Grok's Tip #12: "Press on, regardless" [of the past 5 years]

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grok87
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Grok's Tip #12: "Press on, regardless" [of the past 5 years]

Post by grok87 » Tue Oct 16, 2012 10:33 pm

Grok's Tip #12: "Press on, regardless" [of the past 5 years]

“Press on, regardless”, John Bogle
"Keep moving forward", Walt Disney.

A week ago I went to a corn maze. As some may know, one way to get through a maze is to consistently take only right turns. Or consistently take only left turns. I had tried this approach last year and it worked just fine then. I'm sure it wasn't the fastest way through the maze but I didn't get lost. Moreover because I was confident of not getting lost I was able to move at a steady pace-no hemming and hawing over which way to turn, etc. I found moving steadily forward through the twists and turns of the maze to the final goal to be very satisfying emotionally.

Well I had so much fun a year ago that I decided to go again this year. So a week ago I went to a different maze and tried the same approach. It didn't work out so well this year! At the start of the maze there was a fork. I took the right fork and then took all right turns and yet after about 15 minutes I found myself coming back down that same fork to the place where I started. Frustrated, I took a coffee break and thought things over. I then started again, this time taking the left fork and taking all left turns and, yes, you guessed it, the same thing happened- I ended up back where I started after about 15 minutes. Frustrated, I quit!

I'm sure many of you have this all figured out by now. When I got back to the beginning the first time through, I should have then made a right turn into the other fork (i.e. the left hand fork if you are facing into the opening of the maze) and then continued taking all RIGHT turns. When I had got back to the "beginning" I was actually in the MIDDLE of my "take all right turns to get through the maze" path. But I couldn't see that at the time. Returning to the beginning felt like "failure" although really I was on the path to success if only I had "pressed on, regardless" and "kept moving forward".

What does all this have to do with investing you may ask? Well the S&P 500 is at around 1450 today. And 5 years ago it is was at, you guessed it, around 1450 as well. So we've spent 5 years going nowhere but have experienced tremendous volatility- the S&P 500 bottomed out at 666 in March of 2009. And like my experience with the corn maze this year, many investors seem to be throwing in the towel on stocks. The 10/4/12 Wall Street Journal article “Despite Gains Many Flee the Stock Market”
http://finance.yahoo.com/news/despite-g ... 00651.html
cites fund flow data from the investment company institute (ICI) that since the market’s bottom in March 2009 investors have pulled $138 Billion out of stock funds but added $1 Trillion to bond funds. And in total over the past 5 years, investors have pulled roughly $500 Billion out of stocks.
http://www.ici.org/info/flows_data_2012.xls

However even though the S&P 500 is back where it started 5 years ago, some things have changed:

1) Over the past 5 years the Shiller PE10 (http://www.econ.yale.edu/~shiller/data/ie_data.xls) has dropped from 26 to 22. While a PE10 of 22 is still high compared to the long term average of 16, arguably stocks are cheaper now-i.e. expected future returns should be higher. Professor Shiller has stated that historically a PE10 ratio of 22 has been associated with future real stock returns of 4% vs the long run average real return of about 6%. You can do the math yourself, or if you’re lazy like me you can rely on this nice analysis by CalculatingInvestor http://www.calculatinginvestor.com/2010 ... valuation/

The regression equation shows that every increase of PE10 by 1 results in about 0.5% lower future real return for stocks. So based on this expected real return for stocks is 2% points higher now compared with 5 years ago.

2) Inflation is lower now. During the first half of 2012 annualized inflation was 2.3% vs. 3.2% for the second half of 2007. Lower inflation is arguably better for stocks.

3) 10 year treasury yields have dropped from 4.5% in late 2007 to 1.7% today. So real bond yields have dropped from +1.3% to -0.6%- i.e. bonds are less attractive now.

