Are Equities Overpriced?

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mriordan23
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Are Equities Overpriced?

Post by mriordan23 » Thu Dec 03, 2015 12:43 pm

I am a buy and hold guy in low expense index funds. That being said, I am curious everyone's thoughts on where stock prices are. Schiller seemed to think the market is "frothy" a couple months ago and to be careful. Any opinions?

Elbowman
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Re: Are Equities Overpriced?

Post by Elbowman » Thu Dec 03, 2015 12:52 pm

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.

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Re: Are Equities Overpriced?

Post by larryswedroe » Thu Dec 03, 2015 12:58 pm

We've had long discussions on this issue and IMO there is strong logic to believe that while valuations are historically high, they aren't overvalued

There are many good reasons why P/E should logically be higher today than average

1) much stronger regulatory regimes
2) much wealthier nation--supply of capital is greater thus cost is lower
3) accounting rules requiring impairment testing, and immediate write down of intangibles, which began in 2001 add about 4 to P/E relative to what earnings would be under old rules--clearly better rules but apples to oranges now
4) much higher retention of earnings which has led to faster earnings growth as theory states--that is worth about 1 in P/E
5) much lower trading costs, should lower ERP
6) much lower expense ratios for funds, should lower ERP
7) some would argue that real interest rates being low would justify higher valuations, and I'd add demographics could have same impact

All in all valuations look reasonable to me, certainly not overvalued. And outside the US they are much lower.

Larry

jchiu003
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Re: Are Equities Overpriced?

Post by jchiu003 » Thu Dec 03, 2015 2:03 pm

I don't know all the technical knowledge of "being overvalued," but I have read most of the Bogelheads Wiki pages and the general consensus seems to be invest as early as possible. I'm a first time investor and I had this problem earlier this year. I did a lump sum in January and I'm pretty happy so far. My YTD is probably only 2%, but I'm relieved to have the cash off my hands.

longinvest
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Re: Are Equities Overpriced?

Post by longinvest » Thu Dec 03, 2015 2:12 pm

Our mentor, Jack Bogle, provides the exact answer in this video:
https://youtu.be/A0gQiz0pCyI

Others might say otherwise, but they would be wrong.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

livesoft
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Re: Are Equities Overpriced?

Post by livesoft » Thu Dec 03, 2015 2:18 pm

I had to chuckle because stock prices are always frothy and one always has to be careful. So what kind of nonsense noise is that?

What if some talking head said, "Stock prices are not frothy here, so you don't have to be careful at all." What would you do with that information statement?
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randomguy
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Re: Are Equities Overpriced?

Post by randomguy » Thu Dec 03, 2015 3:02 pm

livesoft wrote:I had to chuckle because stock prices are always frothy and one always has to be careful. So what kind of nonsense noise is that?

What if some talking head said, "Stock prices are not frothy here, so you don't have to be careful at all." What would you do with that information statement?
Pretty much. People in early 2009 were not talking about how great of value stocks were (some were but not many). Most were talking about great depression 2 where we going to drop from 50% down to 90% down. And in 2011 when the 20% drop happened people didn't say load up. They said it was a double dip and get ready to lost another 30%.

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patrick013
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Re: Are Equities Overpriced?

Post by patrick013 » Thu Dec 03, 2015 5:50 pm

I need to practice what I preach. :D

Every crash I've ever monitored the PE's were at least
25ish for the 500 index. Good time to rebalance
I'd say when the PE's get in the mid 20's and higher.

Time will tell.
age in bonds, buy-and-hold, 10 year business cycle

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Rx 4 investing
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Re: Are Equities Overpriced?

Post by Rx 4 investing » Thu Dec 03, 2015 5:58 pm

The good news thus far among valuation-agnostic equity investors in 2015---earnings didn't matter. But in 2016, should that traditional metric take on slightly more importance, upside for equities is probably limited. It appears analysts' forward earnings estimates for 2016 are essentially flat.

Image
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siamond
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Re: Are Equities Overpriced?

Post by siamond » Thu Dec 03, 2015 6:40 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.
I don't know about 30 years, but totally agreed for the coming decade or two.

Stick to the course, or maybe take the opportunity to revisit one's AA and ponder to add more international exposure, not as a timing call, but as a possible change for the long run. A lot of US investors seem to be under-exposed to International...

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Thu Dec 03, 2015 6:47 pm

I think equity valuations are optimistic, and economic indicators and earnings growth, less so

We tell the story of bond risk being priced in, but central banks have been forced to buy bonds ... Yields have been pushed down and investors have been forced to buy stocks ... So I think there's a bit of house of cards there - acknowledging we may well get more QE

From the October review of one of my favourite investment managers, Jonathan Ruffer:
I have quoted before the Scandinavian economist, Knut Wicksell, who observed that when interest rates went to zero and stayed there, expect investment valuations to reach infinity. Three times book may not be infinity, but it’s not safe ..

http://ruffer.co.uk/#ruffer/who-we-are/ ... ent-review
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knpstr
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Re: Are Equities Overpriced?

