decides to add or remove companies on the basis of market conditions being satisfied
What is the turnover rate of your factor funds?

The turnover rate of the S&P 500 is around 4%. And a environment like covid does not necessarily mean a higher turnover rate:
https://www.spglobal.com/en/research-in ... cessarily-
Tinyz
Posts: 102
Joined: Fri Nov 19, 2021 8:59 pm

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

Post by Tinyz »

Based on 2 things. Sentiments/feelings and New information. Some people look at the valuation and felt is too high/low/right/wrong. Some people look at the company business plan/company directors and felt that it will be the game changer(disruptor) or lead the company to a better place. Some people look at the product and felt that it will be popular. There are many reasons and all the decisions are what make up of the market.

Tiny look at all the countries and felt that US is a special company. A shiny company that promotes people to participate in the market. Tiny feels that the company will overcome all challenges it will face as long as it remains as a shiny company.

Tiny really like Mr Warren Buffet one sentence. I want to buy (insert company) for its price because...

:sharebeer
dknightd
Posts: 3727
Joined: Wed Mar 07, 2018 10:57 am

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

Post by dknightd »

Taylor Larimore wrote: Thu Jan 13, 2022 10:16 am
Da5id wrote:I'm firmly in the "don't know don't care" camp.
Da5id:

I generally agree with you. So does Jason Zweig who wrote this article for Money Magazine:

I DON'T KNOW, I DON'T CARE

Best wishes.
Taylor
Thanks for sharing. Interesting read. I think the title should have perhaps been "be at peace with your ignorance".
I know that I do not know, I do not care that I do not know. Good thing, because there is absolutely nothing I can do about it. But, I do care about what the outcome might be. I read this whole thread! I'm not sure why, perhaps I care more than I'm willing to admit!
I invest, because invest we must.
I like index funds. Not a fan of S&P 500 index, it is not broad enough for my liking. So the first problem is, if you are going to invest in an index fund, which one do you choose? As the index gets broader, then the fund manager eventually has to pick which stocks to buy that will reflect the index (it would be hard to always own them all in a market weighted way . . .). Then you have to decide how much volatility are you comfortable with, and so pick an AA.
I noticed I was much more comfortable with volatility when I was working. Then I was saving/investing so that one day I could quit working for money. As a recently retired person, I prefer more stability. Once I'm sure our expenses are met for life, I think I'll be able to accept more volatility again.

I am at peace with my ignorance (mostly, I still like to learn when I can). But I care what the outcome is. So I diversify beyond index stock funds.

As a famous person once said, there are many roads to Dublin. To which I'll add, not everybody wants to go to Dublin ;)

edit: I actually want to go to Dublin. But I'll probably have to fly or take a boat :)
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

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

Post by Nathan Drake »

id_afstand wrote: Fri Jan 14, 2022 2:37 am
Nathan Drake wrote: Thu Jan 13, 2022 2:04 pm
CraigTester wrote: Thu Jan 13, 2022 1:55 pm
Nathan Drake wrote: Thu Jan 13, 2022 12:43 pm
CraigTester wrote: Thu Jan 13, 2022 12:36 pm

Having been a 100% buy-n-hold guy for most of my investing life, I really do get the “I don’t care” strategy….taking comfort that the market just does a lot of jumping around within historical boundaries ...

And even when it broke out of these boundaries, like during the dot.com bubble, at least there was a “reason” for it…..(e.g. this new thing called the Internet)

But this time appears to be different.

It feels like a bad movie where everyone (Bogleheads AND non-Bogleheads), are all just murmuring, I don’t care…., plugging their noses, and plunging their life savings into something that is priced, based on absolutely nothing.

The "greater-fool theory" has been in control for a long time, and I just don't see how this doesn't end really badly....

And fortunately or unfortunately, I do care….a lot.
If this is your major concern (as it is mine), the best thing you can do is construct a highly diversified portfolio like mine where US TSM is limited to 20%, and the rest of your equities are in Factors and exUS where valuations are extremely reasonable historically.
Thanks Nathan Drake

I think we are kindred souls in some ways… seeming to have both come to the same conclusion about the extremes of the US equity market… and reducing exposure….despite lots of pushback….

And as you say, the next question is now what?

Valuation-wise I very much like the idea of shifting to non-US equites, except for one very annoying "gotcha"….

