The last 15 years

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

HomerJ wrote:Wait, CAPE is predicting 5%-7% REAL? And there are DOOM posts about this?

7% REAL is about the normal historical average for the U.S. stock market... So you're basically saying valuations don't matter.

Oh wait, your graph states that it is showing nominal returns, so inflation is NOT the reason the numbers are so far off... Your 10-year CAPE predictions have been wrong for many of the recent 10-year periods since CAPE went above 20. In fact, the stock market has returned near it's historical average for most of those 10-year periods, even though valuations have been quite high.
I believe CAPE currently predicts around 3-4% real (you've been misquoting something somewhere back there)


No, 20 is high, 25 is very high... Unless you're letting the last 23 years skew your thinking...

Here's the historical data BEFORE 1992.
What CAPE data do you want to exclude? Japan reaching a CAPE of 100 in the 80s?

As the US market never experienced a 20+ year bear market in the 20th century, it's reasonable to say valuations never got very high

Show a graph with just actual returns, and the CAPE predictions instead of 8 lines all smashed together. I just showed you data that disproved your assertion that we've gotten around 5%-7% the past 23 years, just like CAPE predicted.

How many years does the model have to be wrong before you wonder if something might be wrong with model?

(FYI - The accounting changes that lets 20 be the "normal" number for CAPE could be your saving grace - Adopt that, and the data starts fitting the model again!)
Your data shows 5% returns over 15 years .. This is perfectly within normal ranges

If we get more QE (and it doesn't collapse the economy) we'll get higher returns for longer .. But what the graph should show you is that, at no point does the market make a lasting jump away from estimates .. It overshot in the 80s, undershot in the 60s - but it's always drifting back towards normal

Just like getting 10 heads in a row ... The longer you keep flipping, the more your results will draft back towards 50:50
"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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JoMoney
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Re: The last 15 years

Post by JoMoney »

Maynard F. Speer wrote:... Just like getting 10 heads in a row ... The longer you keep flipping, the more your results will draft back towards 50:50
Well if we're going to take the stance that there's some bounded mean it must revert to, I like my chart of the "Siegel Constant":
Image
Things look right about average... And at least Siegel's average is looking at the same thing over time, unlike the Shiller PE which isn't using consistent earnings measurements or dealing with other structural changes between the periods being compared.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

JoMoney wrote:
Maynard F. Speer wrote:... Just like getting 10 heads in a row ... The longer you keep flipping, the more your results will draft back towards 50:50
Well if we're going to take the stance that there's some bounded mean it must revert to, I like my chart of the "Siegel Constant":
Image
Things look right about average... And at least Siegel's average is looking at the same thing over time, unlike the Shiller PE which isn't using consistent earnings measurements or dealing with other structural changes between the periods being compared.
Well it's a nice idea ..

Unfortunately I don't think it passes out-of-sample testing

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"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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JoMoney
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Re: The last 15 years

Post by JoMoney »

Maynard F. Speer wrote:...
Unfortunately I don't think it passes out-of-sample testing ...
:D
That was the out-of-sample, here's the full set including the initial period
Image
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
cottonseed1
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Re: The last 15 years

Post by cottonseed1 »

There is this notion that stocks will revert to their mean valuations in much the same way a fair coin toss will tend to converge on 50% heads and 50% tails. This implies over the next 200 years stocks will have similar valuations on average as 1871-2015.

Why 1871-2015? Good question. It is what data we have and can measure so let's just disregard anything we cannot measure! What about valuations before this time period? Aren't they just as important to computing our long term averages as recent data? Mathematically, if you are using an average then yes, they are just as important because they are weighted the same. Does it really make sense to say that Civil War era valuations (1861-1865) are just as important for predicting valuations 15 years hence as 2011-2015 valuations? Is the world/business climate, accounting standards, creation of SEC, access to capital markets all not substantially different now?

Here is some data to think about:

Mean CAPE 1871-1964 14.76
Mean CAPE 1965-2015 (Last 50 years) 19.77
Mean CAPE 1985-2015 (Last 30 years) 23.53
Meam CAPE 1995-2015 (Last 20 years) 26.80

Let's now look at the real returns over those time periods:

Real Return 1871-1964 7.62%
Real Return 1965-2015 5.47%
Real Return 1985-2015 8.20%
Real Return 1995-2015 7.08%

I think it is pretty clear from the data that valuations have been drifting upwards over the second half of the century, without a significant subsequent fall in real stock market returns. Am I saying that current valuations have no effect on future stock market returns? Of course not. Valuations certainly matter. It would be a ridiculous notion to assume that they do not. However, I think it is an equally ridiculous notion to assume that we can simply average out market valuations from 1871-2015, have confidence that markets will never change and for ever oscillate around a static mean.
Snowjob
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Re: The last 15 years

Post by Snowjob »

absent fear of collapse, shouldn't equity be priced to have the same expected return as bonds? I mean *everyone knows that when the market drops it just comes back up* right? If we base everything on the price movement of asset classes on our absurdly unique small set of history and ignore real risks I can see pricing trending to convergence. I suspect many financiers (most?) and many investors look at the historical price movements & relationships and do ignore the real risks and real fundamentals that drive future returns. Everyone here bashes looking at past performance but all of the theory they use to base their asset allocations / investment decisions / savings decisions on is just that, past performance -- at a slightly higher view.

I would argue that the wise investor, if she/he makes investing a priority in their life, will make (read alpha to the average investor) the majority of their money during the down markets as those will be the only substantial discounts available to them over their life time. Yes, valuations matter and buying in true carnage is a great decision. Buying the over priced equities is a hedge, behavioral first (see fear from my prior post) and sequence second (what if we remain permanently elevated for my working career)
Rodc
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Re: The last 15 years

Post by Rodc »

Why 1871-2015? Good question. It is what data we have and can measure so let's just disregard anything we cannot measure! What about valuations before this time period?
Entirely unclear that the market back to 1871 is sufficiently like the modern market (and economy in which it is embedded) to be meaningful.

We don't really have good complete clean data back to 1871.

Given that it is doubly questionable that one should look farther back.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Rodc
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Re: The last 15 years

Post by Rodc »

absent fear of collapse, shouldn't equity be priced to have the same expected return as bonds?
Absent stocks being more risky than bonds, yes they should not be expected to have higher return.

But they are more risky.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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HomerJ
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Re: The last 15 years

Post by HomerJ »

Let's start over.
Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr [nominal] returns peaking at around 5-7%, and that's generally what we've had
The majority of the 10-year nominal returns since the mid-90s have been much higher than 5%-7%. Indeed, they've been in the 9%-11% range, which is the historical average for the U.S. stock market. I provided the data.