Post by knpstr » Thu Dec 03, 2015 6:49 pm

Generally speaking it is not worthwhile to pay any attention to such things.

An excuse may be made "it's just for fun, I'm not going to act on it." However, you may be convinced to act the more you read into such nonsense. Stay the course! Find other hobbies!
:beer
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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mbk734
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Re: Are Equities Overpriced?

Post by mbk734 » Fri Dec 04, 2015 10:12 am

"Ignore the noise you must. Stay the course you must."
Yoda
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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Fri Dec 04, 2015 10:35 am

Don't forget what happened to the world's second largest market when investors ignored valuations

Image

Buying expensive is only compensated if you believe the US market will keep going up in perpetuity .. Global macro investors have a habit of being right until they're wrong
"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

zotty
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Re: Are Equities Overpriced?

Post by zotty » Fri Dec 04, 2015 11:16 am

Maynard F. Speer wrote:Don't forget what happened to the world's second largest market when investors ignored valuations
In 1989, the PE1 at the peak of the japanese bubble was 90. Does that tell us anything useful about markets with a PE1 of 20? PE1 of 30? If you act as if a PE 20 is the same thing as a PE of 90, you are avoiding risk and lowering your expected return.

timing strategies to reduce risk do indeed reduce risk, but reducing risk reduces expected returns. You may miss severe downturns, but you'll also miss spectacular rebalancing opportunities afforded by an asset allocation model with a glide path (or fixed).

no free lunches. if your strategy offers less risk, you are taking less risk, and should expect lower returns. No harm in that, but people shouldn't kid themselves into thinking they'll luck into a better risk adjusted return. not likely.
Nadie Sabe Nada

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greg24
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Re: Are Equities Overpriced?

Post by greg24 » Fri Dec 04, 2015 11:20 am

S&P 500 PE ratio is fairly high compared to historic numbers, but they've been high since the 90s.
http://www.multpl.com/

PE10 ratios are even higher.
http://www.multpl.com/shiller-pe/

What can you do? Buy some fixed income that a lot of people think is bubbly?

I'm a buy and holder. I'm buying and holding.
:sharebeer

staybalanced
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Re: Are Equities Overpriced?

Post by staybalanced » Fri Dec 04, 2015 11:35 am

Who knows? It is odd to me that "experts" even try to predict stock prices.

I do know this, if you were 100% stocks in 2007 and withdrew 4% with inflation increases each year, you would still have more money today.

https://www.portfoliovisualizer.com/bac ... sisResults

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VA_Gent
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Re: Are Equities Overpriced?

Post by VA_Gent » Fri Dec 04, 2015 11:57 am

As for Japan. I often hear about how if the average Japanese investor DCA into the NiKKei 225 they would have been fine.

I ran the numbers to confirm:

Time period (1/1/1990-1/8/2015)
Invest 1,000 (currency units) beginning of each month
Dividends and inflation not considered.
Total invested: 308,000
Ending value: 419,069
Return: 2.35%

Observations:
As recently as 6/1/2013 the investor was still underwater. Meaning a nominal return of 0% for 23 and a half years!
That is what CAN and HAS happened to a single major domestic index.
Diversify globally.

dkturner
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Re: Are Equities Overpriced?

Post by dkturner » Fri Dec 04, 2015 12:06 pm

InvestorAdam wrote:Who knows? It is odd to me that "experts" even try to predict stock prices.

I do know this, if you were 100% stocks in 2007 and withdrew 4% with inflation increases each year, you would still have more money today.

https://www.portfoliovisualizer.com/bac ... sisResults
John Maynard Keynes observed that "experts" try to predict stock prices because they are asked to. His implication being that they probably know better, but are just being polite.

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Fri Dec 04, 2015 12:15 pm

zotty wrote:
Maynard F. Speer wrote:Don't forget what happened to the world's second largest market when investors ignored valuations
In 1989, the PE1 at the peak of the japanese bubble was 90. Does that tell us anything useful about markets with a PE1 of 20? PE1 of 30? If you act as if a PE 20 is the same thing as a PE of 90, you are avoiding risk and lowering your expected return.

timing strategies to reduce risk do indeed reduce risk, but reducing risk reduces expected returns. You may miss severe downturns, but you'll also miss spectacular rebalancing opportunities afforded by an asset allocation model with a glide path (or fixed).

no free lunches. if your strategy offers less risk, you are taking less risk, and should expect lower returns. No harm in that, but people shouldn't kid themselves into thinking they'll luck into a better risk adjusted return. not likely.
You could've bought halfway up the market when the PE10 was 40 and still done rather poorly ... That's only a stone's throw from today's US valuations, and it may be that the Japanese market (like other Asian markets) supports higher average P/Es (still a P/E of 26.5 today and many consider the market 'cheap')

Timing strategies can work reasonably if you leverage to an equivalent level of risk, use an appropriate benchmark, or add rules like momentum (that's really the key to fixing the dire timing side of valuation based AA)

But look at how top investors manage their own money, and it's often just a case of buying what's currently on offer ... As Mark Yusko said: "Investing is the only business I know that when things go on sale, everyone runs out of the store"
"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

azanon
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Re: Are Equities Overpriced?

