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Re: Valuations and the AA decision

staythecourse First should not compare to nominal bond yields, doesn't make sense to compare a real return number with a nominal one. That's the problem with the idea of the FED MODEL---and the money illusion Second, if timing were that simple then there would be many millionaires from timing, but t...
by larryswedroe
Tue Oct 21, 2014 6:42 pm
 
Forum: Investing - Theory, News & General
Topic: Valuations and the AA decision
Replies: 8
Views: 822

Re: Why do Engineers Think They’ll Be Good at Picking Stocks

FWIW
MY own experiences which are pretty long and broad are that in fact engineers have been our best clients--they get the "science" of investing and understand modern financial theory (and the math) and tend to then be very disciplined. So very different experience.
Larry
by larryswedroe
Tue Oct 21, 2014 5:26 pm
 
Forum: Investing - Theory, News & General
Topic: Why do Engineers Think They’ll Be Good at Picking Stocks?
Replies: 30
Views: 1778

Re: Risk in a high dividend stock portfolio

Here's PARTIAL list of links to blogs I've written on dividend paying strategies http://www.cbsnews.com/8301-505123_162-57555994/why-a-high-dividend-strategy-is-dangerous http://www.cbsnews.com/8301-505123_162-37841496/factors-to-consider-for-high-dividend-stock-strategies http://www.cbsnews.com/830...
by larryswedroe
Tue Oct 21, 2014 8:43 am
 
Forum: Investing - Theory, News & General
Topic: Risk in a high dividend stock portfolio
Replies: 13
Views: 1074

Re: Valuations and the AA decision

staythecourse Anyone can do that for themselves. Just invert the CAPE and compare to bond yields. Or better CD yields since they are higher and just as riskless. That's the point I made ---just because valuations are high doesn't mean stocks will underperform. And no one knows the "right" ...
by larryswedroe
Tue Oct 21, 2014 7:34 am
 
Forum: Investing - Theory, News & General
Topic: Valuations and the AA decision
Replies: 8
Views: 822

Re: How to think about expected returns--continuing discussi

James First Buffett advises YOU not to do that. Why not take his advice. Peter Lynch never tried to time market. And no evidence of people having that skill. Bottom line is that IMO that is a loser's game. So why play? That is basically what Buffett said in the quote you cite. And Buffett hasn't sol...
by larryswedroe
Tue Oct 21, 2014 7:31 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: Risk in a high dividend stock portfolio

First, high dividend paying stocks are not in any way substitutes for safe bonds. Second, they USED to be value stocks, but the worst value strategy in terms of returns Third, they are no longer value stocks due to POPULARITY, caused by the Fed's ZRP, along with anything with yield. So now their exp...
by larryswedroe
Tue Oct 21, 2014 7:28 am
 
Forum: Investing - Theory, News & General
Topic: Risk in a high dividend stock portfolio
Replies: 13
Views: 1074

Re: Valuations and the AA decision

BTW- the same thing is true if you like at value premium. Even when BTM spread below average there is still a value premium, just smaller
Larry
by larryswedroe
Mon Oct 20, 2014 11:14 pm
 
Forum: Investing - Theory, News & General
Topic: Valuations and the AA decision
Replies: 8
Views: 822

Re: How to think about expected returns--continuing discussi

Rod First it is important as I said to recognize that the MCS is a tool, and IMO and the opinion of many highly qualified math professionals, world class mathematicians, that is the best tool we have. Just like any model of the world it is flawed (or wrong), but that doesn't mean it doesn't have val...
by larryswedroe
Mon Oct 20, 2014 11:10 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

Rod Very much disagree about its usefulness. Example, if you see reducing your spending rate by 5% increases your odds of success by 10% that is helpful. If decreasing your equity allocation by 10% increases your odds of not running out of money by 10% but decreases your odds of leaving an estate of...
by larryswedroe
Mon Oct 20, 2014 7:48 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

saimond The research seems to show that no magic about CAPE 10, 8 works about as well, and others likely would too. In fact current works about as well. Not fan of Tobin's Q for various reasons. As to MCS, one of the biggest benefits is that it allows you to do MARGINAL analysis very easily --seeing...
by larryswedroe
Mon Oct 20, 2014 9:24 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: New Paper ". . . and the Cross-Section of Expected Retur