You don't get to say that CAPE predictions have generally been accurate over the past 23 years, because they haven't been.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

HomerJ wrote:Let's start over.
Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr [nominal] returns peaking at around 5-7%, and that's generally what we've had
The majority of the 10-year nominal returns since the mid-90s have been much higher than 5%-7%. Indeed, they've been in the 9%-11% range, which is the historical average for the U.S. stock market. I provided the data.

You don't get to say that CAPE predictions have generally been accurate over the past 23 years, because they haven't been.
Here's another way to put it .. Since 1997, stocks have underperformed long-term treasuries, and spent more years lagging total bonds than ahead of them .. CAGR's been 6.43%

Average annual return may give a slightly different result - but sequence of returns is very important in these markets .. Also worth understanding CAPE doesn't have to be looked at over 10 years - we may choose to look at 10 year returns, but mean reversion is a long-term effect we could look at over all sorts of time periods

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"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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HomerJ
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Re: The last 15 years

Post by HomerJ »

Maynard F. Speer wrote:
HomerJ wrote:Let's start over.
Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr [nominal] returns peaking at around 5-7%, and that's generally what we've had
The majority of the 10-year nominal returns since the mid-90s have been much higher than 5%-7%. Indeed, they've been in the 9%-11% range, which is the historical average for the U.S. stock market. I provided the data.

You don't get to say that CAPE predictions have generally been accurate over the past 23 years, because they haven't been.
Here's another way to put it .. Since 1997, stocks have underperformed long-term treasuries, and spent more years lagging total bonds than ahead of them .. CAGR's been 6.43%
And from 1996-today, stocks have returned 7.9%... Even though CAPE in 1996 hit 25. About the same as today. I'd be happy with 7.9% returns over the next 20 years.

So I guess we just proved both of us can prove our points by changing starting points just slightly. A common problem with stock market discussions.

But that's neither here or there. You showed a chart that showed ten-year returns, and you specifically stated that 10-year return predictions have been correct since the mid 90s.

But that was incorrect. CAPE has not been a good predictor of 10-year returns since the mid 90s.
Also worth understanding CAPE doesn't have to be looked at over 10 years - we may choose to look at 10 year returns, but mean reversion is a long-term effect we could look at over all sorts of time periods
Oh of course, we can always just play with different time periods until we get the results we want.

There will be another crash someday, maybe it's already started... Stock market does run in cycles. I do not believe CAPE gives any actionable information, however, about those cycles.

So far, buy and holding through good times and bad times has worked just fine, returning 9%-10% over the long-term. There's no need to try and time the market based on a weakly-correlated valuations model. Trying to go in and out of the market based on "signals" to make extra return is more likely to make you less money.
Elysium
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Re: The last 15 years

Post by Elysium »

Interesting thread. There will always be someone who claims valuations are too high, now is not a good time to invest in equities, so on ... and the crystal ball is always hazy. Hindsight is always 20/20. Had we known we all would have purchased long treasuries back in 1999 and forget equities for 15 years.

Fact of the matter is, regardless of relatively lower returns we still made money with regular saving and investing.

I started investing in 1999 with $3,000 as capital, and in the last 17 years through regular contributions and investment gains, this amount has grown into near seven figures. I could be doing better I guess had we were not in such low return environment, but I cannot complain. Market timing would have ended up with me not having even half of it.
cottonseed1
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Re: The last 15 years

Post by cottonseed1 »

Rodc wrote:
Why 1871-2015? Good question. It is what data we have and can measure so let's just disregard anything we cannot measure! What about valuations before this time period?
Entirely unclear that the market back to 1871 is sufficiently like the modern market (and economy in which it is embedded) to be meaningful.

We don't really have good complete clean data back to 1871.

Given that it is doubly questionable that one should look farther back.
I completely agree with the bold part, which I why I find the idea of using the 1871-2015 valuation mean unappealing. Why should we weight 1871-1901 the same as 1985-2015 when determining the mean which valuations will revert? Should recent data not be weighted more heavily?

It is one thing to say that on average higher market valuations will tend to produce lower future returns and lower market valuations tend to produce higher returns. This is a general statement that I think most everyone can agree with.

It is an entirely different beast when you take a valuation mean from 1871-2015, state that this is the mean markets will revert to, and in order to do so will need to drop by 30%-50% or compound at 2% for the next 10 or 15 years. Applying this level of precision to markets should always be met with skepticism.
Day9
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Re: The last 15 years

Post by Day9 »

If you don't like data from 1871 then I guess you really hate studies that look at long term interest rates in medieval Venice and classical Rome!
I'm just a fan of the person I got my user name from
cottonseed1
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Re: The last 15 years

Post by cottonseed1 »

Maynard F. Speer wrote:
HomerJ wrote:Let's start over.
Maynard F. Speer wrote:Since the mid-90s we've been predicting 10-yr [nominal] returns peaking at around 5-7%, and that's generally what we've had
The majority of the 10-year nominal returns since the mid-90s have been much higher than 5%-7%. Indeed, they've been in the 9%-11% range, which is the historical average for the U.S. stock market. I provided the data.

You don't get to say that CAPE predictions have generally been accurate over the past 23 years, because they haven't been.
Here's another way to put it .. Since 1997, stocks have underperformed long-term treasuries, and spent more years lagging total bonds than ahead of them .. CAGR's been 6.43%

Average annual return may give a slightly different result - but sequence of returns is very important in these markets .. Also worth understanding CAPE doesn't have to be looked at over 10 years - we may choose to look at 10 year returns, but mean reversion is a long-term effect we could look at over all sorts of time periods
Using Shiller's data in Jan of 1997 the CAPE was 28.33. The historical CAPE mean from 1871-1996 was 15. We have a valuation of almost DOUBLE the historical mean. As a matter of fact, there had been only one other time in history that the CAPE had reached those levels. That was the fall of 1929. The real return on stocks from 1929-1939 was 0.81%. From 1929-1947 the real return on stocks was 1.08%. With a valuation so extreme surely stock market returns from 1997 onward would be CONSIDERABLY lower than the past, right?

Real return 1997-2007 5.41%
Real return 1997-2015 5.21%
Real return 1871-2015 6.86%

Another data point worth considering. In 2000 the CAPE reached an astronomical 44. Real stock market returns from 2000-2015 were 1.83%. The reason I point this out is because 1.5-2.0% real is a common forecast for expected 10-15 year returns floating around the internet given current US valuations. The current CAPE is 24-25.
lee1026
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Re: The last 15 years

Post by lee1026 »

When you read stories about things like the Dell-EMC deal, you end up with an impression that either stocks are incredibly undervalued, or that (junk) bonds are incredibly overvalued.

