S&P at 22 times multiple

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erik265
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S&P at 22 times multiple

Post by erik265 » Thu Feb 23, 2017 8:09 am

I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.

The Wizard
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Re: S&P at 22 times multiple

Post by The Wizard » Thu Feb 23, 2017 8:34 am

You're saying the next crash or correction is coming at some point?
Hard to disagree with that...
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Re: S&P at 22 times multiple

Post by Stan Dup » Thu Feb 23, 2017 9:00 am

I was about to write a whole litany of obvious predictions but that would just be snarky.

Yes, the S&P is higher but so what? If your asset allocation is out of balance then rebalance. If you are feeling uncomfortable about losing too much in a downturn then your asset allocation is wrong for you. You should change it to something more conservative and then stick with it.

Remember, when it goes down you get to buy shares cheaper. Dollar cost average your purchases and avoid the emotion.

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Re: S&P at 22 times multiple

Post by Valuethinker » Thu Feb 23, 2017 9:08 am

erik265 wrote:I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.


Experience has taught me the market can stay way out of "fair value" range (either up or down) for far longer than I expect. Things will go up for far longer than I expect, and in bear markets they go down far longer than I expect.

As per others, I would suggest rebalancing to your "sleep at night" target range, and rolling with it. Bull markets are fun ;-).

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greg24
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Re: S&P at 22 times multiple

Post by greg24 » Thu Feb 23, 2017 9:11 am

Yes, the market is richly valued.

And fixed income has low returns.

I just keep investing in my chosen AA. I wish I could magically find high expected returns, but there doesn't seem to be a way.

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Re: S&P at 22 times multiple

Post by Boglegrappler » Thu Feb 23, 2017 9:12 am

Price = Earnings*(1+g) / (k-g) where g is the growth rate and k is the required rate of return.

So P/E is (1+g) /(k-g)

You'll note that in a zero growth company, P/E is simply 1/k . So, if we make some assumption that the required rate of return on an equity security today is, say, double the 10 year treasury rate of about 2 1/2% then the appropriate P/E for a no-growth equity would be 20x.

If you then do some fiddling around with various numbers, you'll find that the appropriate p/e for a company with even modest single digit growth is quite a bit higher than 20.

So, this point is this: its true that a 20x range for the S&P p/e is on the higher side, historically, but.....the current level of interest rates is also on the very low side historically.

Buffett has stated in interviews that the current market (pre-election) is not overvalued given where rates are. And probably would not be considered such until the ten year got up into the 4% range. (Don't ask me to find that clip, but its out there somewhere.) There are others who've noted the same thing.

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Re: S&P at 22 times multiple

Post by carofe » Thu Feb 23, 2017 9:18 am

Reversion to the Mean of the PE is something seen in a period of 10 years according to the Bogle's observation in his book The reversion can happen in a crash or in small corrections or just in poor positive returns (the PE can get adjusted down even with positive returns in a year).

As Buffett said, I dont think we will see a crash but just subpar returns for a decade (a smooth Reverse to the Mean).
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Re: S&P at 22 times multiple

Post by magneto » Thu Feb 23, 2017 9:19 am

erik265 wrote:I am firm believer in reversion to the mean.
Based on historical norms the market is way over valued
I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.


We are all wondering about that.
And have been for some years :!:

When our resolve weakens and we capitulate to the temptation to overweight Stocks, maybe then?
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: S&P at 22 times multiple

Post by sean.mcgrath » Thu Feb 23, 2017 11:37 am

Boglegrappler wrote:Price = Earnings*(1+g) / (k-g) where g is the growth rate and k is the required rate of return.

So P/E is (1+g) /(k-g)



Hi Bogglegrappler,

That's pretty interesting. So if I take LadyGeek's recent post (Credit Suisse yearbook) about the World return on equity being 5.1% from 1900 - 2016, and assume world GDP growth of 2.5% for an awfully long time (this even ignores that by investing in equities rather than, e.g., government spending I am investing in the fast growth part of world GDP), I get an expected "own the market" P/E of 39. If I use a more optimistic equity return of 7%, I get a P/E of 23. Higher than I would have thought. Does this make sense to you?

cheers,
Sean

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Re: S&P at 22 times multiple

Post by Snowjob » Thu Feb 23, 2017 11:42 am

Some of this could be the pricing in of expected tax reductions boosting the E in that ratio. While this forum may ban talk about future policy the market does not ignore these things and is discounting some of this appropriately. If you back that down to 20, its more in line with the historical 16-20 range.