Yes with all the computing paper and the mischief of possibility of data mining (no theory just search for a correlation and then make one up after) that perhaps in terms of tstats 3 or even 4 is the new 2. Having said that, IMO the same hurdles should apply --you want evidence to be persistent and ...
by larryswedroe
Mon Oct 20, 2014 9:17 am
 
Forum: Investing - Theory, News & General
Topic: New Paper ". . . and the Cross-Section of Expected Returns"
Replies: 7
Views: 499

Valuations and the AA decision

http://www.etf.com/sections/index-investor-corner/23578-swedroe-valuations-and-asset-allocation.html?fullart=1&start=3

Thought I should write a blog on this to address the discussion that is ongoing in a thread

Larry
by larryswedroe
Mon Oct 20, 2014 7:45 am
 
Forum: Investing - Theory, News & General
Topic: Valuations and the AA decision
Replies: 8
Views: 822

Re: How to think about expected returns--continuing discussi

James First, not arguing one SHOULD TAKE more risk, only that one needs higher returns, but as I explained there are more than that one way to achieve that objective. But the right answer depends on each person. Second, the reason should perhaps not choose to wait till mean reversion is that you don...
by larryswedroe
Mon Oct 20, 2014 7:40 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: inefficiencies in small lot, near-term muni bonds prices

baw
Nothing to disagree about, as my answer was a general one, not limited to some short maturity. If you buy a bond with just few months to maturity not likely to be able to harvest losses unless as you note there is default, which is almost impossible if buy the kind of bonds I recommend.
Larry
by larryswedroe
Sun Oct 19, 2014 10:26 pm
 
Forum: Investing - Theory, News & General
Topic: inefficiencies in small lot, near-term muni bonds prices?
Replies: 8
Views: 737

Re: How to think about expected returns--continuing discussi

Richard Yes, exactly, and it is based on history, results from study by Asness. Even when forecast low returns still possibility of very high real returns, and vice versa. AS to the issue of an MCS not adjusting future returns based on the first year returns. I wanted to wait before answering becaus...
by larryswedroe
Sun Oct 19, 2014 10:22 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: [how should new investors select funds w/o] Past Perform

few rules Howard to follow A) Should be passively managed, by that I mean transparent, systematic, low cost, tax efficient if appropriate, and should be based on research, not opinions. B) Should provide the amount of exposure you want to the factors or sources of returns that you want exposure to. ...
by larryswedroe
Sun Oct 19, 2014 1:30 pm
 
Forum: Investing - Theory, News & General
Topic: [how should new investors select funds w/o] Past Performance
Replies: 6
Views: 549

Re: How to think about expected returns--continuing discussi

siamond FYI, if unaware FAS 142 instituted around 2001 I think forced immediate writedown of goodwill vs 40-year write off. It's estimated that alone raises the figure by about 3. And the fewer companies paying dividends should lead to about another 1 adjustment. So if you look at say 19 as the aver...
by larryswedroe
Sun Oct 19, 2014 1:27 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

few thoughts First, there is clearly no exact "science" here --the best models only explain about 40% of the future outcomes. But of course this should not be a surprise, for if the models explained 100% then there would be no risk. In other words, surprises happen, both good and bad. And ...
by larryswedroe
Sun Oct 19, 2014 11:35 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

209south Exactly right. One should adjust their plan accordingly. Lower expected returns might mean you should take more risk, or spend less (save more), lower your goal, or plan on working longer, or any combination of these. No right answer, but one right for each person. And at least one should h...
by larryswedroe
Sun Oct 19, 2014 10:02 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

Couple of things First, here's example of why I prefer CAPE 10 over Gordon. Say you have d/p of 2% and expect growth of 1.5%. So you have real expected return of 3.5%. Now valuations double so you have d/p of 1%. So with prices doubling you see expected returns cut just 1% to 2.5%. Now say you start...
by larryswedroe
Sun Oct 19, 2014 9:29 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: inefficiencies in small lot, near-term muni bonds prices