The key line from the analysis:

Dell will spend less on the annual financing cost (interest expense and principal payments) of the $49.5 billion in debt used to purchase EMC, than EMC did on equity dividends and share buybacks in the last 12 months.

EMC isn't a value company; EMC isn't a company that is paying all of its profits out to shareholders; and yet you can issue junk bonds to buy the company, and the net flow of cash to shareholders would be bigger than interest and principal payments combined.
Hulk
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Re: The last 15 years

Post by Hulk »

Boglenaut wrote:Good one!

But this is how people see it:

he money you invested in Jan 2001 - has made 5% a year - $10,000 invested is now worth $20,779
The money you invested in Jan 2002 - has made 7% a year - $10,000 invested is now worth $24,382
The money you invested in Jan 2003 - has made 9% a year - $10,000 invested is now worth $30,103
The money you invested in Jan 2004 - has made 7% a year - $10,000 invested is now worth $22,095
The money you invested in Jan 2005 - has made 7% a year - $10,000 invested is now worth $21,107
The money you invested in Jan 2006 - has made 6% a year - $10,000 invested is now worth $18,834
The money you invested in Jan 2007 - has made 6% a year - $10,000 invested is now worth $16,472
The money you invested in Jan 2008 - has made 7% a year - $10,000 invested is now worth $17,614
The money you invested in Jan 2009 - has made 15% a year - $10,000 invested is now worth 27,104
The money you invested in Jan 2010 - has made 12% a year - $10,000 invested is now worth $19,648
The money you invested in Jan 2011 - has made 10% a year - $10,000 invested is now worth $16,188
The money you invested in Jan 2012 - has made 11% a year - $10,000 invested is now worth $15,515
The money you invested in Jan 2013 - has made 9% a year - $10,000 invested is now worth $13,334
The money you invested in Jan 2014 - has made 2% a year - $10,000 invested is now worth $10,456
The money you invested in Jan 2015 - has LOST 7% this year - $10,000 invested is now worth $9300!!!!!
+1
haha. true
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

HomerJ wrote:And from 1996-today, stocks have returned 7.9%... Even though CAPE in 1996 hit 25. About the same as today. I'd be happy with 7.9% returns over the next 20 years.

So I guess we just proved both of us can prove our points by changing starting points just slightly. A common problem with stock market discussions
But today we're still in that top 90% percentile of historic valuations ... In your words "very high" .. So we're measuring from one peak to another .. Things *should* look good now

I said 10-year estimates are as good as they always have been - and when you look at them charted over long periods, we get 5-10% over and under-shooting all the time, but it still reverts back .. And this is why I recalculated returns for the market if it were correctly valued

If we get the bear market we need now, and stocks only go back to average valuations (not even under shooting on the cheap), then when you calculate your returns from 2001, they'll be much closer to mine ... And if history teaches us anything, that's a much better assumption
"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
cjking
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Re: The last 15 years

Post by cjking »

We don't have to get bogged down in arguments about mean reversion. I have US equities on an expected real return of 4.0% at the moment, based on no future mean-reversion whatsoever.

Five things that might explain why realised returns turn out to be more or less than that:-
1. A long-term decrease in earnings multiples
2. A long-term increase in earning multiples
3. A long-term (not cyclical) collapse in earnings
4. An unprecedented huge and sustained jump in earnings.
5. You measure using a fixed holding period instead of using (say) the average of all possible holding periods from today. For example, you look at a fixed 10 year period, despite the obvious flaw that for any single period short enough to be of interest, noise is going have far more say than signal in determining the result.

I think 1 is slightly more likely than 2, and 3 is infinitely more likely than 4, however I choose not to try and take these factors into account. Also, x being more likely than y may be unimportant, if the probabilities of both are fairly low.

The question isn't should you be in or out of US equities at this valuation, the question is what proportion should you allocated compared to other assets, which could include foreign equities and unlisted real estate. Direct real estate is relatively difficult, but world-ex-us equities calculated on the same basis as the US has an expected return of 6.4%.

Given two halves of the world, one with an expected return of 4.0%, the other 6.4%, it makes sense for the equity portfolio to be a world tracker, if you prioritise diversification, or a world-ex-us tracker if you prioritise returns. It doesn't make sense to choose US equities. Not even if you believe valuation-based investing is nonsense. If you think markets really are efficient on a world-wide scale, then you lose no diversification or returns by choosing world-ex-us instead of US, but you insure yourself against being wrong about the usefulness of valuations. (Though I would add that world-ex-us is internally much more diversified than the US, so these are very broad brush arguments. Also, differences in expense ratios are small change in the overall context.)

Having said that, if you do choose to shun world-ex-us equities for some reason, current valuations don't necessarily mean you should avoid US equities. They simply mean you should choose your exposure on the basis of a central estimate of 4% returns. That might be a lot more than anything else you are both able and willing to invest in.
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HomerJ
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Re: The last 15 years

Post by HomerJ »

duplicate
Last edited by HomerJ on Tue Jan 26, 2016 10:59 am, edited 1 time in total.
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HomerJ
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Re: The last 15 years

Post by HomerJ »

Maynard F. Speer wrote:I said 10-year estimates are as good as they always have been
You are incorrect. Since 1992, the 10-year estimates have been not been good. The data is right there.
If we get the bear market we need now, and stocks only go back to average valuations (not even under shooting on the cheap), then when you calculate your returns from 2001, they'll be much closer to mine ... And if history teaches us anything, that's a much better assumption
It still won't change the all the 10-year results from the past years starting from 1992-2002 up through 2005-2015... Those ten-year periods already happened.

Your model doesn't allow for stocks to stay over-valued for nearly 23 years straight. Even if we have a crash tomorrow, your model has flaws.

The model is based on history's data points... Say we crash, get back to "average" valuations, and then go back above 20 CAPE again... How is your model going to predict what happens next? Will it be like most of the 1900s where a CAPE of 20+ signals a reversion to mean in a few years? Or will it take 23 years again? Pretty huge differences, and both data series will exist in the historical record. How useful will the CAPE model be going forward for predicting returns?

All CAPE seems to predict is that markets run in cycles, but we already knew that. No one knows the schedule however, and CAPE has proven (even if we crash tomorrow!) to be unable to predict the timing of the cycles.