4) Putting the above together the equity risk premium (the enticement to invest in stocks rather than bonds) should be higher now. The equity risk premium = expected future nominal stock return – 10 year treasury return. From 1) and 2) expected nominal stock returns should now be about 1 percentage point higher. And 10 year treasury yields are about 3 percentage points lower. So the Equity risk premium should now be about 4 percentage points higher.

5) Which means of course that, rationally, investors should have shifted money from bonds to stocks over the past 5 years. Instead the opposite has happened.

So even though it FEELS like we are in the same place and haven’t gotten anywhere, the numbers above suggest that, just like me in the corn maze, that feeling may be wrong. If we “press on, regardless” and “keep moving forward” the next 5 years may very well turn out quite different (better!) than the last 5 years for equity investors.

cheers,
grok

Note: this is part of a series of investment tips. The full series can be found here:
http://www.bogleheads.org/wiki/Grok
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by zaboomafoozarg » Tue Oct 16, 2012 10:38 pm

Wow grok, it's been forever!

Good advice. Sometimes it's hard to ignore the flavor-of-the-month investment ideas, but remembering farther back than the 3, 5, and even 10 year results is helpful.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Bongleur » Wed Oct 17, 2012 12:00 am

>5) Which means of course that, rationally, investors should have shifted money from bonds to stocks over the past 5 years. Instead the opposite has happened.
>

So if the market is efficient then the correct thing to do is follow the market and stay away from equities. The PE10 is still too high, as well.

You have not analyzed the continuing existence of the credit bubble, and the fact that the government is continuing a policy of massive interference with the free market. Neither of these factors exist in the backtest data set.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by jimkinny » Wed Oct 17, 2012 6:03 am

Yes, thanks for the tip. One needs to be prepared to stay the course.

Rick Ferri had an article that pointed out that equities (or equitiy subsets like SCV) can have very long periods of relatively poor returns. Never know when things will change. Here is the link:

http://www.rickferri.com/blog/markets/e ... rket-gain/

jim

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by abuss368 » Wed Oct 17, 2012 9:42 am

Thanks!
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by ofcmetz » Wed Oct 17, 2012 12:08 pm

I've enjoyed and learned from all of your tips. I found the perspective that was imparted by this one to be helpful. Thank you for continuing to write them.

Jeff
Never underestimate the power of the force of low cost index funds.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Jerry_lee » Wed Oct 17, 2012 12:21 pm

Well, you don't cut and run regardless of which risks haven't paid off lately.

Over all 5 year periods since 1927, the...

Equity premium has been negative 22% of the time
Size premium has been negative 37% of the time
Value premium has been negative 15% of the time

Also, on average, the 22% of the time the ERP was negative, both size and value were positive. On average, the 37% of the time the size premium was negative, both the ERP and value premium were positive. On average, the 15% of the time the value premium was negative, both the ERP and size premium were positive.

Not sure why you'd want to give up after a disappointing 5 year run for any of these expected return sources, nor why you would want to bet everything on just one of them.
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Bongleur » Wed Oct 17, 2012 12:58 pm

>you don't cut and run regardless of which risks haven't paid off lately.

Spoken like an early accumulator!
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by HomerJ » Wed Oct 17, 2012 1:08 pm

Bongleur wrote:You have not analyzed the continuing existence of the credit bubble, and the fact that the government is continuing a policy of massive interference with the free market. Neither of these factors exist in the backtest data set.
Ah, "This time it's different!"

Long-term, the market is still a good bet.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by midareff » Wed Oct 17, 2012 1:20 pm

Thanks for the post Grok and nice to "see you" again.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Jerry_lee » Wed Oct 17, 2012 1:40 pm

Bongleur wrote:>you don't cut and run regardless of which risks haven't paid off lately.