Just add few things thought of (so perhaps STLutz will no longer agree 100% with me (:-)) Personally recommend sticking ONLY with AAA/AA and also add requirement that must also be either GO or essential services revenue bond. Even then we cut out some issuers of GOs that have very high Adjusted Net ...
by larryswedroe
Sun Oct 19, 2014 9:22 am
 
Forum: Investing - Theory, News & General
Topic: inefficiencies in small lot, near-term muni bonds prices?
Replies: 8
Views: 737

Re: How to think about expected returns--continuing discussi

countmein The adjusted earnings yield is the forecasted REAL return to which you add expected inflation if you want to nominal return (so your calculation is wrong, you don't subtract inflation and IMO would not subtract any speculative return either) We assume current price is the right price (by p...
by larryswedroe
Sat Oct 18, 2014 10:30 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: Long term return forecast [Research Affil. Expected retu

few quick thoughts These are REAL estimated returns and have nothing to do with inflation. And inflation should not impact real returns over the long term, either way. To estimate inflation most take the nominal yield on say 10-year or 30-year Treasury and then subtract yield on same maturity TIPS, ...
by larryswedroe
Sat Oct 18, 2014 4:28 pm
 
Forum: Investing - Theory, News & General
Topic: Long term return forecast [Research Affil. Expected returns]
Replies: 27
Views: 1720

Re: How to think about expected returns--continuing discussi

Countmein I'm simplifying here but the CAPE 10 is now at about 24.7 http://www.multpl.com/shiller-pe That produces an earnings yield of about 4.0 percent. However, we need to make an adjustment to arrive at the forecasted real return to stocks because the earnings figure from the CAPE 10 is on avera...
by larryswedroe
Sat Oct 18, 2014 3:23 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: inefficiencies in small lot, near-term muni bonds prices

Tanelorn Yes you can buy small lots on occasion at much higher yields. Sometimes I have been able to buy bonds at even 50-60bps. higher yields and on rare occasion even more. But that is a liquidity premium, not a free lunch. Now if you are never going to trade them it can be a free lunch. But if wa...
by larryswedroe
Sat Oct 18, 2014 3:13 pm
 
Forum: Investing - Theory, News & General
Topic: inefficiencies in small lot, near-term muni bonds prices?
Replies: 8
Views: 737

Re: How to think about expected returns--continuing discussi

two things First, currently we use the CAPE 10 and the Gordon Model, weighting each 50%. And we apply them across US, Developed and EM. Second, when valuations are high expected returns are low, causing need to take risk to go up. But as I have said many times that doesn't mean you SHOULD raise your...
by larryswedroe
Sat Oct 18, 2014 8:55 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How to think about expected returns--continuing discussi

Rod/countmein We use the current valuation, based on CAPE 10 basically and then do the same not only for US but EM and Developed. We do it once a year, in January. Then add historical premiums based on loadings we have for the factors. That's the unconditional forecast--regardless of time horizon. A...
by larryswedroe
Fri Oct 17, 2014 10:15 pm
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How will we know if value-tilting has stopped working?

protagonist First, we "know" that value and beta are different risks because otherwise we would only need a one-factor model. Second, the value premium and beta premiums are virtually uncorrelated, meaning that they are subject to different risks in some ways. I gave the very logical reaso...
by larryswedroe
Fri Oct 17, 2014 11:46 am
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: New explanation for SV premiums?