You seem to think that if we could just have a 50% crash soon, that will prove that CAPE is correct. But it won't. It's already failed. Predicting that a 50% crash will happen SOMEDAY is worthless, and something that is already known.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

10 years is an arbitrary measure .. It may be that this way of viewing the data isn't working for you

This chart is another way of looking it - and here we're using real returns and a longer time frame ... You see here we've got lots of out-of-sample results (international), and we've got ranges of returns

Now this is essentially a stochastic model .. The more accurate the model becomes, the more precisely it estimates the probability of a particular result .. This doesn't mean we always expect to find the median output .. Of course, if valuation told you where the market would be in 10 years, then the whole sequence of returns would be linear and predetermined .. We use stochastic models in everything from quantum physics to setting insurance premiums

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lee1026
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Re: The last 15 years

Post by lee1026 »

How is international results out of sample? Shiller had access to all of these data when he came up with the concept in the early 1990s. Out of sample would be to use the data from early 90s to now, and only use the mean P/E from 1871-1992. Under those circumstances, shiller P/E fails to predict 10 year returns.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

lee1026 wrote:How is international results out of sample? Shiller had access to all of these data when he came up with the concept in the early 1990s. Out of sample would be to use the data from early 90s to now, and only use the mean P/E from 1871-1992. Under those circumstances, shiller P/E fails to predict 10 year returns.
Shiller didn't come up with the concept - Ben Graham had been cyclically adjusting his P/E ratios at least half a century earlier

But you see, if you understand this chart (this is why I picked it), it requires no assumptions about mean CAPE ratios .. It's showing you absolute CAPE - you see the columns? 0-8 .. 8-12 .. 12-16

How you choose to use the CAPE ratio is up to you .. Some of us concoct an historical average; some of us look at 10 year returns; some of us use relative CAPE (how expensive is the US compared to Europe?); some use absolute CAPE .. The data's right there in that chart - it's up to you how you apply it
"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
lee1026
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Re: The last 15 years

Post by lee1026 »

Shiller didn't come up with the concept - Ben Graham had been cyclically adjusting his P/E ratios at least half a century earlier
But was it famous? I wasn't alive in the early 80s; I wouldn't know. But the fact that we always call it Shiller P/E suggest that it wasn't. And generally with these things, details matter. 10 years vs 8 years vs 5 years or since the last recession. Whether the earnings are inflation adjusted or in nominal terms. What kind of earnings is used, and so on and so forth. Shiller's method was probably used because it is easy to compute and it works well in sample, but I don't think you get to say that someone did something similar long ago, and therefore it is out-of-sample. If you want to use the date for out of sample as Ben Graham's date, we will need to use his method, not Shillers.
But you see, if you understand this chart (this is why I picked it), it requires no assumptions about mean CAPE ratios .. It's showing you absolute CAPE - you see the columns? 0-8 .. 8-12 .. 12-16
How much of the data comes after 1992 or so? Since 15 years ago was 2001, I suspect nearly everything in that chart is in sample.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

lee1026 wrote:
Shiller didn't come up with the concept - Ben Graham had been cyclically adjusting his P/E ratios at least half a century earlier
But was it famous? I wasn't alive in the early 80s; I wouldn't know. But the fact that we always call it Shiller P/E suggest that it wasn't. And generally with these things, details matter. 10 years vs 8 years vs 5 years or since the last recession. Whether the earnings are inflation adjusted or in nominal terms. What kind of earnings is used, and so on and so forth. Shiller's method was probably used because it is easy to compute and it works well in sample, but I don't think you get to say that someone did something similar long ago, and therefore it is out-of-sample. If you want to use the date for out of sample as Ben Graham's date, we will need to use his method, not Shillers.
But you see, if you understand this chart (this is why I picked it), it requires no assumptions about mean CAPE ratios .. It's showing you absolute CAPE - you see the columns? 0-8 .. 8-12 .. 12-16
How much of the data comes after 1992 or so? Since 15 years ago was 2001, I suspect nearly everything in that chart is in sample.
It's like Fama & French didn't invent value investing - Ben Graham had been doing that influentially for decades, with students like Warren Buffett ... But it was controversial - it went against a prevailing perspective (that everything was perfectly priced) - and therefore any outlier results (like Buffett's investing track record) could be explained as statistical anomalies

What Fama & French did - as did Shiller with the PE10 - was to build a model that explained why it worked ... Fama decided value involved a trade-off with risk; Shiller grounded his findings in behavioural finance and investor psychology ... Both received Nobel Prizes

Actually if you were data mining, you'd probably use PE7 ... The thing to realise with CAPE is in some ways it's just window dressing on a theory of behavioural finance ... Most valuation metrics actually give very close estimates (much closer to each other than the likely error in what they're estimating) - CAPE really just reduces a little of the noise on regular P/E ratios ... But certainly we were using cyclically adjusted PE ratios to estimate market value before we had enough data to see whether it worked with international markets
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lee1026
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Re: The last 15 years

Post by lee1026 »

Thing about Fama-French and value is that they picked a very odd metric for value - price to book ratio.

While everything in a company's report is in some ways different from reality, book value is especially bad. Book value tells you what a company paid for its current assets minus statutory depreciation, not what they are worth. This even goes for things that are even trivially easy to value, such as say, the value of IBM shares held by berkshire hathaway, which sits on Berkshire's books for far less than its actual value. You can tell me that Ben Graham did value investing, but I am pretty sure that he tried to figure out what things are actually worth, not just using the book value. So if you want to argue anything based on "value investing" based on its Fama-French formulas, out of sample starts with when Fama-French became a thing, or somewhere in the mid 90s.
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Re: The last 15 years

Post by UADM »

Past results don't correlate with future returns, especially considering how good the US markets have been in the past 20 years.
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Re: The last 15 years

Post by dunscap »

UADM wrote:Past results don't correlate with future returns,
I'm with you...
especially considering how good the US markets have been in the past 20 years.
Odd to put "especially" before the second half of your sentence when it contradicts the first half.
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JoMoney
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Re: The last 15 years

Post by JoMoney »

dunscap wrote:...
especially considering how good the US markets have been in the past 20 years.
Odd to put "especially" before the second half of your sentence when it contradicts the first half.
Also especially odd given history. The past 20 year period (from 1/1/1996 - 12/31/2015) for the S&P500 had a CAGR of 8.2% (source: Morninstar)
Which is low, not "good" relative to the past 50 rolling 20 year periods (Source: DFA Matrix Book)