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Re: S&P at 22 times multiple

Post by willthrill81 » Thu Feb 23, 2017 11:50 am

erik265 wrote:I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.


Reversion to which mean? The mean of P/E? Over which time frame are you calculating the mean? If you're referring to CAPE, it's been 'high' for 25 years with only one brief exception, so you may be waiting a while for reversion to the long-term historic mean, if it ever occurs.
Last edited by willthrill81 on Thu Feb 23, 2017 1:09 pm, edited 1 time in total.
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Re: S&P at 22 times multiple

Post by carofe » Thu Feb 23, 2017 1:05 pm

If I use P/E to time the market I should then sell VTSAX shares, but if I use P/E to see the expected return in the next 10 years then I need to buy more VTSAX shares (take more risk so I can make it), which I'm not comfortable with right now.

Hmmm, I think I'm just going to do nothing. Rebalancing will take care of it.
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Re: S&P at 22 times multiple

Post by corn18 » Thu Feb 23, 2017 1:20 pm

carofe wrote:If I use P/E to time the market I should then sell VTSAX shares, but if I use P/E to see the expected return in the next 10 years then I need to buy more VTSAX shares (take more risk so I can make it), which I'm not comfortable with right now.

Hmmm, I think I'm just going to do nothing. Rebalancing will take care of it.


:sharebeer

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Re: S&P at 22 times multiple

Post by Runner01 » Thu Feb 23, 2017 1:47 pm

I don't really have anything to add other than the fact that all of these recent posts about market valuation and an impending market crash make me feel like this bull market is just getting started.

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Re: S&P at 22 times multiple

Post by WhiteMaxima » Thu Feb 23, 2017 1:51 pm

S&P 22 PE is high and could go higher. So it all depend on your risk tolerance. I

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Re: S&P at 22 times multiple

Post by Accrual » Thu Feb 23, 2017 3:12 pm

Runner01 wrote:I don't really have anything to add other than the fact that all of these recent posts about market valuation and an impending market crash make me feel like this bull market is just getting started.


Unfortunately, I feel the opposite is true. Part of me believes earnings is artificially high due to larger 'credit utilization' throughout commercial and consumer markets. Earnings overall may continue to grow, but wealth is not being generated at the consumer level of the economy.

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Re: S&P at 22 times multiple

Post by JoMoney » Thu Feb 23, 2017 3:53 pm

erik265 wrote:I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.

But we're still below the "mean" :wink:
Image

If you're looking at a valuation metric, like P/E, maybe there will be an upward "mean reversion" in the earnings, as opposed to a downward "mean reversion" in price. We haven't had a good earnings growth spurt since 2013-2014. Earnings for 2015 and 2016 were below that of 2011
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Re: S&P at 22 times multiple

Post by WhyNotUs » Thu Feb 23, 2017 4:26 pm

erik265 wrote: I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.


We don't know :confused
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Re: S&P at 22 times multiple

Post by blueblock » Thu Feb 23, 2017 7:12 pm

There sure are a lot of "fearful" posts about the stock markets these days. "Locking in gains" is my favorite I'm-not-market-timing phrase from those who are selling.

For someone like me, who is not especially analytical or sophisticated, it's all about having a widely diversified, low cost index portfolio, plus the right asset allocation. (I learned that I have the right allocation when I slept like a baby through 2008-09.)

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Re: S&P at 22 times multiple

Post by Investorjoe » Thu Feb 23, 2017 7:49 pm

According to http://www.multpl.com/ its actually at 26.5.
2363/89=26.5
2363 current S&P500.
89= current earnings past 4 quarters.
In order to have a 22 P/E ratio earnings would have had to be $107.4 which its not.

I would say 26.5 is even a little bit high by 'new' standards since the past 20 years.