Spoken like an early accumulator!
No, diversification makes sense whether you are 18 or 81.
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Browser » Wed Oct 17, 2012 2:16 pm

Say, I wonder if anybody ever did an analysis that relates the level of PE/10 to market volatility? It wouldn't surprise me if markets are more volatile when valuations are elevated and vice versa. So, it might be the case that high valuations not only presage lower intermediate-long term returns but also a rockier ride to realize those returns.
We don't know where we are, or where we're going -- but we're making good time.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by abuss368 » Wed Oct 17, 2012 3:19 pm

Jerry_lee wrote:
Bongleur wrote:>you don't cut and run regardless of which risks haven't paid off lately.

Spoken like an early accumulator!
No, diversification makes sense whether you are 18 or 81.
I could not have said it better.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by 325e » Wed Oct 17, 2012 5:57 pm

Good quotes. Here is one more

Warren and I try to swim as best as we can. Sometimes the tides are with us, sometimes they’re against us. We don’t bother to predict tides, cause we intend to swim for a long time
- Charlie Munger

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Bongleur » Wed Oct 17, 2012 6:33 pm

Munger & Warren are stock pickers. How does that advice relate to index investing?

At age 81, Capital Preservation trumps "diversifying."
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by abuss368 » Wed Oct 17, 2012 7:27 pm

Bongleur wrote:Munger & Warren are stock pickers. How does that advice relate to index investing?

At age 81, Capital Preservation trumps "diversifying."
On a CNBC interview, Warren Buffett was asked what investments the individual investor should look into. He responded that most folks would be well served by a simple low cost index fund that owned the market.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:40 pm

zaboomafoozarg wrote:Wow grok, it's been forever!

Good advice. Sometimes it's hard to ignore the flavor-of-the-month investment ideas, but remembering farther back than the 3, 5, and even 10 year results is helpful.
THanks zaboomafoozarg!
RIP Mr. Bogle.

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grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:50 pm

Bongleur wrote: You have not analyzed the continuing existence of the credit bubble, and the fact that the government is continuing a policy of massive interference with the free market. Neither of these factors exist in the backtest data set.
Hi Bongleur,
Well the Shiller data goes back to the late 1800s. As far as the government interfering with the free market, if by that you mean low interest rates, then this actually happened in the 1950s:

http://money.msn.com/mutual-fund/invest ... s-wsj.aspx
cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:53 pm

jimkinny wrote:Yes, thanks for the tip. One needs to be prepared to stay the course.

Rick Ferri had an article that pointed out that equities (or equitiy subsets like SCV) can have very long periods of relatively poor returns. Never know when things will change. Here is the link:

http://www.rickferri.com/blog/markets/e ... rket-gain/

jim
Thanks for the link jim. Figure 1 is interesting.
cheers,
RIP Mr. Bogle.

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grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:53 pm

abuss368 wrote:Thanks!
you're welcome abuss.
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:54 pm

ofcmetz wrote:I've enjoyed and learned from all of your tips. I found the perspective that was imparted by this one to be helpful. Thank you for continuing to write them.

Jeff
Thanks Jeff- glad you found it helpful.
cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:57 pm

Jerry_lee wrote:Well, you don't cut and run regardless of which risks haven't paid off lately.

Over all 5 year periods since 1927, the...

Equity premium has been negative 22% of the time
Size premium has been negative 37% of the time
Value premium has been negative 15% of the time

Also, on average, the 22% of the time the ERP was negative, both size and value were positive. On average, the 37% of the time the size premium was negative, both the ERP and value premium were positive. On average, the 15% of the time the value premium was negative, both the ERP and size premium were positive.

Not sure why you'd want to give up after a disappointing 5 year run for any of these expected return sources, nor why you would want to bet everything on just one of them.
Thanks for the stats Jerry_Lee, very interesting...
cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 8:59 pm

HomerJ wrote:
Bongleur wrote:You have not analyzed the continuing existence of the credit bubble, and the fact that the government is continuing a policy of massive interference with the free market. Neither of these factors exist in the backtest data set.
Ah, "This time it's different!"