Post by azanon » Fri Dec 04, 2015 12:21 pm

larryswedroe wrote:All in all valuations look reasonable to me, certainly not overvalued. And outside the US they are much lower.

Larry
This is the key thing I'm currently homing in on. If you had no other choice, I'd essentially agree with Larry - US valuations at least make sense given the circumstances. But overseas valuations are actually historically average, and in some cases lower than average. So strictly from the CAPE vs. future 10-year return perspective forecasting, one is looking at upwards to an extra 4-7% return on EAFE/EM vs. US stock (source: researchaffiliates), while EAFE has, at least traditionally, only had slightly more volatility than the S&P 500. And FWIW, researchaffiliates gives predicted volatility for EAFE and EM as well.

Then there's the question, do you take US Equity risk with CAPE based forcasted returns what they are, or do you just stomach lousy returns but get that capital preservation with bonds. I guess what I'm saying here is that its hard to get excited about equity returns and their associated risks, when valuations, strictly speaking, are much higher than normal. So there's a reason they're high, as Larry outlined, but does it make you want to "buy"? It doesn't me, especially when I have a much better choice from the valuation perspective overseas.

Disclosure: So my current US stock allocation is at a "diversifier-only" level allocation. I'm willing to have 5-10% of even a bad investment, if not for diversification purposes only :mrgreen: But the lion's share of my portfolio has one or two traits: 1. Great capital preservation aspects 2. Good to great forecasted returns. Why would anyone want an asset class that had neither, other than maybe to diversify?

One final thing about CAPE based research. It doesn't get into the issue of if there's a reason CAPE is high, low, or average. It simply shows that the higher CAPE is, the lower the expected return. So one can explain away a high based CAPE for a given country, but it won't change the predictive nature of CAPE. There are only 2 variables - 1. current CAPE and 2. Predicted 7-10 year return, and the correlation between the two is significant.

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Fri Dec 04, 2015 12:55 pm

You also have to remember, in real terms, CAPE is most predictive over around 20 years (with a correlation of almost 0.7) - so prices could still surprise on the upside (especially with more QE), but you could be locked into lower-than-average returns for quite a bit longer than many expect

Image

US valuations also look high in terms of Market/GDP, Price/book, median Price/Sales .. so I don't think changes-in-accounting-practices entirely explain away the problem

The one bright side I can see is sector composition .. Concentration in Tech and low financials could explain as much as 50% of relative US equity overvaluation, leaving US equities only around 20% overvalued

I think the reason the US is high is perceived stability - as opposed to Russia, where there might be a lot of upside, but you'd need to be brave to have more than 5% in the region
"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

garlandwhizzer
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Re: Are Equities Overpriced?

Post by garlandwhizzer » Fri Dec 04, 2015 1:22 pm

Maynard F Speer wrote:


But look at how top investors manage their own money, and it's often just a case of buying what's currently on offer ... As Mark Yusko said: "Investing is the only business I know that when things go on sale, everyone runs out of the store"
1+

I believe this to be entirely true. Are US stocks richly valued by historical standards? Yes. Are bonds richly valued by historical standards that is to say very low yields for safety? Yes. Is real estate richly valued by historical standards? Yes, yet again. Cap rates in commercial real estate have been declining for 15 years, and home prices continue to be high relative to household income even in the aftermath of the real estate bust.

All safe or even solid assets seem to me to be richly valued. What isn't? Risky volatile areas where even most fear to tread: PME, EM, Energy stocks, and to a lesser extent developed international markets. Rich valuations of less volatile US assets do not imply that a collapse or bust in equities is likely in the near future. It does imply that returns going forward are going to be substantially lower than by historical standards. In past decades one could use a 60 TSM/40 Treasury portfolio and count on significant returns over the long term well in excess of inflation. Returns from here of such a portfolio for the foreseeable future (5 -10 years perhaps) are likely to be disappointing relative to the long term past. But now there are no good alternatives that don't have substantial risk because everything except risky assets are similarly richly valued.

We live in an very affluent but highly indebted society. Affluence drives up the prices of less risky assets as lots of dollars chase relative safety. Debt beyond a certain point drives down end demand and future economic growth. So the result may be high asset prices combined with sluggish growth, both of which work in concert against future investment returns. PE expansion has partially helped to drive this 6 year equity bull market which is why valuations are generous presently. We may be at a point now where further PE expansion poses significant risk of bubble formation. Without that, we must rely solely on domestic and global economic growth to drive future equity appreciation.

As for bonds, the bull market of the last 30+ years is likely over and real returns of quality bonds are likely to be close to zero over the next decade. Bonds will continue to provide portfolio stability and are essential if one wants to sleep at night during market collapses, but we can't count on them for substantial positive real returns like they have done for the last 3+ decades.