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Re: S&P at 22 times multiple

Post by Saphomd » Thu Feb 23, 2017 8:16 pm

I have enough bonds in my portfolio with Vanguard to not worry about the S&P having a multiple of 22. If the market goes down, I am ready. :beer

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Re: S&P at 22 times multiple

Post by FIREchief » Thu Feb 23, 2017 9:08 pm

Investorjoe wrote:According to http://www.multpl.com/ its actually at 26.5.
2363/89=26.5
2363 current S&P500.
89= current earnings past 4 quarters.
In order to have a 22 P/E ratio earnings would have had to be $107.4 which its not.

I would say 26.5 is even a little bit high by 'new' standards since the past 20 years.


$89.09 is the earnings for fourth quarter 2015 through third quarter 2016.

With 86.6% of fourth quarter earnings reported, first quarter 2016 through fourth quarter 2016 = $96.76 (this is directly from S&P's website). So, P/E just dropped by over 2 to 24.4. Still a bit high, but getting better. If the companies meet the estimated reported earnings for 2017, at your 2363 price level, the P/E would drop to 19.6. Companies often exceed their earnings projections, so there isn't much here to make me nervous.
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Re: S&P at 22 times multiple

Post by Investorjoe » Thu Feb 23, 2017 10:27 pm

We will have to wait and see what the 4th quarter 2016 brings us, untill then only thing we can do is use the last 4 quarters which as you said is $89.09.
And I dont have as much faith about 'earnings projections' they are a bunch of crock. I put as much faith into them as I do weather forecasts for 2 weeks from now.
http://www.cnbc.com/2016/01/08/goldman- ... s-why.html
Here youll see earnings estimates. Theve been saying for the past 2-3 years earnings will be in the $100's but theyve been wrong for that many years. Maybe they will actually get it right this time but im not holding my breathe.

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Re: S&P at 22 times multiple

Post by FIREchief » Fri Feb 24, 2017 12:42 am

Investorjoe wrote:We will have to wait and see what the 4th quarter 2016 brings us, untill then only thing we can do is use the last 4 quarters which as you said is $89.09.
And I dont have as much faith about 'earnings projections' they are a bunch of crock. I put as much faith into them as I do weather forecasts for 2 weeks from now.
http://www.cnbc.com/2016/01/08/goldman- ... s-why.html
Here youll see earnings estimates. Theve been saying for the past 2-3 years earnings will be in the $100's but theyve been wrong for that many years. Maybe they will actually get it right this time but im not holding my breathe.


Does Standard and Poors use an independent earnings forecast or those put out by each constituent company? If they are independent, then I tend to agree with you. OTOH, if they use the forecasts published by each company, then they might actually tend to be conservative. Understating your earnings forecast, and then overachieving will make you very popular as a president/CEO. Missing your earnings forecast can often lead to an "opportunity" to find a new job. :oops:
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Re: S&P at 22 times multiple

Post by TinkerPDX » Fri Feb 24, 2017 1:02 am

Boglegrappler wrote:Price = Earnings*(1+g) / (k-g) where g is the growth rate and k is the required rate of return.

So P/E is (1+g) /(k-g)

You'll note that in a zero growth company, P/E is simply 1/k . So, if we make some assumption that the required rate of return on an equity security today is, say, double the 10 year treasury rate of about 2 1/2% then the appropriate P/E for a no-growth equity would be 20x.

If you then do some fiddling around with various numbers, you'll find that the appropriate p/e for a company with even modest single digit growth is quite a bit higher than 20.

So, this point is this: its true that a 20x range for the S&P p/e is on the higher side, historically, but.....the current level of interest rates is also on the very low side historically.

Buffett has stated in interviews that the current market (pre-election) is not overvalued given where rates are. And probably would not be considered such until the ten year got up into the 4% range. (Don't ask me to find that clip, but its out there somewhere.) There are others who've noted the same thing.


Hadn't seen this way if factoring growth into the p/e/return equation. Thanks for sharing.

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Re: S&P at 22 times multiple

Post by Dirghatamas » Fri Feb 24, 2017 2:10 am

TinkerPDX wrote:
Boglegrappler wrote:Price = Earnings*(1+g) / (k-g) where g is the growth rate and k is the required rate of return.

So P/E is (1+g) /(k-g)
quote]

Hadn't seen this way if factoring growth into the p/e/return equation. Thanks for sharing.