Long-term, the market is still a good bet.
Thanks. Of course in the long-term we are all dead. I'm hoping the next 5 years are better than the last 5 for equities.
cheers,
RIP Mr. Bogle.

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grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 9:00 pm

midareff wrote:Thanks for the post Grok and nice to "see you" again.
thanks midareff
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 9:21 pm

Browser wrote:Say, I wonder if anybody ever did an analysis that relates the level of PE/10 to market volatility? It wouldn't surprise me if markets are more volatile when valuations are elevated and vice versa. So, it might be the case that high valuations not only presage lower intermediate-long term returns but also a rockier ride to realize those returns.
Good thought. I checked it out using the volatility (defined as coefficient of variation = "standard deviation"/mean) of the "real price" from the shiller data set. There does not seem to be any clear relationship between the PE10 ratio and volatility.
I'd post the chart, but I don't know how.
cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Wed Oct 17, 2012 9:26 pm

325e wrote:Good quotes. Here is one more

Warren and I try to swim as best as we can. Sometimes the tides are with us, sometimes they’re against us. We don’t bother to predict tides, cause we intend to swim for a long time
- Charlie Munger
Thanks, here's a link to more Charlie Munger quotes.
http://svenduplic.com/post/11141552880/ ... lie-munger
cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sat Oct 20, 2012 8:38 am

grok87 wrote:
Browser wrote:Say, I wonder if anybody ever did an analysis that relates the level of PE/10 to market volatility? It wouldn't surprise me if markets are more volatile when valuations are elevated and vice versa. So, it might be the case that high valuations not only presage lower intermediate-long term returns but also a rockier ride to realize those returns.
Good thought. I checked it out using the volatility (defined as coefficient of variation = "standard deviation"/mean) of the "real price" from the shiller data set. There does not seem to be any clear relationship between the PE10 ratio and volatility.
I'd post the chart, but I don't know how.
cheers,
Here's a more clear answer:
Annualized monthly volatility (using "real" S&P 500 price) over the past 100+ years has averaged 22 (same scale as the VIX).
There have been 3 major "bubbles" in the Shiller data: 1929, 1966 and 2000. Here's a brief description of how the market's volatility behaved in those periods:

a) 1929 peak: As the Shiller PE10 ratio climbed from 11 in January of 1926 to 34 in September of 1929, annualized volatiliy drifted upward from 20 to 35. Volatility peaked at 103 when the market bottomed out at a Shiller PE10 of 6 in mid 1932. So one might describe this slight increase in volatility as the market was trending toward its peak as "people were getting a little worried"

b) 1966 peak: As the Shiller PE10 ratio climbed from 10 in 1950 to 24 in 1966, annualized volatility bounced around from 10 to 35. When the market peaked in late 1965/early 1966 volatility was at its trough of around 10. One might describe this as "complacency". THis was the Nifty Fifty period

c) 2000 peak: As the Shiller PE10 ratio climbed from 17 in 1990 to 44 in 2000 volatility bounced around from 6 to 33. When the market peaked in 2000 volatility was at a relatively low point of about 10- again complacency.

cheers,
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by market timer » Sat Oct 20, 2012 10:52 am

grok87 wrote:Here's a more clear answer...
One explanation for this pattern is that low realized volatility is supportive of higher valuations.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sat Oct 20, 2012 11:10 am

market timer wrote:
grok87 wrote:Here's a more clear answer...
One explanation for this pattern is that low realized volatility is supportive of higher valuations.
Interesting idea- care to flesh it out with some data or intuitive reasoning? There did noit appear to be a simple linear relationship according to my analysis.
Cheers
RIP Mr. Bogle.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Bongleur » Sat Oct 20, 2012 11:45 am

>annualized volatiliy drifted upward from 20 to 35. ... So one might describe this slight increase in volatility

Sounds like a whole lot of increase; should state in terms of change in Standard Deviation to judge degree.
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by market timer » Sat Oct 20, 2012 12:21 pm

grok87 wrote:
market timer wrote:
grok87 wrote:Here's a more clear answer...
One explanation for this pattern is that low realized volatility is supportive of higher valuations.
Interesting idea- care to flesh it out with some data or intuitive reasoning? There did noit appear to be a simple linear relationship according to my analysis.
Cheers
A Google Scholar search found this article from 1996: http://www.jstor.org/discover/10.2307/4 ... 1290441231

Given the high negative correlation between volatility and equity prices since then, I expect the results have held out-of-sample over the past 16 years.