IMO there's nothing hidden about the risks of small value companies as the many simple, logical, clear explanations in the literature point out. The anomaly is small growth, not small value--and that is IMO well explained by the jackpot or lottery effect, investor preference for positive skewness an...
by larryswedroe
Fri Oct 17, 2014 11:38 am
 
Forum: Investing - Theory, News & General
Topic: New explanation for SV premiums?
Replies: 1
Views: 292

Thinking about the current drop in prices

http://www.etf.com/sections/index-investor-corner/23565-swedroe-are-you-prepared-to-face-a-bear.html

Hopefully some good reminders for Bogleheads and some thoughts that might help you sleep a bit better

Larry
by larryswedroe
Fri Oct 17, 2014 9:12 am
 
Forum: Investing - Theory, News & General
Topic: Thinking about the current drop in prices
Replies: 0
Views: 518

Re: How will we know if value-tilting has stopped working?

stlutz First, if you want to define value in a different way such as using a retail index fine, but that isn't the way the academic community looks at it, and the way I am discussing, Second, most of the excess volatility in large caps is gone once you get to about 100 stocks, so IMO that argument d...
by larryswedroe
Fri Oct 17, 2014 9:07 am
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: How to think about expected returns--continuing discussi

Robert Don't understand at all your issue. The research by many shows that the BEST estimate of future returns is current valuations, with similar results if use current earnings but slightly better if use a CAPE measure like Shiller's. So I recommend, and we use, the method that the literature says...
by larryswedroe
Fri Oct 17, 2014 8:56 am
 
Forum: Investing - Theory, News & General
Topic: How to think about expected returns--continuing discussion
Replies: 53
Views: 4020

Re: How will we know if value-tilting has stopped working?

protagonist yes you are incorrect. the value premium is just that. Higher returns. The debate is about whether the higher return was compensation for risk or mispricing, behavioral. Two schools of thought, though not mutually exclusive, could be some of both. Great example is MOM premium, which almo...
by larryswedroe
Thu Oct 16, 2014 11:04 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: why you might not want to buy what's popular

bama
I did not say they were overvalued, just highly valued and thus have low expected returns. And you cannot buy yesterday's returns, only tomorrows
Larry
by larryswedroe
Thu Oct 16, 2014 5:21 pm
 
Forum: Investing - Theory, News & General
Topic: why you might not want to buy what's popular
Replies: 8
Views: 1173

Re: How will we know if value-tilting has stopped working?

Protagonist First, the value premium is persistent and pervasive around the globe and statistically significant the only debate being behavioral or risk. Second, volatility isn't the only type of risk, nor the only definition. As I noted you don't need the volatility story to believe value stocks ar...
by larryswedroe
Thu Oct 16, 2014 4:52 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: How will we know if value-tilting has stopped working?

stlutz Don't you find it convenient that to avoid the higher vol story you have to EXCLUDE the very period when you would expect value to perform the worst, and it did? Is that not data mining at its worst? Also while the number of stocks does matter, it would in no way show up in 40% higher SD when...
by larryswedroe
Thu Oct 16, 2014 7:31 am
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

why you might not want to buy what's popular

http://www.cbsnews.com/news/why-its-folly-to-follow-investment-fads/

This will be my last post for CBS, writing now for mutualfunds.com as well as ETF.com
Larry
by larryswedroe
Thu Oct 16, 2014 7:27 am
 
Forum: Investing - Theory, News & General
Topic: why you might not want to buy what's popular
Replies: 8
Views: 1173

Re: "Smart" Beta - general consensus?

FWIW Mostly smart beta is really just beta, or loading on some common factor, or source of returns (not really smart anything, just higher loadings perhaps on factors). Example is RAFI indices are not IMO smart beta. Now there is IMO such a thing as smart beta, incorporating screens to exclude asset...
by larryswedroe
Wed Oct 15, 2014 8:36 pm
 
Forum: Investing - Theory, News & General
Topic: "Smart" Beta - general consensus?
Replies: 8
Views: 509

Re: How will we know if value-tilting has stopped working?

swaption First re volatility of returns. There is clearly evidence that value stocks are more volatile. 1927-2013 LG had SD of 18.7 and LV of 26.2, that's not only higher SD but 40% higher SD, Also when FF wrote their paper on three factor model they noted that value stocks have higher returns AFTER...
by larryswedroe
Wed Oct 15, 2014 6:40 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: How will we know if value-tilting has stopped working?