Code: Select all

1996 to 2015: 8.2%
1995 to 2014: 9.9%
1994 to 2013: 9.2%
1993 to 2012: 8.2%
1992 to 2011: 7.8%
1991 to 2010: 9.1%
1990 to 2009: 8.2%
1989 to 2008: 8.4%
1988 to 2007: 11.8%
1987 to 2006: 11.8%
1986 to 2005: 11.9%
1985 to 2004: 13.2%
1984 to 2003: 13%
1983 to 2002: 12.7%
1982 to 2001: 15.2%
1981 to 2000: 15.7%
1980 to 1999: 17.9%
1979 to 1998: 17.7%
1978 to 1997: 16.6%
1977 to 1996: 14.6%
1976 to 1995: 14.6%
1975 to 1994: 14.6%
1974 to 1993: 12.8%
1973 to 1992: 11.3%
1972 to 1991: 11.9%
1971 to 1990: 11.2%
1970 to 1989: 11.6%
1969 to 1988: 10.3%
1968 to 1987: 9.9%
1967 to 1986: 11%
1966 to 1985: 9.6%
1965 to 1984: 8.7%
1964 to 1983: 9.2%
1963 to 1982: 9.1%
1962 to 1981: 7.5%
1961 to 1980: 7.5%
1960 to 1979: 7.5%
1959 to 1978: 6.5%
1958 to 1977: 8.1%
1957 to 1976: 7.9%
1956 to 1975: 7.1%
1955 to 1974: 6.9%
1954 to 1973: 10.9%
1953 to 1972: 11.7%
1952 to 1971: 11.6%
1951 to 1970: 12.1%
1950 to 1969: 13.4%
1949 to 1968: 14.9%
1948 to 1967: 14.6%
1947 to 1966: 13.7%
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Re: The last 15 years

Post by HomerJ »

JoMoney wrote:
dunscap wrote:...
especially considering how good the US markets have been in the past 20 years.
Odd to put "especially" before the second half of your sentence when it contradicts the first half.
Also especially odd given history. The past 20 year period (from 1/1/1996 - 12/31/2015) for the S&P500 had a CAGR of 8.2% (source: Morninstar)
Which is low, not "good" relative to the past 50 rolling 20 year periods (Source: DFA Matrix Book)

Code: Select all

1996 to 2015: 8.2%
1995 to 2014: 9.9%
1994 to 2013: 9.2%
1993 to 2012: 8.2%
1992 to 2011: 7.8%
1991 to 2010: 9.1%
1990 to 2009: 8.2%
1989 to 2008: 8.4%
1988 to 2007: 11.8%
1987 to 2006: 11.8%
1986 to 2005: 11.9%
1985 to 2004: 13.2%
1984 to 2003: 13%
1983 to 2002: 12.7%
1982 to 2001: 15.2%
1981 to 2000: 15.7%
1980 to 1999: 17.9%
1979 to 1998: 17.7%
1978 to 1997: 16.6%
1977 to 1996: 14.6%
1976 to 1995: 14.6%
1975 to 1994: 14.6%
1974 to 1993: 12.8%
1973 to 1992: 11.3%
1972 to 1991: 11.9%
1971 to 1990: 11.2%
1970 to 1989: 11.6%
1969 to 1988: 10.3%
1968 to 1987: 9.9%
1967 to 1986: 11%
1966 to 1985: 9.6%
1965 to 1984: 8.7%
1964 to 1983: 9.2%
1963 to 1982: 9.1%
1962 to 1981: 7.5%
1961 to 1980: 7.5%
1960 to 1979: 7.5%
1959 to 1978: 6.5%
1958 to 1977: 8.1%
1957 to 1976: 7.9%
1956 to 1975: 7.1%
1955 to 1974: 6.9%
1954 to 1973: 10.9%
1953 to 1972: 11.7%
1952 to 1971: 11.6%
1951 to 1970: 12.1%
1950 to 1969: 13.4%
1949 to 1968: 14.9%
1948 to 1967: 14.6%
1947 to 1966: 13.7%

Interesting data... Note, however, that real results would be better, if you want compare the different time periods. Inflation has been especially low for the past 5-10 years, which would skew the results upwards a bit compared to other periods where inflation was higher.

But anyway, 8.2% nominal is a lot better than what was predicted by CAPE. At the time, in 1996, CAPE was at record highs not seen since 1929, right before the Great Depression. Anyone who followed CAPE was pretty sure doom was coming. Shiller himself predicted 0% real returns.

Instead, we got 8.2% annual nominal return for 20 years. Buying and holding and doing nothing got you 8.2% return even in the BAD years.

I don't understand how CAPE proponents can be so certain their system works, when it has failed so spectacularly in the recent past. I mean, it would be one thing if they tried to explain away the recent failure of CAPE, saying that these last 20 years have just been an outlier that is acceptable and possible in CAPE theory, but instead they baldly state that CAPE has actually worked great over the past 20 years. That it has successfully predicted much lower returns, even though returns have only been a little lower, and nowhere near the CAPE doom predictions.
Last edited by HomerJ on Fri Jan 29, 2016 11:34 am, edited 1 time in total.
magneto
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Re: The last 15 years

Post by magneto »

The question that arises from the US stocks erratic but generally upwards progress nor'-east since 1999/2000; is whether or not US stocks steady progress will continue for a further 15 years. :?:

Is the US stock market progress since 2000 typical or atypical. :?:

Various markets around the world have not seen such steady progress.

E.G. The UK market (FTSE100) is trading well below the giddy 6930 level reached in December 1999. For a UK only investor (unlikely we know) they would be 40% down in inflation adjusted/purchasing power terms, unless they had accumulated dividends and rebalanced astutely.
How far do we have to stand back from the FTSE100 wall-chart to see steady upwards progress. :?:
Perhaps too far for those in or approaching retirement. :!:

So the questions are :-

+ Is the US stock market progress since 2000 typical or atypical. :?:
+ Does the US market have some special property that sets it apart. :?:
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

HomerJ wrote:But anyway, 8.2% nominal is a lot better than what was predicted by CAPE. At the time, in 1996, CAPE was at record highs not seen since 1929, right before the Great Depression. Anyone who followed CAPE was pretty sure doom was coming. Shiller himself predicted 0% real returns.