As for the intuition, my guess is that it's due to the key role leverage plays in determining asset prices. Some nice charts on that relationship here: http://www.sciencedirect.com/science/ar ... 7308000764

As the asset you're leveraging becomes more volatile, the amount of leverage you can apply falls. For example, suppose you borrow at 1% to buy an asset yielding 3%, and you are willing to accept a 5% standard deviation per day. If the asset has no volatility, you can leverage this 2% spread arbitrarily high. If the asset has a standard deviation of 1%, you can apply 5x leverage, and so forth. You see a similar result when exchanges hike margin requirements (determining the maximum amount of leverage per futures contract), which often results in falling prices for markets affected.

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grayfox » Sat Oct 20, 2012 12:51 pm

grok87 wrote: However even though the S&P 500 is back where it started 5 years ago, some things have changed:

1) Over the past 5 years the Shiller PE10 (http://www.econ.yale.edu/~shiller/data/ie_data.xls) has dropped from 26 to 22. While a PE10 of 22 is still high compared to the long term average of 16, arguably stocks are cheaper now-i.e. expected future returns should be higher. Professor Shiller has stated that historically a PE10 ratio of 22 has been associated with future real stock returns of 4% vs the long run average real return of about 6%. You can do the math yourself, or if you’re lazy like me you can rely on this nice analysis by CalculatingInvestor http://www.calculatinginvestor.com/2010 ... valuation/
Run this on foreign stock markets and things look a lot rosier.
Sic transit gloria mundi. [STGM]

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grayfox » Sat Oct 20, 2012 1:09 pm

grok87 wrote:
2) Inflation is lower now. During the first half of 2012 annualized inflation was 2.3% vs. 3.2% for the second half of 2007. Lower inflation is arguably better for stocks.

3) 10 year treasury yields have dropped from 4.5% in late 2007 to 1.7% today. So real bond yields have dropped from +1.3% to -0.6%- i.e. bonds are less attractive now.
I might argue that 2 and 3 are negative for stocks.

2) Crestmont research has a chart, in this document Inflation and P/Es, which shows that high P/E's are associated with low inflation. Conversely, high inflation or deflation is associated with low P/E ratios.

The latest CPI-U inflation rate was 1.99% year-over-year. Inflation has been in the sweet spot for P/E's. So if, in the future, we get either higher inflation or deflation, it seems like P/E's might fall.

3) Real Treasury yields are negative. So even with below average real equity return of 4%, there is a big equity premium. But the spread is wide, not because stocks are looking good, but because Treasuries are looking so bad. This is like holding a beauty contest at the dog pound.

If, by some miracle, real interest rates were to rise (falling bond prices), the ERP would narrow, unless stock prices also fell.

Isn't there theory that everyone together is smarter than any single person? Maybe investors are not so dumb for abandoning U.S. stock market.
Sic transit gloria mundi. [STGM]

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Latecomer » Sat Oct 20, 2012 7:35 pm

Grok!...So nice to "hear" from you. Years ago, you gave us advice which has kept us simple, stable and afloat. We are now in our mid-60's and partially retired.

Taxable: 60% Total Stock Market and 40% FTSE All-world ex-US

Non-taxable: 50% Vanguard's TIPS and 50% Intermediate Treasury Funds

To this day, your name comes to me - along with Laura - whenever I get out my gratitude list. :moneybag

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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sun Oct 21, 2012 8:37 am

Latecomer wrote:Grok!...So nice to "hear" from you. Years ago, you gave us advice which has kept us simple, stable and afloat. We are now in our mid-60's and partially retired.