I would take this with a HUGE grain of salt based on real data. The primary problem with this well known equation is that it ignores share dilution. The returns a company gets or a country's stock market gets are irrelevant: what matter is the return you get. That comes from EARNINGS PER SHARE.

Here is an excellent paper by Vanguard's chief economist which goes into the conundrum of growth vs. returns. The main conclusion is that there is 0 or slightly negative correlation between returns and growth. Growth doesn't imply good returns!
https://personal.vanguard.com/pdf/s813.pdf

The same non-trivial fact is illustrated vividly in this year's Credit Suisse Yearbook for example showing the returns from China, the world's fastest growing economy for the last 20 years. The returns for a western investor were about the worst in the world in presence of the fastest growing economy with very fast growing companies :shock: :oops:

To fund any future investment or growth, a company MAY issue new shares or issue debt..share dilution can lead to MUCH poorer returns than the equation suggests. There are many examples where there was so much dilution that the results were worse than 0 growth! China is a perfect example (at least for a western investor).

One can only use past returns/general culture/rule of law/active investors forcing governance etc. to get any reasonable returns. In absence of these, especially with state run/affiliated companies or companies with insiders/majority shareholders, the returns a minority shareholder gets are basically whatever the board wants them to get!

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Re: S&P at 22 times multiple

Post by sean.mcgrath » Fri Feb 24, 2017 4:24 am

Dirghatamas wrote:
I would take this with a HUGE grain of salt based on real data. The primary problem with this well known equation is that it ignores share dilution. The returns a company gets or a country's stock market gets are irrelevant: what matter is the return you get. That comes from EARNINGS PER SHARE.


Hi Dirghatamas,

That's right, of course: a company with high growth is almost certain to have lower returns per share than it's growth rate would suggest as it sucks in cash to keep expanding. An exception perhaps being software: Microsoft in the early days showed us how you can get massive growth with minimal additional costs per unit.

However, I'm still trying to get my head around the formula Bogglegrappler posted. If I take the entire world, it should be possible to fund a 2.5% growth rate with internally generated cash. So I'll ask you the same question I asked Bogglegrappler:

So let's assume I own all of the equity in the world, that I can fund my 2.5% annual growth out of internal cash generation, but I'm thinking of selling to an incredibly wealthy alien and will then head off with Elon Musk to colonize Mars. If I take LadyGeek's recent post (Credit Suisse yearbook) about the World return on equity being 5.1% from 1900 - 2016, and assume world GDP growth of 2.5% for an awfully long time (this even ignores that by investing in equities rather than, e.g., government spending I am investing in the fast growth part of world GDP), I would sell at a P/E of 39. If I use a more optimistic equity return of 7%, I get a P/E of 23. Higher than I would have thought. Does this make sense to you?

Realize I'm not particularly interested in whether the market is "over or under priced." More curious about why my logic doesn't hold.

cheers,
Sean

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Re: S&P at 22 times multiple

Post by Bogle_Feet » Fri Feb 24, 2017 4:28 am

Remember Alan Greenspan's irrational exuberance speech? That was on December 5, 1996 when the S&P was at about $744. Stocks more than doubled over the next 3 years and 3 months, peaking at about $1,527.

We had a massive 49% correction from 2000 - 2002 and yet another massive 56% crash from 2007 - 2009. Crashes of 50% or more have only happened 3 times since 1928 and one of those crashes (1929) was facilitated by lack of regulation and fraud, easy credit and wild speculation that are not happening today. So is the market really that overdue for a big correction?

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Re: S&P at 22 times multiple

Post by erik265 » Fri Feb 24, 2017 9:19 am

Bogle_Feet wrote:Remember Alan Greenspan's irrational exuberance speech? That was on December 5, 1996 when the S&P was at about $744. Stocks more than doubled over the next 3 years and 3 months, peaking at about $1,527.

We had a massive 49% correction from 2000 - 2002 and yet another massive 56% crash from 2007 - 2009. Crashes of 50% or more have only happened 3 times since 1928 and one of those crashes (1929) was facilitated by lack of regulation and fraud, easy credit and wild speculation that are not happening today. So is the market really that overdue for a big correction?