When Bill Gross coined the term some years ago, "the new normal" describing a future of widespread and persistent low returns, many laughed at him, believing it to be another mistaken call like his short on Treasuries. Fewer are laughing now. It appears to me that we are indeed in the "new normal" now and will be stuck there for some time into the future. I hope that, like most future forecasts, my expectations of the future are wrong but I cannot convince myself that 10 year Treasury yields will soon return to 5 or 6 percent plus, or that real GDP growth will soon return to 3%+ long term, or that stocks will provide a long term real return of 7% for the next decade or so.

Garland Whizzer

rgs92
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Re: Are Equities Overpriced?

Post by rgs92 » Fri Dec 04, 2015 1:30 pm

As a related question, why is PXSV (PowerShares Fundamental Pure Small Value Portfolio ETF) doing so poorly (down over 7% YTD)?
Perhaps this index is not overpriced...

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Re: Are Equities Overpriced?

Post by Imbros » Fri Dec 04, 2015 3:55 pm

I have nothing to add but just wanted to say how much I appreciate the input of Maynard F. Speer and Garland Whizzer on this subject.

Thank you for sharing all this valuable information and your wisdom with everyone here. It means a lot, especially for younger Bogleheads like myself.
There is no greatness where there is no simplicity, goodness and truth. -L. Tolstoy

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nedsaid
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Re: Are Equities Overpriced?

Post by nedsaid » Sat Dec 05, 2015 4:14 pm

larryswedroe wrote:We've had long discussions on this issue and IMO there is strong logic to believe that while valuations are historically high, they aren't overvalued

There are many good reasons why P/E should logically be higher today than average

1) much stronger regulatory regimes
2) much wealthier nation--supply of capital is greater thus cost is lower
3) accounting rules requiring impairment testing, and immediate write down of intangibles, which began in 2001 add about 4 to P/E relative to what earnings would be under old rules--clearly better rules but apples to oranges now
4) much higher retention of earnings which has led to faster earnings growth as theory states--that is worth about 1 in P/E
5) much lower trading costs, should lower ERP
6) much lower expense ratios for funds, should lower ERP
7) some would argue that real interest rates being low would justify higher valuations, and I'd add demographics could have same impact

All in all valuations look reasonable to me, certainly not overvalued. And outside the US they are much lower.

Larry
Larry, I pretty much agree with you here. I will say that I don't think US Stocks are in the bargain bin either.

I hate to sound like a broken record but stocks always look expensive in bull markets. If stocks were never expensive, we would not have bull markets!

I can't tell you how many articles that I read over the years warning of high valuations during bull markets. You could take an article from the mid-1990's and substitute a few new reasons for market overvaluation for a few of the old ones, rerun the article and no one would know the difference. Today, I am supposed to be all flustered by Shiller P/E 10 which I didn't even hear about until maybe three years ago. In the mid-1990's it must have been something else. Maybe a ratio of the Dow compared to the price of Gold or something like that.

My suspicion is that financial publications run major articles on a 5 year cycle, change a bit here and there but essentially run the same articles over and over. Sort of like sitting in church and thinking to yourself, I think I have heard this sermon before. Pastors aren't the only folks out there who dust off old favorites and recycle them.

Stocks always look expensive during bull markets. Skip! Stocks always look expensive during bull markets. Skip!
A fool and his money are good for business.

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Re: Are Equities Overpriced?

Post by nedsaid » Sat Dec 05, 2015 4:51 pm

In answer to Garland Whizzer, I have wondered if investment returns will be subdued for quite a while. Indeed, I wonder if we will smell of whiff of mild deflation. So I have wondered aloud on this forum about long term treasuries. I would be delighted with 2-3% yields if we actually experience mild deflation.

Times aren't bad but somehow the economy just never quite gets going. This doesn't have the feel of boom times. Sort of just muddling through.

I would agree with Mr. Bogle's prediction of 6% nominal stock returns and 4% real and 2-3% nominal returns on bonds. I don't view stocks as overvalued but with forward P/E's at about 18, I don't see much room for P/E expansion. Indeed, if interest rates actually do start heading up again, we would likely see a bit of P/E contraction which would be a drag on returns.

But I have my rational side and my emotional side. By nature, I am more of an optimist than a pessimist and thus tend to lean towards stocks. I believe in the progress of human endeavor over time and the advancement of civilization. I believe that the economy will grow over time.

But at the same time, there have always been reasons to fear the future.