I don't understand how CAPE proponents can be so certain their system works, when it has failed so spectacularly in the recent past
I think we're better at dealing with uncertainty ... Here's the chart from Philosophical Economics ... 1996, pm-adjusted CAPE seemed to be estimating about 7.5% .. We got 8.2%

I don't know how many different ways I can say it, but that's what we'd call a typical margin of error .. 1988 and 1964 are your outlier results

Image
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

magneto wrote:The question that arises from the US stocks erratic but generally upwards progress nor'-east since 1999/2000; is whether or not US stocks steady progress will continue for a further 15 years. :?:

Is the US stock market progress since 2000 typical or atypical. :?:

Various markets around the world have not seen such steady progress.

E.G. The UK market (FTSE100) is trading well below the giddy 6930 level reached in December 1999. For a UK only investor (unlikely we know) they would be 40% down in inflation adjusted/purchasing power terms, unless they had accumulated dividends and rebalanced astutely.
How far do we have to stand back from the FTSE100 wall-chart to see steady upwards progress. :?:
Perhaps too far for those in or approaching retirement. :!:

So the questions are :-

+ Is the US stock market progress since 2000 typical or atypical. :?:
+ Does the US market have some special property that sets it apart. :?:
I think companies like Apple (and whether Europe or Asia could create one) maybe set the US apart a bit .. But the general economy, I think the UK and Europe are just as good for small-caps and unquoted companies

I'm a mostly UK investor (haven't been in US stocks for years), but I don't know that many of us actually invest in FTSE 100 or All Share trackers (I never have) ... The FTSE 100 derives about 80% of its revenues from overseas, and is very heavily weighted towards energy, banking and mining ... So it's an odd index, and it's been a disaster (over this period .. I think there'll be a time to buy again)

The big UK active large-cap funds, like the Edinburgh Investment Trust/Invesco Perpetual High Income/Woodford Equity Income/etc. have virtually mirrored S&P 500 performance, I think .. largely by avoiding sectors like energy and mining, and having similar sector weightings to the US .. Again, a matter of recency perhaps - if I come across as an index-cynic, it's because from my experience indexing doesn't always work (when you've got an index which is very unbalanced and perhaps not very exposed to your own economy)
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Re: The last 15 years

Post by HomerJ »

Maynard F. Speer wrote:
HomerJ wrote:But anyway, 8.2% nominal is a lot better than what was predicted by CAPE. At the time, in 1996, CAPE was at record highs not seen since 1929, right before the Great Depression. Anyone who followed CAPE was pretty sure doom was coming. Shiller himself predicted 0% real returns.

I don't understand how CAPE proponents can be so certain their system works, when it has failed so spectacularly in the recent past
I think we're better at dealing with uncertainty ... Here's the chart from Philosophical Economics ... 1996, pm-adjusted CAPE seemed to be estimating about 7.5% .. We got 8.2%

I don't know how many different ways I can say it, but that's what we'd call a typical margin of error .. 1988 and 1964 are your outlier results

Image
That chart is a mess...

Okay, look at the Shiller P/E line.. the light green line... In 1996, CAPE was above 25, which hadn't happened since the Great Depression... YOUR chart shows an estimate of around 2.5% nominal, which tracks with Shiller's paper written in 1996 when he predicted 0% real. The actual 10-year returns was in the 8% nominal range.

That is NOT close, NOT with typical margin of error.

Okay, so now you've switched to a pm-adjusted CAPE, which has a prediction 5% higher than Shiller P/E.... Ten bucks says that model didn't exist in 1996, and instead is a new back-tested model, that fixes all the problems with the Shiller P/E model that we've discovered over the past 20 years.

And if THAT doesn't work going forward, there will be a new model called the pm-adjusted, free-floating, cash-flow-neutral CAPE which will throw in some more variables to get the line close to the actual historical results....

The point is, I'm talking about the original Shiller PE model, which has failed over the past 20 years, and you're talking about something else, but calling it simply CAPE. The fact that you are using a pm-adjusted CAPE (what does that even mean?) instead of CAPE means you AGREE with me that CAPE failed over the past 20 years.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

HomerJ wrote:That chart is a mess...

Okay, look at the Shiller P/E line.. the light green line... In 1996, CAPE was above 25, which hadn't happened since the Great Depression... YOUR chart shows an estimate of around 2.5% nominal, which tracks with Shiller's paper written in 1996 when he predicted 0% real. The actual 10-year returns was in the 8% nominal range.

That is NOT close, NOT with typical margin of error.

Okay, so now you've switched to a pm-adjusted CAPE, which has a prediction 5% higher than Shiller P/E.... Ten bucks says that model didn't exist in 1996, and instead is a new back-tested model, that fixes all the problems with the Shiller P/E model that we've discovered over the past 20 years.

And if THAT doesn't work going forward, there will be a new model called the pm-adjusted, free-floating, cash-flow-neutral CAPE which will throw in some more variables to get the line close to the actual historical results....

The point is, I'm talking about the original Shiller PE model, which has failed over the past 20 years, and you're talking about something else, but calling it simply CAPE. The fact that you are using a pm-adjusted CAPE (what does that even mean?) instead of CAPE means you AGREE with me that CAPE failed over the past 20 years.
We do lots of things to correct issues with valuation metrics ... But even at 2.5%, this is well within normal standard deviation ... If you want an outlier result it's the 14% in 1987 (which would have had you absolutely livid)

Remember CAPE isn't designed to estimate 10 year returns ... Mean reversion is a long-term tendency - not a 10-year tendency ... What the chart should show you is that all valuation metrics estimate 10-year returns within a reasonable margin error
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Re: The last 15 years

Post by HomerJ »

Maynard F. Speer wrote:... But even at 2.5%, this is well within normal standard deviation ...
It's 5.5% off... Predicts 2.5% nominal, actual was 8% nominal. If you mean 5.5% difference is one standard deviation, then there's no point in estimating returns at all with that large of a spread.
We do lots of things to correct issues with valuation metrics
Yes, this is called backtesting. Which rarely seems to work going forward.
Remember CAPE isn't designed to estimate 10 year returns
Then why are people using it to predict returns? We constantly see posts (even from Bogle himself), stating that returns are likely to be "this low number going forward" because of "valuations". But when they said that in recent past, they were wrong. Shiller himself predicted 0% real in 1996... He was way off. Doesn't mean his model is completely wrong. But it obviously isn't completely right, either. So why should we invest based on his model?
Mean reversion is a long-term tendency - not a 10-year tendency
So, not actionable. And yes, bull markets are followed by bear markets which are then followed by bull markets. But we don't know when. But someday. How many PhDs have spent their whole lives working on this stuff to tell us that?
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Re: The last 15 years

Post by HomerJ »

Mean reversion is a long-term tendency - not a 10-year tendency
Also, people in 1996 certainly assumed mean reversion to happen in the short-term... Up to that point, mean reversion occurred within a few years of hitting such high valuations.