Well Deregulation and speculation will be coming so a market crash is not that far fetched

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Re: S&P at 22 times multiple

Post by gfaseed » Fri Feb 24, 2017 9:22 am

The most difficult thing is to stay the course.
The market maybe expensive, but if you have an asset allocation, stick with it.

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Re: S&P at 22 times multiple

Post by TheTimeLord » Fri Feb 24, 2017 9:31 am

erik265 wrote:I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.


You do realize P/E can be adjusted 2 ways. One by changing the P as you suggest or the other by an increase in the E. The market prices based on future not current E. If you want a better understanding of market pricing I would look for what the PE is forecast to be at the end of 2017 not today. You are basically trying to drive forward while looking in the rear view mirror, while the market drives forward while looking through hazy glasses and dim light.
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Re: S&P at 22 times multiple

Post by willthrill81 » Fri Feb 24, 2017 11:00 am

Investorjoe wrote:According to http://www.multpl.com/ its actually at 26.5.
2363/89=26.5
2363 current S&P500.
89= current earnings past 4 quarters.
In order to have a 22 P/E ratio earnings would have had to be $107.4 which its not.

I would say 26.5 is even a little bit high by 'new' standards since the past 20 years.


The problem with that is that Shiller is still using GAAP data to compute CAPE, and that's wrong. Jeremy Siegel has demonstrated very well that due to accounting changes made over 20 years ago, we should be using NIPA data for earnings, or else we're undervaluing earnings and artificially making CAPE too high.

When we make these changes, we find that the current CAPE is actually around 22, which is actually below the average CAPE for the last 25 years.
Last edited by willthrill81 on Fri Feb 24, 2017 5:21 pm, edited 1 time in total.
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Re: S&P at 22 times multiple

Post by CFM300 » Fri Feb 24, 2017 11:30 am

erik265 wrote:I am firm believer in reversion to the mean. I know wall street has given stocks the trump bump in hopes of lower taxes and less regulation. Based on historical norms the market is way over valued I wonder how long it will take till market reverts back to the mean a sell off must be coming soon i suspect.

I've never understood this concept. To what mean do you think the market reverts?

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Re: S&P at 22 times multiple

Post by midareff » Fri Feb 24, 2017 11:36 am

That's why an written IPS and follow your balance bands process is important. Set you AA (+/- 5%) according to your need, ability and willingness to take risk and then just manage your stuff according to your IPS. Other than that don't worry about things you have no control over.

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Re: S&P at 22 times multiple

Post by Toons » Fri Feb 24, 2017 11:40 am

Keep investing as much as you can as often as you can :happy
Time flies by,,,,you blink you are 50.
Put compounding to work.
:happy
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Re: S&P at 22 times multiple

Post by Boglegrappler » Fri Feb 24, 2017 12:24 pm

That's pretty interesting. So if I take LadyGeek's recent post (Credit Suisse yearbook) about the World return on equity being 5.1% from 1900 - 2016, and assume world GDP growth of 2.5% for an awfully long time (this even ignores that by investing in equities rather than, e.g., government spending I am investing in the fast growth part of world GDP), I get an expected "own the market" P/E of 39. If I use a more optimistic equity return of 7%, I get a P/E of 23. Higher than I would have thought. Does this make sense to you?


Well, you've done the math correctly. Naturally, that equation is a model, that assumes perpetual growth, and we know that ain't going to happen. But its quite useful in dissecting what is going on.

I had a finance professor years ago who used this all the time in discussion equity valuations, and made it clear when someone was saying that company A was over valued that they were actually saying that the g factor implied by the market price was too high, or that the implicit rate of return demanded was too low.

I always try to get to the question of what's a reasonable return to be seeking (given the alternatives of fixed income and other things) and if you can answer that, you have the P/E that should apply to a no-growth company. Its always a good starting point for valuation discussions.

Using the simplification of a steady growth model helps put some light on why some companies sell at 45X and others sell at 13X. After you take into account temporary depressions of earnings, it all starts to make sense.

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Re: S&P at 22 times multiple

Post by FIREchief » Fri Feb 24, 2017 4:17 pm

TheTimeLord wrote: If you want a better understanding of market pricing I would look for what the PE is forecast to be at the end of 2017 not today. You are basically trying to drive forward while looking in the rear view mirror, while the market drives forward while looking through hazy glasses and dim light.