At least with the research I did, there appears to be a lot of truth to the old adage that when the US gets a cold, the world gets the flu….

Correlations between US and EFA for instance tend toward 1 "when US equities crash"… At least so far…,

And since my primary goal is to reduce exposure to what I consider a very high risk of a US equity crash, I don't appear to help that goal by reallocating more to non-US equities...

Now from a buy-low-sell-high perspective, I very much agree that valuations make some of the international markets appear much more attractive than the US, right now…and therefore I do happily own some…

However, I’m viewing the lion’s share of my portfolio as an “option" to purchase VTI at better prices…(I think Buffett appears to be doing the same thing on a much bigger scale with his $146B in cash)

P.S. 99% of the time, I would consider this move very foolish, but as discussed throughout this thread, I can’t find any justification for today’s US valuations….other than widespread adoption of the “I don’t care strategy”…. Which doesn’t appear to be long-term sustainable….

Best of luck to you…, Craig Tester
My portfolio won’t prevent a crash from hitting everything hard. Covariance (long term dispersions) are far more important. And exUS still has wide long term dispersions despite short term correlations.

However, short term crashes don’t bother me. Most fully recover by a few years

What worries me the most about overvaluation is the potential for long term poor returns - Japan after the 80s or US from 1966-1984

Diversification works fantastically against overvalued markets over the long term to produce reliably robust returns

I would hesitate to sit on the sidelines in cash waiting for a big U.S. correction and then buying into that US correction. It may not come. Returns may just be low and valuations correct slowly over time. Additionally, corrections can cause negative momentum in markets leading to very poor returns for a very long time because that market is deemed “at risk”. I feel that’s the way exUS is viewed at present. But eventually that too will have a positive change of course.
Fascinating topic!

As for a Europe-based investor, I don’t have access to the interesting factor products like those of Avantis. I am doing plain vanilla all world, something like the VT, so my stock allocation is roughly 60%, 30% developed exUS and 10% Emerging.
Over the recent years the valuations of the US part have grown way higher than those of exUS, and expected long-term returns for the US and exUS started to diverge. At least Vanguard thinks so https://personal.vanguard.com/pdf/ISGVE ... online.pdf

I ‘ve been thinking about overweighting the developed exUS part of my portfolio for a number of years. In the absence of good factor products, such a tilt can be seen, to a degree indeed, as a substitute for the factoring. What stopped me up until now was the complexity and no clear condition when to remove the tilt.

@Nathan Drake you are a proponent of tilting towards international. Did you think about conditions when such a tilt does not make sense anymore? As I understand the history, the US market tends on average to have higher valuations and a higher real growth. The valuation gaps is excessive now, but it will probably not be at this level forever. So if a tilting towards international makes sense, say with a horizon of several years up to a decade or two, it’s a good idea to think about exit conditions, to formalize them to avoid behavior mistakes. I wonder if someone though about such conditions and is willing to share them.
I am a US based investor, but history actually does not support the idea of US valuations being higher. That is a phenomenon of the most recent past decade. CAPE has largely been equal across US vs exUS, and interestingly enough when it’s not that is usually indicative of a bubble (see: Japan for exUS).

When analyzing returns of US vs exUS I suggest you read the paper “The Long Run is Lying to you”. ExUS returns are often criticized due to the performance of the last 30 years vs US, but context is always important with investing.

In 1990, exUS was in a bubble with very high valuations due to Japan. US valuations were low. Over the next thirty years US went from low to high, which was a huge boost to returns. ExUS did the opposite, which was a huge drag. Most of the outperformance is because of this change in valuation.

So that’s why I’m confident that 10+ year returns for exUS should be reasonably good because significant valuation contraction is a much lower risk than it is for US. It’s still possible for US valuations to increase further, like Japan, but in the meantime I don’t expect exUS to be poor.

On this forum it is often accepted to have 80%+ in US equities. Anything over 40% exUS is seen as a “dangerous” tilt, and I completely disagree. If one decides to allocate 60%+ to exUS, that is a completely rational choice and far more diversified because you are investing in many countries as opposed to just one. I would simply allocate to what you feel comfortable with and just stay the course with that for the long term.