Mean reversion being a "long-term tendency" is a brand new point of view.

Faced with 23 years of PE10 over 20, CAPE proponents either had to admit that the model was flawed and missing a variable or two, or change their tune about how long it takes to revert to the mean.

Either way, it makes CAPE non-actionable. It's a pretty worthless theory that states "when this signal hits 25, mean reversion will occur in 2-30 years"
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Re: The last 15 years

Post by lee1026 »

Remember CAPE isn't designed to estimate 10 year returns ... Mean reversion is a long-term tendency - not a 10-year tendency ... What the chart should show you is that all valuation metrics estimate 10-year returns within a reasonable margin error
I thought CAPE became popular precisely because it did a good job of estimating 10 year returns in backtesting? So what does it estimate? 15 year returns? 20?

To a certain extent, the time period selection is subject to another data mining fallacy - since you are defining after the fact what "long term" actually means, it will always look good.
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Re: The last 15 years

Post by rbaldini »

For what it's worth to this conversation (which somehow sprang from a very innocuous original post):

When I used cross-validation to compare the predictive performance of a Shiller P/E model to a simple "just-guess-the-average" model on S&P 500 annual return data, the P/E did appear to enjoy some predictive advantage (in terms of squared error). But the improvement was quite modest - only about 5.5% error reduction. Both models are "bad", in that in any given year, the return is likely to deviate wildly from the predicted value. It's just that P/E may be slightly better.

I did not look to see if the performance was worse in recent decades.

I'd be happy to share details.

Here's the magnitude of the difference: The simple P/E model I used predicts that the S&P 500 will return about 3.9% over the next year, as opposed to about 9.5% if you just take the historical (geometric) average since 1928. Now this estimate will almost certainly be off by at least a few percent, so don't hold your breath (and don't take this as financial advice). It certainly doesn't predict a 50% correction, or even a negative return.
Last edited by rbaldini on Sat Jan 30, 2016 1:46 pm, edited 11 times in total.
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JoMoney
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Re: The last 15 years

Post by JoMoney »

magneto wrote:The question that arises from the US stocks erratic but generally upwards progress nor'-east since 1999/2000; is whether or not US stocks steady progress will continue for a further 15 years. :?:

Is the US stock market progress since 2000 typical or atypical. :?:

Various markets around the world have not seen such steady progress.

E.G. The UK market (FTSE100) is trading well below the giddy 6930 level reached in December 1999. For a UK only investor (unlikely we know) they would be 40% down in inflation adjusted/purchasing power terms, unless they had accumulated dividends and rebalanced astutely.
How far do we have to stand back from the FTSE100 wall-chart to see steady upwards progress. :?:
Perhaps too far for those in or approaching retirement. :!:

So the questions are :-

+ Is the US stock market progress since 2000 typical or atypical. :?:
+ Does the US market have some special property that sets it apart. :?:
As far as US stocks to UK stocks go, looks fairly typical -
If you compare the FTSE-100 in Pound Sterling, to the S&P-100 in US Dollars, there's very little difference in total return since 12/31/1999.
10,000 has grown to 15,572.72 for the FTSE-100
10,000 has grown to 16,048.21 for the S&P-100

If you convert the U.S. dollars to Pounds it looks a bit better, but that situation was reversed a few years ago.
If you look at a broader U.S. index like the S&P500 it has a higher weighting of smaller mid-cap stocks that did particularly well since 2000, but is even less of an apples to apples comparison.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dc81584
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Re: The last 15 years

Post by dc81584 »

ogrehead wrote:
Maynard F. Speer wrote:This is a very rough calculation (I'm sure someone can do it better – I've simply used total return and not calculated dividends separately) if the market corrects by about 50% (which some suggest it needs to):

The money you invested in Jan 2001 - has made 1% a year - $10,000 invested is now worth $10,789
The money you invested in Jan 2002 - has made 1.8% a year - $10,000 invested is now worth $12,892
The money you invested in Jan 2003 - has made 3.3% a year - $10,000 invested is now worth $15,329
The money you invested in Jan 2004 - has made 1% a year - $10,000 invested is now worth $11,260
The money you invested in Jan 2005 - has made 0.5% a year - $10,000 invested is now worth $10,524
The money you invested in Jan 2006 - has LOST 1.1% a year - $10,000 invested is now worth $8,954
The money you invested in Jan 2007 - has LOST 1.9% a year - $10,000 invested is now worth $8,447
The money you invested in Jan 2008 - has LOST 1.9% a year - $10,000 invested is now worth $8,590
The money you invested in Jan 2009 - has made 4% a year - $10,000 invested is now worth $13,300
The money you invested in Jan 2010 - has LOST 0.3% a year - $10,000 invested is now worth $9,869
The money you invested in Jan 2011 - has LOST 4.3% a year - $10,000 invested is now worth $8,052
The money you invested in Jan 2012 - has LOST 7% a year - $10,000 invested is now worth $7,590
The money you invested in Jan 2013 - has LOST 14% a year - $10,000 invested is now worth $6,475

Again, ballpark at best, and very crudely calculated, but if markets continue to mean revert towards average valuations, buying into these expensive post-2000 markets hasn't exactly been the best game in town
It's easier to understand why you constantly trash stock returns when your numbers come from a completely different planet from everyone else. I wouldn't invest in stocks if I were wearing your glasses either.

Edit: Hypothetically cutting returns in half is a cute game. Because we can expect the stock market to just implode and cut in half without issuing further dividends, earnings improving, etc. before "average" valuations return to what they were, what, 50-60 years ago?
Are you kidding? Mean reversion happens. 1995-1999 was anomalous. Valuations are high, both from a TTM and CAPE-10 perspective, growth is, at best, satisfactory, and companies are either hoarding cash or using the cheap money to buy back stock. If it looks like crap, smells like crap, and tastes like crap, it must be crap.
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Re: The last 15 years

Post by dc81584 »

For the first AND last time, CAPE-10 can be a decent indicator of lower or higher intermediate-term forward returns. It's amazing how many people think they are A) smarter than Robert Shiller and B) slick enough to put words in his mouth and expect to gain credibility by doing so. Give it up. The math is SO simple. The higher the price, the lower the return. The lower the price, the higher the return. Is this TRULY difficult to understand?
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Re: The last 15 years

Post by JoMoney »

dc81584 wrote:...The higher the price, the lower the return. The lower the price, the higher the return. Is this TRULY difficult to understand?
The CAPE is lower now (Jan 1, 2016 = 23.93) than it was 10 years ago (Jan 1, 2006 = 26.47) or 20 years ago (Jan 1, 1996 = 24.76).
Are you saying that because it's lower now, we should expect higher returns?
I think what should be obvious, is it will depend highly on the future price relative to CAPE. If you expect a lower ratio in the future, revise expectations downward. If you expect a higher future CAPE then returns will be higher relative to today.
...and if you average over time, you'll get the 'average' of whatever that period is.
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

lee1026 wrote:
Remember CAPE isn't designed to estimate 10 year returns ... Mean reversion is a long-term tendency - not a 10-year tendency ... What the chart should show you is that all valuation metrics estimate 10-year returns within a reasonable margin error
I thought CAPE became popular precisely because it did a good job of estimating 10 year returns in backtesting? So what does it estimate? 15 year returns? 20?