Agree 100%. Although, it seems the majority here prefer to look 10 years backwards in that rear view mirror.

9 posts above yours:

FIREchief wrote: If the companies meet the estimated reported earnings for 2017, at your 2363 price level, the P/E would drop to 19.6. Companies often exceed their earnings projections, so there isn't much here to make me nervous.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: S&P at 22 times multiple

Post by Dirghatamas » Fri Feb 24, 2017 4:46 pm

sean.mcgrath wrote:
Dirghatamas wrote:
I would take this with a HUGE grain of salt based on real data. The primary problem with this well known equation is that it ignores share dilution. The returns a company gets or a country's stock market gets are irrelevant: what matter is the return you get. That comes from EARNINGS PER SHARE.


Hi Dirghatamas,

That's right, of course: a company with high growth is almost certain to have lower returns per share than it's growth rate would suggest as it sucks in cash to keep expanding. An exception perhaps being software: Microsoft in the early days showed us how you can get massive growth with minimal additional costs per unit.

However, I'm still trying to get my head around the formula Bogglegrappler posted. If I take the entire world, it should be possible to fund a 2.5% growth rate with internally generated cash. So I'll ask you the same question I asked Bogglegrappler:

So let's assume I own all of the equity in the world, that I can fund my 2.5% annual growth out of internal cash generation, but I'm thinking of selling to an incredibly wealthy alien and will then head off with Elon Musk to colonize Mars. If I take LadyGeek's recent post (Credit Suisse yearbook) about the World return on equity being 5.1% from 1900 - 2016, and assume world GDP growth of 2.5% for an awfully long time (this even ignores that by investing in equities rather than, e.g., government spending I am investing in the fast growth part of world GDP), I would sell at a P/E of 39. If I use a more optimistic equity return of 7%, I get a P/E of 23. Higher than I would have thought. Does this make sense to you?

Realize I'm not particularly interested in whether the market is "over or under priced." More curious about why my logic doesn't hold.

cheers,
Sean


Well by the time you set off with Elon, I will have uploaded my brain so I will get to Mars first. Physical travel is so early 21st century 8-)

More seriously, first, I agree with your central case. In fact I agree so strongly that I never change and that is my only investment for the last 25 years and likely will be my last till I pass. I always hold 100% world stocks, regardless of whether folks think any one sector or country is over valued or under valued and whether we are in a recession or a bubble.

Over the past 116 years, every country monitored has an equity risk premium which is in a surprisingly narrow band: stocks have beaten bonds in every country if your horizon is long. So, yes I expect world stocks to beat world bonds over the next 20-40 years. I make no predictions for short term of say 10 years. Having said that, there are many possible (but not probable) reasons this (and your calculations) may not work out:

1) Private vs. public: You only hold public companies. If more entrepreneur's go for private (to avoid so much short term scrutiny) and they are the main profit makers, you could lose out

2) Small companies: Most of the growth over time has happened by small companies starting, going public and over time, becoming big. There is a recent trend to do IPO after the company has already become big to juice its initial returns. In this case, the long term investor after companies go public may get bad returns: Uber, Snap, recent announcement about Saudi Aramco..

3) Robots: If robots take most jobs and the displaced humans have none, consumption may drop, dropping GDP and earnings..no profits for you long term. There is no growth without more consumption.

4) Nationalization: With declining growth rates, countries may embrace Socialism and nationalize companies wiping out stock holders like you.

5) Taxation: Profits exist only because Governments let them. Rational govts keep taxes (income and corporate) at a sutainable rate..however with large debts, entitlements and so forth, if taxes go up a lot, stocks will get killed because of no profits much before bonds keel over. Eventually this would hurt both stocks & bonds but as Japan shows, there may be a considerable lag in time and your time may be over by then.

I am leaving out obvious ones like Nuclear War, Comets, disease etc because they are out of the financial scope of the forum. So, I worry about all this but don't do anything about it.

I don't know if your approach of world stocks is the best possible but I am sure there are numerous worse ways to invest. Anyway, that's how I invest :beer

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willthrill81
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Re: S&P at 22 times multiple

Post by willthrill81 » Fri Feb 24, 2017 5:26 pm

Dirghatamas wrote:There is no growth without more consumption.