I am not an expert on factor based products in Europe but there are workarounds that are discussed on the Rational Reminder forum.
Last edited by Nathan Drake on Fri Jan 14, 2022 10:51 am, edited 1 time in total.
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Nathan Drake wrote: Fri Jan 14, 2022 10:40 am I am a US only investor
OK, the truth is out, Nathan has been trolling all along :)

I'm assuming that is a typo?
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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

Da5id wrote: Fri Jan 14, 2022 10:46 am
Nathan Drake wrote: Fri Jan 14, 2022 10:40 am I am a US only investor
OK, the truth is out, Nathan has been trolling all along :)

I'm assuming that is a typo?
Doh! :oops: :mrgreen:

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

Post by vanbogle59 »

Nathan Drake wrote: Fri Jan 14, 2022 10:51 am
Da5id wrote: Fri Jan 14, 2022 10:46 am
Nathan Drake wrote: Fri Jan 14, 2022 10:40 am I am a US only investor
OK, the truth is out, Nathan has been trolling all along :)

I'm assuming that is a typo?
Doh! :oops: :mrgreen:

Meant US based
I was wondering if it was some sort of Freudian slip?
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Re: If Valuation doesn't matter, what does?

Post by id_afstand »

Nathan Drake wrote: Fri Jan 14, 2022 10:40 am
id_afstand wrote: Fri Jan 14, 2022 2:37 am Fascinating topic!

As for a Europe-based investor, I don’t have access to the interesting factor products like those of Avantis. I am doing plain vanilla all world, something like the VT, so my stock allocation is roughly 60%, 30% developed exUS and 10% Emerging.
Over the recent years the valuations of the US part have grown way higher than those of exUS, and expected long-term returns for the US and exUS started to diverge. At least Vanguard thinks so https://personal.vanguard.com/pdf/ISGVE ... online.pdf

I ‘ve been thinking about overweighting the developed exUS part of my portfolio for a number of years. In the absence of good factor products, such a tilt can be seen, to a degree indeed, as a substitute for the factoring. What stopped me up until now was the complexity and no clear condition when to remove the tilt.

@Nathan Drake you are a proponent of tilting towards international. Did you think about conditions when such a tilt does not make sense anymore? As I understand the history, the US market tends on average to have higher valuations and a higher real growth. The valuation gaps is excessive now, but it will probably not be at this level forever. So if a tilting towards international makes sense, say with a horizon of several years up to a decade or two, it’s a good idea to think about exit conditions, to formalize them to avoid behavior mistakes. I wonder if someone though about such conditions and is willing to share them.
I am a US based investor, but history actually does not support the idea of US valuations being higher. That is a phenomenon of the most recent past decade. CAPE has largely been equal across US vs exUS, and interestingly enough when it’s not that is usually indicative of a bubble (see: Japan for exUS).

When analyzing returns of US vs exUS I suggest you read the paper “The Long Run is Lying to you”. ExUS returns are often criticized due to the performance of the last 30 years vs US, but context is always important with investing.

In 1990, exUS was in a bubble with very high valuations due to Japan. US valuations were low. Over the next thirty years US went from low to high, which was a huge boost to returns. ExUS did the opposite, which was a huge drag. Most of the outperformance is because of this change in valuation.

So that’s why I’m confident that 10+ year returns for exUS should be reasonably good because significant valuation contraction is a much lower risk than it is for US. It’s still possible for US valuations to increase further, like Japan, but in the meantime I don’t expect exUS to be poor.

On this forum it is often accepted to have 80%+ in US equities. Anything over 40% exUS is seen as a “dangerous” tilt, and I completely disagree. If one decides to allocate 60%+ to exUS, that is a completely rational choice and far more diversified because you are investing in many countries as opposed to just one. I would simply allocate to what you feel comfortable with and just stay the course with that for the long term.

I am not an expert on factor based products in Europe but there are workarounds that are discussed on the Rational Reminder forum.
Thanks for your reply!

If I remember the data correctly, the US stock market real returns since 1900 have been around 6,5%, while exUS returned 4,5% over that period. So, there is underlying difference in growth rates, it can be (partly) explained by the fact that US did not experience wars on its territory in that period. While Europe was devasted twice, the Russian market was wiped out in 1917. More recent valuations of the US market tend to be higher than those of international (of course if you neglect the bubble of Japan in the late 1980ies) https://indices.barclays/IM/21/en/indic ... c-cape.app

So the picture is mixed, but I believe the US market generates new companies that are transformative and provide for a faster wealth generation (it does not necessarily mean that those companies are a good investment though).