To a certain extent, the time period selection is subject to another data mining fallacy - since you are defining after the fact what "long term" actually means, it will always look good.
We'd probably call it a Stochastic Model -
"A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques."

As you say, the length of time it tends to take markets to revert to more normal valuations could be radically different in the future - considering the impact hedge funds can have on market behaviour, as well as potentially index investing .. But that doesn't matter .. Valuations are a very simple principle (as noted above) - turning them into estimates is a much fuzzier science

In real terms, CAPE has tended to be most predictive over about 15-20 years .. This chart demonstrates historical correlations over different time periods

Image
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Re: The last 15 years

Post by JoMoney »

Image
If we look at it as some sort of "Stochastic Model", we're assigning some probability based on history. Looking at these past 30 years we might expect the same likelihood of future CAPE going up to 44 as going down to 14.
We could go back further in time to have an even larger data set, but even in this limited time frame you might justifiably argue that the earnings measured using different accounting guidelines, different sector weightings, different finance structures aren't necessarily comparable to those in the recent period.
An even bigger problem is the pseudo-logical rigor some assume by applying a probability to it at all. Looking at it as a probability scenario based on this data would assign zero probability to the CAPE going to something less than 14 or higher higher than 44, a larger data set might bring other possibilities into it but it doesn't change the problem of there being other scenarios that are quite possible, both higher and lower that are not being considered. The second axiom of probability implies that "if you cannot precisely define the whole sample space, then the probability of any subset cannot be defined either". Some people want to assume CAPE is likely to go down from here, some may want to assume it's likely to go up... and some of us know for certain that nobody knows what the "probability" of either is.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
dc81584
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Re: The last 15 years

Post by dc81584 »

JoMoney wrote:
dc81584 wrote:...The higher the price, the lower the return. The lower the price, the higher the return. Is this TRULY difficult to understand?
The CAPE is lower now (Jan 1, 2016 = 23.93) than it was 10 years ago (Jan 1, 2006 = 26.47) or 20 years ago (Jan 1, 1996 = 24.76).
Are you saying that because it's lower now, we should expect higher returns?
I think what should be obvious, is it will depend highly on the future price relative to CAPE. If you expect a lower ratio in the future, revise expectations downward. If you expect a higher future CAPE then returns will be higher relative to today.
...and if you average over time, you'll get the 'average' of whatever that period is.
Are you really asking me this question? 23.93 is still way too high. The multiple expansion that occurred in the 1990s was, to some degree, justified by actual earnings growth (without the financial engineering that is seemingly commonplace today), and the market still reverted to the so-called mean. With slower growth, give me one reason why this time should be any different?
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JoMoney
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Re: The last 15 years

Post by JoMoney »

dc81584 wrote:...
Are you really asking me this question? 23.93 is still way too high. The multiple expansion that occurred in the 1990s was, to some degree, justified by actual earnings growth (without the financial engineering that is seemingly commonplace today), and the market still reverted to the so-called mean. With slower growth, give me one reason why this time should be any different?
We'll I posted a graph of what the market has mean reverted to...
viewtopic.php?f=10&t=182894&start=50#p2774000
But I don't believe that's what you're talking about, I think you're talking about CAPE mean reversion... and then seem to be assuming "slower growth", which seems odd that you're not willing to assume mean reversion in growth.
Either way, we face challenges today that are harsh, but I don't think it's un-surmountable relative to what we've been through in the past. I'm not assuming it will be any different, nor assuming I'm going to use some metric to pick a better price down the road. Whatever happens, I plan to be averaging right along with it.
I have no idea if CAPE will be higher or lower 10 years from now. My argument is that people insisting it will be lower is just another opinion that's likely priced in at where we are today. If they're right, people should be looking forward to it, as it will be a reason to expect higher future returns... or at least that's what everyone keeps saying in the bond threads about rising interest rates.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Maynard F. Speer
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Re: The last 15 years

Post by Maynard F. Speer »

Cliff Asness had a good quote, along the lines of "The best way to look thin is to stand next to a fat guy"

Look at historical CAPE ratios, and just imagine that the irrational exuberance of the 90s Tech Boom didn't happen .. Draw a line connecting 1995 to 2005 and imagine we're still where we are today

Now, would there be any compelling reason (looking at the data) to presume average CAPE ratios are likely to be higher in the future?

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"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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HomerJ
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Re: The last 15 years

Post by HomerJ »

Maynard F. Speer wrote:Cliff Asness had a good quote, along the lines of "The best way to look thin is to stand next to a fat guy"

Look at historical CAPE ratios, and just imagine that the irrational exuberance of the 90s Tech Boom didn't happen .. Draw a line connecting 1995 to 2005 and imagine we're still where we are today

Now, would there be any compelling reason (looking at the data) to presume average CAPE ratios are likely to be higher in the future?
Yes, looking at the data, there absolutely is a reason to wonder if average CAPE ratios are likely to be higher in the future.

The last 20-25 years don't look anything like the previous 100... Is there any compelling reason to presume that the next 20 years will look like 1895-1920 instead of the last 25 years?

(Actually, the last 25 years look very similar to the previous 100, but with a higher median).

We have one 25-year example now where the pattern appears to have been broken. I'm not saying we won't mean revert to 15, but why are you so sure we will?

You do know about the accounting changes that have led many people to state "20 is the new 15", right? Could it be possible, looking at the data, that the median is now higher? That 15 should be considered low (like in 2009), and 25 is just a little bit high (instead of insane bubble high, like in the past 100 years before the 90s).

You have to account for the data from the past 25 years somehow. You can't just ignore it.
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