The Great Depression of the 1930's and the rise of fascism. You talk about the "new normal" and those who lived through the thirties experienced that on steroids. Then the great War afterwards and it looked like civilization was in peril. The post-war era brought great economic expansion but again communism was the new menace and we settled into a new cold war. As a grade schooler, the world was maybe 1/3 free and 2/3 ruled by communist dictatorships. The bad guys appeared to be winning. The Vietnam War came along and with it inflation. There was also the social unrest and I honestly wondered if the country would just come apart. We had economic boom in the 1980's and the 1990's, the cold war ended and the good guys won. But then the markets crashed in 2000 and we experienced 9-11. Terrorism was the new menace. The economic boom ended with the 2008-2009 financial crisis. But somehow we recovered and now we are worried about a stock market that has done too well. Again, we are experiencing some social tension and the future looks cloudy. You get the idea.

If I had listened to all the gloom and doom, I probably would have hid underneath my bed with all my money too scared to invest. But I saved and then invested and then hoped for the best. Somehow it all worked out. It was pretty scary at times but I just kept at it.

So I am the same guy that says valuations matter and matter a lot. I look for bargains and they seem to be in the areas Garland talks about. But mostly I am sticking to my diversified portfolio, valuations are not extreme and there is a lot of pessimism out there. I don't feel the need to make big changes at this time. Staying the course for now.
A fool and his money are good for business.

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Re: Are Equities Overpriced?

Post by longinvest » Sat Dec 05, 2015 6:03 pm

I think that valuations and future return predictions are useless for choosing whether I should put more money into stocks or into bonds.

If we knew which asset will have the highest return between now and the time when we need they money, we would invest all our money into it. Doing otherwise would be irrational. Unfortunately, that's not how markets work.

All assets are currently priced at their fairest perceived value by buyers and sellers in the market. I have no reason to believe that there is any lack of clever buyers and sellers in the market. Any potential buyer that sees a bargain would be a fool not to buy. Any potential seller that sees an overvaluation would be a fool not to sell. Unless, of course, they were expecting much better deals by waiting before making their transaction (the wait must have a high probability of yielding bigger profits than making the transaction now). Any such seller or buyer would not tell me about it, or announce it on a widely read internet forum, as this would kill the profit opportunity.

So, if anybody claims that stocks or bonds are currently a bargain (or have high expected returns), all I can assume is that this person wants to sell his stocks or bonds (as higher demand pushes prices up). If anybody claims that stocks or bonds are currently too expensive (or have low expected returns), all I can assume is that either (1) this person wants to buy stocks or bonds (as lower demand pushes prices down), or (2) he wants to sell alternative investments. So conveniently, he'll probably claim that these alternative investments are currently a good deal.

Personally, I don't care about valuations and future return expectations. Returns will be whatever they will be; I have no control over that. Nobody can predict future stocks returns, and I mean nobody.

What I can easily do is to harvest the total returns of the stock and bond markets using low-cost total-market index funds. I can also easily avoid catastrophic returns by including enough bonds in my portfolio (at least 25%, at most 75%). This good-enough Bogleheads-type portfolio will allow me to reach my financial objectives.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Toons
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Re: Are Equities Overpriced?

Post by Toons » Sat Dec 05, 2015 7:03 pm

Who knows,does it really matter?
Invest now and stay invested. :happy
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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Sat Dec 05, 2015 8:34 pm

longinvest wrote:All assets are currently priced at their fairest perceived value by buyers and sellers in the market. I have no reason to believe that there is any lack of clever buyers and sellers in the market. Any potential buyer that sees a bargain would be a fool not to buy. Any potential seller that sees an overvaluation would be a fool not to sell
This may be the case, but I think you've got to be a little cautious when central banks have been forced (are still being forced) to buy $trillions in government bonds .. We seem to be in uncharted territories of market engineering

Then we've got hedge funds, like Chenavari Toro (which I'm glad to say I've got some exposure to), making profits from dislocations in market pricing due to QE .. Smart money has a lot more options nowadays, and not all of them make markets more efficient - people are losing somewhere

Image

I think like Shiller says, there are probably many shades of 'smart' and 'dumb' in the market, and unless we hold a true global market portfolio, we're all making fairly substantial active bets we're possibly not even aware of
"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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William Million
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Re: Are Equities Overpriced?

Post by William Million » Sat Dec 05, 2015 10:02 pm

mriordan23 wrote:I am a buy and hold guy in low expense index funds. That being said, I am curious everyone's thoughts on where stock prices are. Schiller seemed to think the market is "frothy" a couple months ago and to be careful. Any opinions?
Schiller also thought the market was frothy in 2010. He's more often wrong than right.

If you ask Bogleheads, who are cautious by nature, many will tell you returns will be lower going forward. I don't buy it. Equities aren't that much higher than where they were 15 years ago, and there are many significantly undervalued markets around the world. So if you're diversified globally, I believe you'll do fine. However, as always, it'll be a bumpy ride.

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Re: Are Equities Overpriced?

