Are Equities Overpriced?

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Mon Dec 07, 2015 10:36 pm

bhsince87 wrote:
siamond wrote:
bhsince87 wrote:If you believe in efficient and wise markets, then no, equities are not overpriced.

They are priced exactly as they should be at this point in time.
Boggles my mind a little bit that anybody can still believe in such theory. Not only this is directly contrary to basic human nature, but more factually, were the recent Internet (2000) and real estate (2008) bubbles already forgotten? Bubbles are hard to quantify, this doesn't mean they don't exist, nor that markets are perfectly efficient... Hence the unescapable conclusion that valuations do matter.
A lot of folks do believe in this theory.

https://en.wikipedia.org/wiki/Efficient ... hypothesis

My comment was a bit tongue in cheek, because I don't quite buy into it, at least in the short term.
Oh it's a great theory for explaining a lot of what goes on in the markets

But as I joked back, it's predicated on this eternal paradox that if enough people believe it, it stops working

On the Impossibility of Informationally Efficient Markets
https://www.aeaweb.org/aer/top20/70.3.393-408.pdf
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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TomatoTomahto
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Re: Are Equities Overpriced?

Post by TomatoTomahto » Mon Dec 07, 2015 10:48 pm

Toons wrote:Who knows,does it really matter?
Invest now and stay invested. :happy
We get DW's bonus early in the new year. We will put some of it aside for taxes and periodic bills (property tax, tuition, etc.). So, everything else being equal, I hope equities are just a bit less "overpriced" then. But, things are never equal, so we will invest at whatever the valuation levels are.

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Slick8503
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Re: Are Equities Overpriced?

Post by Slick8503 » Mon Dec 07, 2015 10:48 pm

I understand "efficient market" to mean that all KNOWN information is priced in. To me, that does not mean that they must be priced correctly.

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Mon Dec 07, 2015 11:31 pm

Slick8503 wrote:I understand "efficient market" to mean that all KNOWN information is priced in. To me, that does not mean that they must be priced correctly.
It comes in various strengths .. Strong-form EMH posits that all information (public and private) is priced in, so it's impossible to outperform except through luck (as you suggest, making guesses that turn out to be right)

Weak-form suggests future prices can't be predicted based on past prices, so markets are a random walk - although momentum is fairly well documented, and is considered an 'anomaly' (in the context of EMH)

I think it's optimistic to believe any single theory (that didn't include human behaviour, algorithmic and emergent behaviour, and some solid theories about how markets strive to operate) could ever give you a complete picture of something that's influenced by all these things .. Only in October we had a 'momentum reversal' that should only occur once every 11,000 years through chance
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

Clive
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Re: Are Equities Overpriced?

Post by Clive » Tue Dec 08, 2015 3:51 pm

Hi Maynard.

From a UK perspective, taken with a cup of salt, on a better-than-nowt basis, a 'balanced' portfolio relative to global stock, bond, property and gold 2014 proportions, reflected back to 1932 and adjusted for (first chart) consumer price inflation (UK RPI) and (second chart) house price inflation (UK national average), total gains (stocks +dividends, house price + imputed rent) :

Image

Image

Human emotions/economic circumstances/policies can elevate a asset for prolonged periods. Today's ceiling can become tomorrows floor and perhaps elevate even further no matter how odd that may appear at the time.

Mean reversions tend to occur more abruptly. As though the collective market suddenly realise an extreme is evident and correct out of that relatively quickly.

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stemikger
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Re: Are Equities Overpriced?

Post by stemikger » Tue Dec 08, 2015 5:29 pm

Elbowman wrote:I think there is general agreement that 10-30 year nominal equity returns will not be as high as their historical averages. However, equity (expected) returns are higher than any of the alternatives, so I don't think there is much to do besides sit tight and perhaps save more.
+1

I agree. If you are a Boglehead you pick you AA and it doesn't matter whether stocks are frothy and bonds are not the greatest right now. I always remind myself of Taylor Larimore's saying: Bonds are to sleep and stocks are to eat. So, I am not going to add risk and definitely not going to time the market. I am going to pick an AA that enables me to sleep and definitely, definitely save more is the only winning strategy. I also set my expectations very low, and plan accordingly. I use a 2% return and unless it is less than that, I will not meet my goal to retire in 10 years. I do save 34% of my salary, but my wife's salary is not included in the equation, so I'm not exactly living like a church mouse. Quite the contrary, we have a bad restaurant habit. lol.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Tue Dec 08, 2015 6:24 pm

Clive wrote:Hi Maynard.

From a UK perspective, taken with a cup of salt, on a better-than-nowt basis, a 'balanced' portfolio relative to global stock, bond, property and gold 2014 proportions, reflected back to 1932 and adjusted for (first chart) consumer price inflation (UK RPI) and (second chart) house price inflation (UK national average), total gains (stocks +dividends, house price + imputed rent) :

Image

Image

Human emotions/economic circumstances/policies can elevate a asset for prolonged periods. Today's ceiling can become tomorrows floor and perhaps elevate even further no matter how odd that may appear at the time.

Mean reversions tend to occur more abruptly. As though the collective market suddenly realise an extreme is evident and correct out of that relatively quickly.
I always think unless you're prepared to try your hand as a macro investor, it's very difficult to do better than holding what the market holds (in terms of where it's got its money .. that's the real active vs passive debate, afaic)

It's interesting how they've calculated property .. Normally I see it calculated in terms of (presumably) pure financial investment in property - which tends to come out with a lower allocation .. Could I put 58% in UK property today? (I'm fairly nervous about 1% at the moment)

I'm also more cautious than ever about things that look good (no matter how logical) going backwards .. I think there are so many ways your assumptions will be prejudiced by how things went; what became 'common knowledge'; how much the world may have actually changed, and things can be 'different this time' ... What I'm coming round to more and more is 10% each: private equity, venture capital, developed equity, emerging equity, long/short, global macro, opportunistic investments, real assets, loans, bonds/cash - pure play on diversification and compounding absolute returns
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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Sammy_M
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Re: Are Equities Overpriced?

Post by Sammy_M » Tue Dec 08, 2015 6:30 pm

Maynard F. Speer wrote:Only in October we had a 'momentum reversal' that should only occur once every 11,000 years through chance
I must have missed that. You're talking October 2015?

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Tue Dec 08, 2015 6:42 pm

Sammy_M wrote:
Maynard F. Speer wrote:Only in October we had a 'momentum reversal' that should only occur once every 11,000 years through chance
I must have missed that. You're talking October 2015?
Yep - actually 2 days after I decided to allocate 10% of my portfolio to long/short equity

Needless to say, a once-in-11,000-years momentum reversal is not the best for long/short equity funds, and even my gaping abyss of pessimism hadn't factored that in

Luckily I can laugh about it now :beer
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes

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