Taxable: 60% Total Stock Market and 40% FTSE All-world ex-US

Non-taxable: 50% Vanguard's TIPS and 50% Intermediate Treasury Funds

To this day, your name comes to me - along with Laura - whenever I get out my gratitude list. :moneybag
Latecomer,
Good to hear from you again! I'm glad to hear things are going well.
Here's the original thread you are referring to
http://www.bogleheads.org/forum/viewtopic.php?p=135192

And I was glad to hear that you posted a couple of years after that, that things had gone well.
http://www.bogleheads.org/forum/viewtopic.php?p=135192

how did you do it? if you followed my and Laura's advise in Jan of 2008 then the fall of 2008 must have been pretty rough. You must be the poster child for "Press on, regardless"!

cheers,
RIP Mr. Bogle.

Topic Author
grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sun Oct 21, 2012 8:45 am

market timer wrote:
grok87 wrote:
market timer wrote:
grok87 wrote:Here's a more clear answer...
One explanation for this pattern is that low realized volatility is supportive of higher valuations.
Interesting idea- care to flesh it out with some data or intuitive reasoning? There did noit appear to be a simple linear relationship according to my analysis.
Cheers
A Google Scholar search found this article from 1996: http://www.jstor.org/discover/10.2307/4 ... 1290441231

Given the high negative correlation between volatility and equity prices since then, I expect the results have held out-of-sample over the past 16 years.

As for the intuition, my guess is that it's due to the key role leverage plays in determining asset prices. Some nice charts on that relationship here: http://www.sciencedirect.com/science/ar ... 7308000764

As the asset you're leveraging becomes more volatile, the amount of leverage you can apply falls. For example, suppose you borrow at 1% to buy an asset yielding 3%, and you are willing to accept a 5% standard deviation per day. If the asset has no volatility, you can leverage this 2% spread arbitrarily high. If the asset has a standard deviation of 1%, you can apply 5x leverage, and so forth. You see a similar result when exchanges hike margin requirements (determining the maximum amount of leverage per futures contract), which often results in falling prices for markets affected.
Thanks. THe links look interesting but I think may be hard for non-academics to access. Can you perhaps summarize what they are saying perhaps?
I think your intuition about low volatility being one of the drivers of higher asset prices sounds right. I think it's possible that low volatility and high stock prices are both symptoms of complacency/ irrational exuberance- i.e. the behavioralist "irrational exuberance" argument.
cheers,
cheers,
RIP Mr. Bogle.

Latecomer
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Latecomer » Sun Oct 21, 2012 10:23 am

grok87 wrote:
Latecomer wrote:Grok!...So nice to "hear" from you. Years ago, you gave us advice which has kept us simple, stable and afloat. We are now in our mid-60's and partially retired.

Taxable: 60% Total Stock Market and 40% FTSE All-world ex-US

Non-taxable: 50% Vanguard's TIPS and 50% Intermediate Treasury Funds

To this day, your name comes to me - along with Laura - whenever I get out my gratitude list. :moneybag
Latecomer,
Good to hear from you again! I'm glad to hear things are going well.
Here's the original thread you are referring to
http://www.bogleheads.org/forum/viewtopic.php?p=135192

And I was glad to hear that you posted a couple of years after that, that things had gone well.
http://www.bogleheads.org/forum/viewtopic.php?p=135192

how did you do it? if you followed my and Laura's advise in Jan of 2008 then the fall of 2008 must have been pretty rough. You must be the poster child for "Press on, regardless"!

cheers,
How did I do it?...I was like a deer in the headlights, at first, but I knew that I had better just hang on, because "Stay the Course" was the only boat that I knew about. Luckily, we are still afloat! :sharebeer