Post by Boglegrappler » Sat Dec 05, 2015 10:14 pm

When Bill Gross coined the term some years ago, "the new normal" describing a future of widespread and persistent low returns, many laughed at him, believing it to be another mistaken call like his short on Treasuries. Fewer are laughing now. It appears to me that we are indeed in the "new normal" now and will be stuck there for some time into the future. I hope that, like most future forecasts, my expectations of the future are wrong but I cannot convince myself that 10 year Treasury yields will soon return to 5 or 6 percent plus, or that real GDP growth will soon return to 3%+ long term, or that stocks will provide a long term real return of 7% for the next decade or so.
This is a decent summarization.

Equities are priced on the model of P= E(1+g)/ (k-g), where P is price, E is earnings , k is the "required" rate of return, and g is the growth rate in earnings. With some exceptions, the normal growth rate is now very modest, if its even positive at all. There are plenty of businesses that are essentially treading water. The "k" factor is a function of available rates of return on investment, which is basically reflected in the credit markets. The Fed may be suppressing very short rates, but there's very little demand for capital for incremental investment because for many, many businesses, there's not much return on it. Lender's are have trouble getting their cash working because borrowers can't earn a decent return on employing it

This leads to a high P/E situation, which is justified. The criticism of high valuations usually references history without regard to what historical interest rates were. At today's rates, and even if rates rise 100 basis points, most equities aren't all that over valued.

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Re: Are Equities Overpriced?

Post by bhsince87 » Sat Dec 05, 2015 11:06 pm

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.
BH87

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Maynard F. Speer
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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Sat Dec 05, 2015 11:13 pm

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.
And if enough people believe that, you've got the recipe for a Mt. Fuji size market bubble
"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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Re: Are Equities Overpriced?

Post by sperry8 » Sun Dec 06, 2015 12:57 am

I think they are on the high end. But that doesn't help me. Equity valuations can stay high (or low) for very long periods outside of their "true" valuation. Further, if you get out... you must decide when to get back in as well. Two calls must be made at near the exact right time (or the opportunity cost of being out while reduce/remove any gain from incorrect timing). So although I think they are high... what can I do? I must make two almost perfect timing calls to take advantage. And I certainly am unable to do that. So unless you think a crash is imminent AND further believe it will not come back (see Japan), then you have no choice but to be a Boglehead and stay the course.

What I do to optimize however is tax loss harvest, rebalance into lower performing segments within my AA, and keep taxes, ER and trading costs to a bare minimum. These are things I can control.
Humbling BH contest results: 2017: #516 of 647 | 2016: #121 of 610 | 2015: #18 of 552 | 2014: #225 of 503 | 2013: #383 of 433 | 2012: #366 of 410 | 2011: #113 of 369 | 2010: #53 of 282

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Re: Are Equities Overpriced?

Post by oliveoiltycoon » Sun Dec 06, 2015 1:13 am

Are equities overpriced? Yes, but so are bonds. So I'll buy them both anyway because what else would I buy?

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Re: Are Equities Overpriced?

Post by ofcmetz » Sun Dec 06, 2015 4:55 am

Toons wrote:Who knows,does it really matter?
Invest now and stay invested. :happy
^This. I don't think they are are a bargain, but like the namesake of this site says, "invest we must".
Never underestimate the power of the force of low cost index funds.

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Re: Are Equities Overpriced?

Post by cjking » Sun Dec 06, 2015 7:14 am

longinvest wrote:All assets are currently priced at their fairest perceived value by buyers and sellers in the market. I have no reason to believe that there is any lack of clever buyers and sellers in the market.
My experience extrapolated from postings on this forum is that the vast majority of US investors are nowhere near to being neutral when it comes to US equities versus anywhere-else-equities. I suppose US investors may not be the only ones who are not geographically neutral about where there money is invested.

I do assume be efficiency within individual markets, but not necessarily between them, and the bias I see suggests I have some hope of being right.

If one had the somewhat artificial dilemma of choosing between TSM and a world-ex-US fund, I think there is some reason to think the 1.9% extra smoothed earnings yield (1/PE10) of the latter may predict extra annualised extra returns of that order. Even if the world-ex-US fund doesn't out-perform, at least you'll have been more diversified holding it.

If Boglehead principles were strictly implemented, the equity fund recommended as the default/only one you need would be a world index tracker, not TSM.

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Re: Are Equities Overpriced?

Post by magneto » Sun Dec 06, 2015 11:00 am

Sorry, unable to answer yes or no.

Have posted this link in a parallel thread re 'Rule of Twenty' :-

http://www.smithers.co.uk/page.php?id=34

Make what you will of the data.

Using the smoothed but allegedly broken measure of Dividend Yield; taking current DY at just above 2%, and a normal expected current range of 1.8 to 3.0, leaves the S&P towards the top end price-wise, but far from the circa 1% excesses of 1999.

As in the 'Rule of Twenty' thread, the game-changer might be a significant uptick in inflation. Then all asset classes (other than cash) could be in some difficulties and maybe a period of underperformance due to the effects of rising interest rates.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Are Equities Overpriced?