If I decide to tilt away from the US, it means essentially two things. First, that I deem it more probable than the market that the exUS market would deliver a higher return, and second, this higher return would happen even when long-term growth of the US market is higher. Conclusion that such a tilt is a mid to long term speculation. And all those hedge fund managers and other PhDs in finance see this difference in valuation, it is too obvious. When you do speculate, it’s best to prepare for the exit conditions: what puzzles me is to find a good criteria as to when remove the tilt. Say if CAPE 10 of US is not bigger than that of exUS + 30%, for an example. It looks naïve and it probably is so.

There seems to be an option for a European investor to buy US ETFs via options. But it’s too complex on the one hand, and on the other I am not very persuaded that implementations of SCV are implementing exactly that. In an interview with Ben Felix, a guy from DFA said that they use momentum to trade in and out, which is logical, but SCV on itself requires many other less transparent factors to be a good implementation.

Concluding, yes, it seems that developed exUS will return more than US in the next decade or so. But how to make it actionable? When to get out from the tilt?
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Even the WSJ is trying to answer the question of this thread today in the attached article titled,

"Why Has the U.S. Stock Market Done So Well? And Can It Continue?"

https://www.wsj.com/articles/why-has-th ... 1642132077
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

Here's a fun one from 2014

https://www.usatoday.com/story/money/ma ... /12689123/

How long can this market stay overvalued? <--- Written in 2014
On Monday, July 14 (2014), the Dow Jones Industrial Average hit another record high. As stock prices soar higher, their price/earnings ratios increase, making the stocks more "expensive." The obvious drawback to buying stocks in an expensive market is that there is a higher probability of larger losses in the event of a pullback, and long-term returns can be muted.

Many commentators are currently focusing more attention on Yale Professor Robert Shiller's "Cyclically-Adjusted Price/Earnings Ratio" or CAPE, rather than the trailing twelve-month P/E ratio, which is currently 19.6. (The median is 14.56.)

Using Shiller's formula of averaging earnings over a 10-year time frame, the CAPE (also known as the "P/E 10") is currently 26.19 – which tells you that stocks are almost as expensive as they were in 2007 – just before the financial crisis. (The median is 15.93.) As a result of comparing the current Shiller CAPE to the median, we can see that the market is currently overvalued by approximately 60%.
Even if the market crashes next week, CAPE has ALREADY failed as prediction tool.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sat Jan 15, 2022 10:29 pm Here's a fun one from 2014

https://www.usatoday.com/story/money/ma ... /12689123/

How long can this market stay overvalued? <--- Written in 2014
On Monday, July 14 (2014), the Dow Jones Industrial Average hit another record high. As stock prices soar higher, their price/earnings ratios increase, making the stocks more "expensive." The obvious drawback to buying stocks in an expensive market is that there is a higher probability of larger losses in the event of a pullback, and long-term returns can be muted.

Many commentators are currently focusing more attention on Yale Professor Robert Shiller's "Cyclically-Adjusted Price/Earnings Ratio" or CAPE, rather than the trailing twelve-month P/E ratio, which is currently 19.6. (The median is 14.56.)

Using Shiller's formula of averaging earnings over a 10-year time frame, the CAPE (also known as the "P/E 10") is currently 26.19 – which tells you that stocks are almost as expensive as they were in 2007 – just before the financial crisis. (The median is 15.93.) As a result of comparing the current Shiller CAPE to the median, we can see that the market is currently overvalued by approximately 60%.
Even if the market crashes next week, CAPE has ALREADY failed as prediction tool.
Um, the WSJ article doesn't say anything about CAPE.
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sat Jan 15, 2022 10:38 pm
HomerJ wrote: Sat Jan 15, 2022 10:29 pm Here's a fun one from 2014

https://www.usatoday.com/story/money/ma ... /12689123/

How long can this market stay overvalued? <--- Written in 2014
On Monday, July 14 (2014), the Dow Jones Industrial Average hit another record high. As stock prices soar higher, their price/earnings ratios increase, making the stocks more "expensive." The obvious drawback to buying stocks in an expensive market is that there is a higher probability of larger losses in the event of a pullback, and long-term returns can be muted.