That's a common myth, but it's not clear that it's true at all. Some argue that consumption is the effect and that growth in capital is the cause.

"What is the engine of growth, then? It is the savers and investors. Only by sacrificing current consumption, can people put money into banks or share offerings, which end up in the hands of new and existing businesses who can then use that money to create new technology, factories, or human capital, allowing them to increase their productivity. Capital creates productivity, and productivity is the driver of our standard of living.

To express the same ideas on a smaller scale: Imagine an ancient fisherman who catches five fish per day with a spear. If he eats all the fish each day, he is saving and investing none. But if he can survive on four, and use the body of the fifth one to invent a fishing hook (or trade it with someone else in exchange for a net), he has invested in capital instead of current consumption – this builds his future productivity.

As it works for the fisherman, so it works for the whole country: investment is good for building a nation’s productivity. A shortage of national investment (collectively called the “national savings rate”) can lead to a complicated spiral of international trade conditions much like the ones we are seeing now: a current account deficit, a trade deficit, and eventually a gigantic depreciation of the value of a country’s currency, and some say hyperinflation as well."
http://www.mrmoneymustache.com/2012/04/ ... me-frugal/
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Dirghatamas
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Re: S&P at 22 times multiple

Post by Dirghatamas » Fri Feb 24, 2017 8:15 pm

willthrill81 wrote:
Dirghatamas wrote:There is no growth without more consumption.


That's a common myth, but it's not clear that it's true at all. Some argue that consumption is the effect and that growth in capital is the cause.


willthrill81

"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer." Adam Smith, 1776


Let's see, the father of modern economics vs. Mr. Money Moustache? Who do I pick?

I am not being glib. The world is awash in capital. Asian societies are notorious for saving too much. Japan, Korea, Now China keep pushing for more consumption internally because without constant exports..the systems are unsustainable. When savings are forced to be kept in China, the market quickly get swamped into all sort of inefficient investments like ghost cities.

Saving doesn't create investments. Look up MMT or many of its cousins. Banks can create loans out of thin air so having adequate capital is never the issue. The issue is simply returns on capital..will the production actually sell profitably, which can only happen with consumption (and with the consumer having some thing to offer in return).

Consider this extreme thought experiment. All human jobs are replaceable tomorrow by robots which are all owned by a trillionaire. He gets trillions in loans from banks (they are just bits nothing real) and gets robots to build lots of robots..the problem is that with humans not having jobs, who now consumes the offerings from robots? What can they offer the robots in return? Nothing and so the system collapses and the trillionaire goes bankrupt!

This is sort of what is happening with US vs. the exporting countries. If the US consumer doesn't consume enough, the exporting countries like Japan, China etc. suffer. But long term, what does the US consumer offer these exporters in return? The parallels to the robot case is worrying.

I do think going forward, investment capital and production are the easy things. They will happen. Its the consumption side (and offering anything in return for these products) that is the problem.

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Re: S&P at 22 times multiple

Post by willthrill81 » Fri Feb 24, 2017 8:22 pm

Dirghatamas wrote:
willthrill81 wrote:
Dirghatamas wrote:There is no growth without more consumption.


That's a common myth, but it's not clear that it's true at all. Some argue that consumption is the effect and that growth in capital is the cause.


willthrill81

"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer." Adam Smith, 1776


Let's see, the father of modern economics vs. Mr. Money Moustache? Who do I pick?


He's not the only one, not by a long shot.

"But we do largely agree that investment, rather than consumer spending, is the means to achieving the high growth. High growth can sustain consumer spending in the future."
-Casey Mulligan, Professor of Economics, University of Chicago
https://economix.blogs.nytimes.com/2013 ... owth/?_r=0

And if you'll notice the Adam Smith quote, he does not say that consumption drives growth, rather that consumption is the purpose of production, which is very obvious.

The "consumption drives economic growth" argument makes no sense. It is investment that enables consumption. Why are our economies so far advanced now compared to 100 years ago? Population growth? That doesn't work because very populous countries like India are far behind the U.S. It is the investments that have been made in the U.S. over time that have led to this growth, though economists do not entirely agree on which specific investments are the biggest drivers of this growth.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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