Post by nedsaid » Sun Dec 06, 2015 11:11 am

Maynard F. Speer 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.
And if enough people believe that, you've got the recipe for a Mt. Fuji size market bubble
Except for that is not what is happening now. Look at all the doom and gloom just here on this forum. The financial press is very negative. My take is that valuations are stretched but not irrationally so. Sentiment is negative. Valuations are meh, mildly bullish or neutral or mildly bearish depending on how you read the tea leaves. Sentiment is pretty negative which normally is bullish. The economy is muddling along.

The game changer is an uptick in inflation which right now seems a remote possibility. Even if the Fed raises short term rates, will that really affect intermediate or long term rates? There is still a lot of slack in our economy. We seem to be an economy of twos. Two percent interest rates, two percent economic growth, two percent pay raises. Sports fans, this is not 1999.
A fool and his money are good for business.

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Re: Are Equities Overpriced?

Post by Prudence » Sun Dec 06, 2015 11:35 am

Yes, as of Friday, equity prices were frothy. So, over the short term, there could be a 50% drop in prices any time for a number of reasons. If you are a long term buy and hold investor with a horizon of 10+ years, you should be ok.

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Re: Are Equities Overpriced?

Post by siamond » Sun Dec 06, 2015 11:50 am

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.

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Re: Are Equities Overpriced?

Post by Maynard F. Speer » Sun Dec 06, 2015 11:53 am

nedsaid wrote:
Maynard F. Speer 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.
And if enough people believe that, you've got the recipe for a Mt. Fuji size market bubble
Except for that is not what is happening now. Look at all the doom and gloom just here on this forum. The financial press is very negative. My take is that valuations are stretched but not irrationally so. Sentiment is negative. Valuations are meh, mildly bullish or neutral or mildly bearish depending on how you read the tea leaves. Sentiment is pretty negative which normally is bullish. The economy is muddling along.

The game changer is an uptick in inflation which right now seems a remote possibility. Even if the Fed raises short term rates, will that really affect intermediate or long term rates? There is still a lot of slack in our economy. We seem to be an economy of twos. Two percent interest rates, two percent economic growth, two percent pay raises. Sports fans, this is not 1999.
This is true, but then there seemingly was a fair bit of pessimism over valuations leading up to 2000 - I'm not sure I remember so much of it in the media (seem to remember more: borrow money to invest in tech stocks .. To this day, if I find myself in the same camp as a Bloomberg presenter, I have to have a serious sit down and think about things)

Image

But then the market was 63% invested in equities going into 2000, whereas now it's only around 35% .. So I think there is skepticism, but the key is the actual 'wisdom of the markets' says you should only be about 35% equities (or 40, if you include 5% private equity)

Image

The reason equities seem expensive to me is there doesn't seem to be much of a safety net .. With rates rising, and key economic indicators falling, I think we should be seeing valuations pricing in more risk .. As has been said, if rates stay at zero, valuations reach infinity .. The risk of being a pessimist is it would probably be silly to rule out more QE - but I've got to say long/short equity is becoming more and more appealing to me .. AQR's QLEIX seems to be off to a good start
"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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Re: Are Equities Overpriced?

Post by nedsaid » Sun Dec 06, 2015 12:19 pm

Maynard, as normal your posts are very thought provoking.

I have never seen a chart of the relative market weighting of asset classes over time. What I have seen are charts of market weightings of a world portfolio.

1973-74 was the big bad bear market that everyone wanted to forget about. It was a piece of market history that was burned into the mind of investors. It is interesting that your chart shows that equities were 48.8% of the Global Portfolio then. My memory banks recall that P/E ratios got down to about 8. So stocks were an absolute steal then. In 1978, equities got down to 42.2% of market weight.

Another great buying opportunity would have been 2002 or 2003. In 2002, equities were down to 43.9% of the global financial markets. The next great opportunity would have been 2009, where equities were 40.3%.

My untrained eye would say that when equities get to be in the low forties in global market weight that this would be a flashing "buy" signal. Now (2012) we are at 37.7%. Hmmm. One difference between now and the buying opportunities that I cited is that since 2008, Central Banks have been doing the equivalent of dropping money from helicopters and governments have been doing a lot of borrowing. Corporations are doing a lot of borrowing now because the cost of capital is a lot lower for debt than it is for equity.

Even I would not tell people to sell the house, your belongings, and the kids to buy stocks based on stocks being a low percentage of Global Market weightings. What I would conclude is that the flooding of the markets with money has driven up the price of most asset classes.

So you can see why I have a dislike for mechanical investment strategies. Each market is in its own unique situation and context and I think investing based strictly on formulas will turn and bite you at some point. There is a broader picture to always be looking at.
A fool and his money are good for business.

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Re: Are Equities Overpriced?

Post by dc81584 » Sun Dec 06, 2015 6:34 pm

I'll go with "Yes."

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Re: Are Equities Overpriced?