Topic Author
grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sun Oct 21, 2012 9:38 pm

grayfox wrote:
grok87 wrote: However even though the S&P 500 is back where it started 5 years ago, some things have changed:

1) Over the past 5 years the Shiller PE10 (http://www.econ.yale.edu/~shiller/data/ie_data.xls) has dropped from 26 to 22. While a PE10 of 22 is still high compared to the long term average of 16, arguably stocks are cheaper now-i.e. expected future returns should be higher. Professor Shiller has stated that historically a PE10 ratio of 22 has been associated with future real stock returns of 4% vs the long run average real return of about 6%. You can do the math yourself, or if you’re lazy like me you can rely on this nice analysis by CalculatingInvestor http://www.calculatinginvestor.com/2010 ... valuation/
Run this on foreign stock markets and things look a lot rosier.
Agree- I'll try to post that 5 year comparison when I get a chance.
RIP Mr. Bogle.

Topic Author
grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Sun Oct 21, 2012 9:44 pm

grayfox wrote:
grok87 wrote:
2) Inflation is lower now. During the first half of 2012 annualized inflation was 2.3% vs. 3.2% for the second half of 2007. Lower inflation is arguably better for stocks.

3) 10 year treasury yields have dropped from 4.5% in late 2007 to 1.7% today. So real bond yields have dropped from +1.3% to -0.6%- i.e. bonds are less attractive now.
I might argue that 2 and 3 are negative for stocks.

2) Crestmont research has a chart, in this document Inflation and P/Es, which shows that high P/E's are associated with low inflation. Conversely, high inflation or deflation is associated with low P/E ratios.

The latest CPI-U inflation rate was 1.99% year-over-year. Inflation has been in the sweet spot for P/E's. So if, in the future, we get either higher inflation or deflation, it seems like P/E's might fall.

3) Real Treasury yields are negative. So even with below average real equity return of 4%, there is a big equity premium. But the spread is wide, not because stocks are looking good, but because Treasuries are looking so bad. This is like holding a beauty contest at the dog pound.

If, by some miracle, real interest rates were to rise (falling bond prices), the ERP would narrow, unless stock prices also fell.

Isn't there theory that everyone together is smarter than any single person? Maybe investors are not so dumb for abandoning U.S. stock market.
Thanks for the link to the Crestmont research. Their arrow shaped regression line seems more suggestive than definitive. I'm not necessarily disagreeing with the conclusion though- that high inflation and deflation are bad for stocks.
RIP Mr. Bogle.

Bongleur
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by Bongleur » Mon Oct 22, 2012 1:31 am

Speaking of the last 5 years... has anyone run the numbers on a rebalance strategy with 5% bands? How many times would a 50:50 investor in say TSM : 5 Yr Treasuries have rebalanced in each year from 2007 to date?

I don't have time right now (just did two unexpected plumbing jobs in the last several days... old stuff doesn't come out & new parts don't fit...) but I'd like to look at the M* data and see what dates TSM would have been down 5%, and then see what the capital gain on the bond fund would be, and figure how much tax drag there would have been on each rebalance.

No tax advantaged money (that is a temporary quirk of govt policy and if buy-hold-rebalance works, it must work without depending upon special treatment). No new money either-- example is retired or nearly, with $1M split 50:50 to be rebalanced at 5%.

So 5% is $25,000, the capital gains on that added to say $60,000 a year in pension/SS/dividends/interest income. Guesstimating how much is cost basis (return of capital) is important; he's been saving for 40 years... Also the bond fund probably has an acute spike in NAV, so there is a lot of short term gap gains.
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Tue Nov 20, 2012 7:47 am

RIP Mr. Bogle.

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grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Thu May 16, 2013 6:08 pm

RIP Mr. Bogle.

Topic Author
grok87
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Re: Grok's Tip #12: "Press on, regardless" [of the past 5 ye

Post by grok87 » Fri Oct 18, 2013 10:24 am

RIP Mr. Bogle.

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