Many commentators are currently focusing more attention on Yale Professor Robert Shiller's "Cyclically-Adjusted Price/Earnings Ratio" or CAPE, rather than the trailing twelve-month P/E ratio, which is currently 19.6. (The median is 14.56.)

Using Shiller's formula of averaging earnings over a 10-year time frame, the CAPE (also known as the "P/E 10") is currently 26.19 – which tells you that stocks are almost as expensive as they were in 2007 – just before the financial crisis. (The median is 15.93.) As a result of comparing the current Shiller CAPE to the median, we can see that the market is currently overvalued by approximately 60%.
Even if the market crashes next week, CAPE has ALREADY failed as prediction tool.
Um, the WSJ article doesn't say anything about CAPE.
Um, I didn't reference the WSJ article. Behind a paywall anyway.

I would humbly suggest you start a new thread if you are going to post articles that have nothing to do with valuations, since you started this thread to talk about valuations.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sun Jan 16, 2022 9:59 am
CraigTester wrote: Sat Jan 15, 2022 10:38 pm
HomerJ wrote: Sat Jan 15, 2022 10:29 pm Here's a fun one from 2014

https://www.usatoday.com/story/money/ma ... /12689123/

How long can this market stay overvalued? <--- Written in 2014
On Monday, July 14 (2014), the Dow Jones Industrial Average hit another record high. As stock prices soar higher, their price/earnings ratios increase, making the stocks more "expensive." The obvious drawback to buying stocks in an expensive market is that there is a higher probability of larger losses in the event of a pullback, and long-term returns can be muted.

Many commentators are currently focusing more attention on Yale Professor Robert Shiller's "Cyclically-Adjusted Price/Earnings Ratio" or CAPE, rather than the trailing twelve-month P/E ratio, which is currently 19.6. (The median is 14.56.)

Using Shiller's formula of averaging earnings over a 10-year time frame, the CAPE (also known as the "P/E 10") is currently 26.19 – which tells you that stocks are almost as expensive as they were in 2007 – just before the financial crisis. (The median is 15.93.) As a result of comparing the current Shiller CAPE to the median, we can see that the market is currently overvalued by approximately 60%.
Even if the market crashes next week, CAPE has ALREADY failed as prediction tool.
Um, the WSJ article doesn't say anything about CAPE.
Um, I didn't reference the WSJ article. Behind a paywall anyway.

I would humbly suggest you start a new thread if you are going to post articles that have nothing to do with valuations, since you started this thread to talk about valuations.
The whole point of the article is to offer different theories on why the US markets are uniquely experiencing such outsize valuations right now....However they never reference CAPE.

What I found most interesting is they don't really draw a conclusion.... Similar in some ways to the meandering ideas put forward on this thread....I just find it fascinating that it keeps going up, but nobody seems to be able to point at a "good" reason for why.....Maybe it really is just beer and football, like you say....

P.S. a subscription is only a few bucks a month but you may have to catch a "special", I also think you can even sign up for the first month free....at least that was the way it worked when I signed up a long time ago... Its actually become one of the only news sources I consistently trust (though not completely)
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Sun Jan 16, 2022 10:31 am What I found most interesting is they don't really draw a conclusion.... Similar in some ways to the meandering ideas put forward on this thread....I just find it fascinating that it keeps going up, but nobody seems to be able to point at a "good" reason for why.....Maybe it really is just beer and football, like you say....
It's pointless to explore why because there is no one good reason people can agree on. We just know that the investors are (or, were, until 2021?) buying US equities. That's all we know.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Marseille07 wrote: Sun Jan 16, 2022 10:56 am
CraigTester wrote: Sun Jan 16, 2022 10:31 am What I found most interesting is they don't really draw a conclusion.... Similar in some ways to the meandering ideas put forward on this thread....I just find it fascinating that it keeps going up, but nobody seems to be able to point at a "good" reason for why.....Maybe it really is just beer and football, like you say....
It's pointless to explore why because there is no one good reason people can agree on. We just know that the investors are (or, were, until 2021?) buying US equities. That's all we know.
Ironically, the only reason we seem to all agree on this time, is that there is no reason.

This is in stark contrast to prior bubbles. No “internet is going to change everything “ arguments, this time.

I keep wondering how future experts will explain this period….
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sun Jan 16, 2022 2:14 pm I keep wondering how future experts will explain this period….
A lot better than current experts. Easy to look backwards and make up a explanation.