Post by packer16 » Sun Dec 06, 2015 7:37 pm

It depends upon future interest rates. If you think rates are going to rise significantly then stocks are overvalued. If they remain the same then stocks are fairly valued. If they continue their decline then stocks are undervalued. One note is that historical average P/Es (calculated over longer periods than 5 years) are based upon much higher interest rates and thus are biased upward unless interest rates return to those levels. When I look at long term interest rate charts I see very little mean reversion.

I am in the camp of fairly valued to undervalued stock & steady or declining interest rates. I see most factors leading to lower rates, like the developed world aging population with more risk aversion, areas of the world gaining economic wealth (Asia) having a savings culture and technology keeping goods inflation in check.

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Re: Are Equities Overpriced?

Post by nedsaid » Mon Dec 07, 2015 2:09 am

Packer16, that is a good post above. I am mostly in your camp. Interest rates have an effect on P/E ratios. I noticed Burton Malkiel's book talked about this too. Lower interest rates influence the market towards higher P/E's and higher interest rates tend to result in lower P/E's.

We need to realize there are other factors at work. For example market euphoria pushed P/E ratios much higher than today in early 2000 even though interest rates were also much higher than today.

There are a number of factors that influence stock valuations. This is why I comment that you have to consider market and economic conditions when making judgments about valuations. This doesn't all happen in a vacuum.
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Rx 4 investing
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Re: Are Equities Overpriced?

Post by Rx 4 investing » Mon Dec 07, 2015 3:30 pm

It seems to me a lot of concerns stem from seasoned Forum participants who worry the less experienced BH investors might automatically link objective measures of risk and reward to predictions.

The rewards of stock market investing (equity investing) , for investors with a long time horizon, has been discussed endlessly. It is also well- documented in many investment texts. No one is disputing the longer the time frame, the less concerned an investor needs to be with valuations.

But for pre-retirees ( aging "Boomers" ) for example, or early retirees, they face the possibility of sequence of returns risk. The amount of time until the paychecks stops is getting shorter and shorter, or in some cases have already stopped. By having an appreciation market history and metrics, we can get a totally objective reading of where current markets are trading. This can help some of us calculate the upside/downside to fair value, giving us a better appreciation of whether this fits our individual risk profile. Objective risk/reward scales enable us to structure our portfolios unemotionally and rationally.

Some of us also monitor economic trends to try to better appreciate how these can modify investors' sentiment and move valuations closer or further away from fair value. For example, as Ned noted, interest rates and inflation can play a role in fair value market valuations. And they do matter to some extent. The “Rule of 20” captures the essential relationship between corporate earnings (cash flows) and discount rates (driven mostly by marginal inflationary expectations.) FYI...Since 1914, the average of the summation is 19.3 –- pretty close to the originator's “20.”

Rule-of-thumb formula: 20 minus Y-o-Y inflation rate = fair value

Fair value = 20 P/E minus 0.2 % = 19.8

Current P/E t-t-m of S & P 500 = 21.8

Observation: The market is trading about 9% above this historical relationship of 20 and fair value. ( 21.8- 20 = 1.8; 1.8 /20 = 9%). The market is now in an area of rising risk relative to history. That observation is different from a forecast.

Benjamin Graham was a market historian and mathematician. He wrote about the "20 P/E" relationship in The Intelligent Investor:

"People who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run."

Where is the market's price-to-dividend ratio relative to history?

Since 1871, the average dividend yield is 4.40%. Today the market's price-to- dividend ratio is 49 to 1 (or 2.0% dividend yield). The S & P 500, when measured by dividends, is trading around 110% above its historical average [ ( 49 - 23 ) /23 x 100 = 113% ].

Can the market go higher from here? Sure it can. Looking at market history however, as the market goes higher and higher, valuation metrics can give us an objective assessment of risk / reward. Here's a few more Graham quotes to think about ...

"The more dependent the valuation becomes on anticipations of the future – and the less it is tied to a figure demonstrated by past performance – the more vulnerable it becomes to possible miscalculation and serious error. "

"With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles; but we cling tenaciously and unquestioningly to our prejudices."

Best wishes for continuing success.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: Are Equities Overpriced?

Post by nedsaid » Mon Dec 07, 2015 9:59 pm

Rx4Investing, thanks for the excellent post above.

First, I will say that there is always hearty disagreement about market valuations. That is what makes a market. Certainly stocks are not a bargain here, I agree with that. But I don't see a big warning light flashing either. If we are 9% or so overvalued, that is no reason for panic. It suggests that future returns will be subdued.

Second, thanks for making the point about retirees and near retirees. They have more reason to be concerned about all of this. Younger investors have much less to be concerned about.

Third, I am in hearty agreement that valuations matter. If bonds had higher yields than today, I would likely lighten up on my stocks. But I don't get too excited about 2% or 3% bond yields.

Fourth, in other threads Rx4Investing has raised the point that investors should not dismiss long term bonds. If indeed we see a whiff of deflation, even 2% would look pretty darned good. We need to keep an open mind.
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Re: Are Equities Overpriced?

Post by bhsince87 » Mon Dec 07, 2015 10:28 pm

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.
BH87

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