protoganist You are confusing a whole bunch of issues. First, historical results as not predictor of future generally refers to the performance of active managers. Second, past performance of asset classes factors gives you reason to believe that premiums should continue if the evidence is both pers...
by larryswedroe
Wed Oct 15, 2014 4:55 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: Masters in business interview I did with Barry Ritholtz

lab hope this is helpful, from a piece I did while ago on subject The following is an example of the role serendipity can play in returns. The Research Affiliates Fundamental Indices (RAFI) are value based strategies that weight the holdings based on four fundamental factors of sales, earnings, divi...
by larryswedroe
Wed Oct 15, 2014 1:20 pm
 
Forum: Investing - Theory, News & General
Topic: Masters in business interview I did with Barry Ritholtz
Replies: 13
Views: 1197

Re: Why Are Expected Investment Returns So Low?

Few things
First as countries develop and become wealthier and regulatory regimes are strengthened and Central Banks learn more about fighting recessions, it's logical to assume equity premium should fall.
Second, the ERP is rising daily in last month (:-))
Larry
by larryswedroe
Wed Oct 15, 2014 10:43 am
 
Forum: Investing - Theory, News & General
Topic: Why Are Expected Investment Returns So Low?
Replies: 13
Views: 1621

Re: How will we know if value-tilting has stopped working?

Browser Completely agree. That's the risk IMO of value stocks, that is what the research shows. Especially in times of financial crises--as value stocks tend to be more leveraged and have fewer capital access alternatives So what should one do about that? That's why you don't think of things in isol...
by larryswedroe
Wed Oct 15, 2014 10:40 am
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: How will we know if value-tilting has stopped working?

stlutz you should go into it at the outset knowing that there is a very good chance that it will not work. IMO there is NO justification for this statement. What would be correct based on the evidence is that there is A chance, about the same chance as there being no equity premium. In fact, at leas...
by larryswedroe
Tue Oct 14, 2014 10:57 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: How will we know if value-tilting has stopped working?

Browser Yes it is IMO. There is no anomaly about value stocks having higher returns based on cost of capital story. The only issue is are investors mispricing value stocks for behavioral reasons. I don't think that is correct. IMO the anomaly is really small growth stocks vastly overvalued by invest...
by larryswedroe
Tue Oct 14, 2014 8:18 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: What hedges inflation (other than TIPs)

Gold?
Sure if your horizon is perhaps 100 years.
1980-2002 gold lost about 85% in REAL terms, thus it cannot possibly be considered an inflation hedge for any normal investors horizon
Larry
by larryswedroe
Tue Oct 14, 2014 8:15 pm
 
Forum: Investing - Theory, News & General
Topic: What hedges inflation (other than TIPs)
Replies: 11
Views: 744

Re: How will we know if value-tilting has stopped working?

Browser, How will you know if the equity premium has stopped working--it's the same question. It's simply a cost of capital story. Value stocks have higher costs of capital and thus have higher expected returns (the flip side). Investors demand a premium, for whatever reason, either behavioral or ri...
by larryswedroe
Tue Oct 14, 2014 5:30 pm
 
Forum: Investing - Theory, News & General
Topic: How will we know if value-tilting has stopped working?
Replies: 44
Views: 3035

Re: What hedges inflation (other than TIPs)

http://www.multifactorworld.com/Lists/Posts/Post.aspx?ID=145

Here is a piece Jared Kizer, my colleague and co-author

Larry
by larryswedroe
Tue Oct 14, 2014 5:24 pm
 
Forum: Investing - Theory, News & General
Topic: What hedges inflation (other than TIPs)
Replies: 11
Views: 744

Re: Should your AA change based on World Events?

Here's way to think about this IMO A) Are you the only one who knows what you are reacting to? Of course not B) Thus the things you are worried about are surely embedded already in prices. C) Thus it's too late to react unless your crystal ball is clear, and there aren't any clear ones. D) Markets d...
by larryswedroe
Tue Oct 14, 2014 8:58 am
 
Forum: Investing - Theory, News & General
Topic: Should your AA change based on World Events?
Replies: 22
Views: 1362
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