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


P.S. A future CraigTester Jr. may look at those explanations in 2040 and say "See, it was OBVIOUS that 2024 was the year everything was going to crash. Market-timing is easy!"

Just like you looked back at 2000 and 2008, and have said how "clear" it was (looking backwards). But you've now learned that in real-time, it's never clear. You've been waiting since at least 2018 for the obvious crash.
Last edited by HomerJ on Sun Jan 16, 2022 3:06 pm, edited 1 time in total.
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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

CraigTester wrote: Sun Jan 16, 2022 2:14 pm
Marseille07 wrote: Sun Jan 16, 2022 10:56 am
CraigTester wrote: Sun Jan 16, 2022 10:31 am What I found most interesting is they don't really draw a conclusion.... Similar in some ways to the meandering ideas put forward on this thread....I just find it fascinating that it keeps going up, but nobody seems to be able to point at a "good" reason for why.....Maybe it really is just beer and football, like you say....
It's pointless to explore why because there is no one good reason people can agree on. We just know that the investors are (or, were, until 2021?) buying US equities. That's all we know.
Ironically, the only reason we seem to all agree on this time, is that there is no reason.

This is in stark contrast to prior bubbles. No “internet is going to change everything “ arguments, this time.

I keep wondering how future experts will explain this period….
Well, there are some similarities

"EV is going to change everything"...although this is only seen with TSLA

The major difference, I think, is that well established big tech names almost seem immune from cyclicality and decline of earnings. I simply believe many of these companies have yet to hit any major resistance but soon will as the impact of scale lessens. Earnings will inevitably disappoint, and the valuations will reduce to come into line with the new reality that "no, perpetual high earnings and margins aren't really a new norm"
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Re: If Valuation doesn't matter, what does?

Post by patrick »

CraigTester wrote: Sun Jan 16, 2022 2:14 pm Ironically, the only reason we seem to all agree on this time, is that there is no reason.

This is in stark contrast to prior bubbles. No “internet is going to change everything “ arguments, this time.

I keep wondering how future experts will explain this period….
You have to misinterpret (or ignore) quite a few posts here to think we all agree on that.

From a pure boglehead perspective, "this time" is not different. You can never identify bubbles except in hindsight, and you can't conclusively assign a reason to current prices either. There is no "stark contrast" because those things applied just as well in the past.

Those who nonetheless try to speculate on reasons why stocks are currently at high prices by some measure can (and did) give specific reasons which at least sound plausible. Low interest rates are a real reason for higher stock prices, since low interest rates mean lower expected returns on bonds, and thus lower expected returns required of stocks to make them fairly priced relative to bonds. Then there is the idea of large tech companies eating the world, which is somewhat similar to the old “internet is going to change everything “ idea, but this time we have a much clearer idea of how it will happen.

Future "experts" will explain this period by looking at the actual results, which we do not yet have. Depending on what they see, they will either select the existing plausible-sounding arguments that stocks will go way up, or the existing plausible-sounding arguments that stocks will stay about the same, or the existing plausible-sounding arguments that stocks will go way down. If they want to be really fancy, they might throw in something regarding geopolitical events that haven't yet happened and/or the success or failure of specific products that haven't yet been launched.
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Sun Jan 16, 2022 2:14 pm Ironically, the only reason we seem to all agree on this time, is that there is no reason.

This is in stark contrast to prior bubbles. No “internet is going to change everything “ arguments, this time.

I keep wondering how future experts will explain this period….
Actually I agree with what patrick said - there are broad reasons, such as low interest rates, that might explain what we're seeing in US equities.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

patrick wrote: Sun Jan 16, 2022 2:42 pm
CraigTester wrote: Sun Jan 16, 2022 2:14 pm Ironically, the only reason we seem to all agree on this time, is that there is no reason.

This is in stark contrast to prior bubbles. No “internet is going to change everything “ arguments, this time.

I keep wondering how future experts will explain this period….
You have to misinterpret (or ignore) quite a few posts here to think we all agree on that.

From a pure boglehead perspective, "this time" is not different. You can never identify bubbles except in hindsight, and you can't conclusively assign a reason to current prices either. There is no "stark contrast" because those things applied just as well in the past.

Those who nonetheless try to speculate on reasons why stocks are currently at high prices by some measure can (and did) give specific reasons which at least sound plausible. Low interest rates are a real reason for higher stock prices, since low interest rates mean lower expected returns on bonds, and thus lower expected returns required of stocks to make them fairly priced relative to bonds. Then there is the idea of large tech companies eating the world, which is somewhat similar to the old “internet is going to change everything “ idea, but this time we have a much clearer idea of how it will happen.

Future "experts" will explain this period by looking at the actual results, which we do not yet have. Depending on what they see, they will either select the existing plausible-sounding arguments that stocks will go way up, or the existing plausible-sounding arguments that stocks will stay about the same, or the existing plausible-sounding arguments that stocks will go way down. If they want to be really fancy, they might throw in something regarding geopolitical events that haven't yet happened and/or the success or failure of specific products that haven't yet been launched.

I have heard interest rates pointed to a few times, but never with a good explanation for why international equities didn’t respond in kind…

In many examples, international rates are lower than in the US but there is far less exuberance in their valuations.

I’ve also heard tech pointed to several times, but again, not in away that wasn’t already true years ago…

I don’t know your age, but if you lived through the Japanese run or the dot com era, would you agree that while valuations feel similar, nothing else does…?
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Re: If Valuation doesn't matter, what does?

Post by patrick »

CraigTester wrote: Mon Jan 17, 2022 6:27 am I have heard interest rates pointed to a few times, but never with a good explanation for why international equities didn’t respond in kind…

In many examples, international rates are lower than in the US but there is far less exuberance in their valuations.

I’ve also heard tech pointed to several times, but again, not in away that wasn’t already true years ago…

I don’t know your age, but if you lived through the Japanese run or the dot com era, would you agree that while valuations feel similar, nothing else does…?
I would not agree with that.

There are other similarities. You just mentioned one of them -- some expect tech to have a major impact on the future. Maybe people raving about tech in the 90s were right, just a bit early.

How do you know that international equities didn't respond to interest rates? They might be much lower if interest rates were normal. Tech might explain why international is not higher -- by centralizing most commerce and communication in a few companies, tech might capture much of the profit that otherwise would go to other companies. That also explains lower prices of non-tech US companies.

Interest rates are the one thing that clearly isn't similar to the past. If I believed CAPE (or whichever valuation ratio you prefer) could reliably predict future returns, I would have to believe that stock prices today are far more justifiable than they were back in 2000.
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Mon Jan 17, 2022 6:27 am I have heard interest rates pointed to a few times, but never with a good explanation for why international equities didn’t respond in kind…

In many examples, international rates are lower than in the US but there is far less exuberance in their valuations.

I’ve also heard tech pointed to several times, but again, not in away that wasn’t already true years ago…

I don’t know your age, but if you lived through the Japanese run or the dot com era, would you agree that while valuations feel similar, nothing else does…?
Because investors make different decisions. Investors might be buying US equities because rates are low. But that doesn't mean they're buying international for the same reason.

As I previously said, there's no single reason everyone agrees on. Just that low interest rates might be a plausible one to explain what's happening in the US. It doesn't mean it is universally applicable around the globe.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Marseille07 wrote: Mon Jan 17, 2022 2:19 pm
CraigTester wrote: Mon Jan 17, 2022 6:27 am I have heard interest rates pointed to a few times, but never with a good explanation for why international equities didn’t respond in kind…

In many examples, international rates are lower than in the US but there is far less exuberance in their valuations.

I’ve also heard tech pointed to several times, but again, not in away that wasn’t already true years ago…

I don’t know your age, but if you lived through the Japanese run or the dot com era, would you agree that while valuations feel similar, nothing else does…?
Because investors make different decisions. Investors might be buying US equities because rates are low. But that doesn't mean they're buying international for the same reason.

As I previously said, there's no single reason everyone agrees on. Just that low interest rates might be a plausible one to explain what's happening in the US. It doesn't mean it is universally applicable around the globe.
That's an interesting perspective.... If I may ask further, why do you think low interest rates would be a catalyst in one market... and not another?
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Mon Jan 17, 2022 2:59 pm That's an interesting perspective.... If I may ask further, why do you think low interest rates would be a catalyst in one market... and not another?
Some places love other investment options such as RE. Some places don't invest much in the markets at all because they have the social safety net in place and don't have to risk their capital to live comfortably.
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