Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

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Rx 4 investing
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Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by Rx 4 investing » Sun May 08, 2016 3:15 pm

See link BELOW for analyst’s current “fair value” estimate of ‘1,539’

Current price of S & P 500 of 2,057 found here: http://www.multpl.com/s-p-500-historical-prices

From the article:
“This analysis is dated March 12, 2016. However the calculated fair value of the S&P 500 index is not affected by the precise date of the analysis and our fair value estimate of 1475 to 1603 with a mid-point of 1539 will not change until at least after the next set of quarterly earnings numbers becomes available, and even then will not change much.”
--Markets rarely trade at “fair value”. I like to think of it as a risk/reward measure providing an investor a totally objective reading of where the US equity market trades versus the long-term relationships.

--Investors might use the “fair value” reading to calculate the upside/downside from the current price and determine if the S & P 500’s current valuation level offers them a “margin of safety”.

--This may also help him/her appreciate where this fits according to their need and ability to take risk.

--Buffett has occasionally stated he likes a “margin of safety” value of + 25% percent, but it might depend on how confident the investor is about the projected earnings growth rates.

--If highly confident, an investor might accept a smaller "margin of safety".

--But if a risk-averse investor is less confident, he/she might want a "margin of safety" that is larger.

The IF’s analyst’s disclaimer:

”Caution is warranted because the S&P 500 can sometimes spend years in an over-valued or an under-valued-state. But ultimately, as we have seen in the early 2000’s crash, and the crash of 2008 and early 2009, valuation does correct itself. (And sometimes over-corrects to the downside).”

Investor’s Friend page: http://www.investorsfriend.com/s-and-p- ... valuation/

Before considering any actions around allocation changes, here’s a review of sage wisdom from our mentor:
"There is a third option, but only for bold and self-confident investors. It does not abandon the "stay the course" principle, but it allows for a mid-course correction if stormy weather threatens on the horizon. If rational forecasts indicate that one asset class offers a considerably better investment opportunity than another, you might shift a modest percentage of your assets from the class judges less attractive to the class judged more attractive. This policy is referred to as tactical asset allocation. It is an opportunistic, transitory, aggressive policy that - if skill, insight, and luck are with you - may result in marginally better long-term returns than either a fixed-ratio approach or benign neglect.

It's grand to possess skill and insight, though all of us tend to overrate our abilities in both areas. But luck, too, plays a role. Many investors are right, but at the wrong time. It does no good to be too early or too late. Tactical asset allocation, if the strategy is to be used at all, should therefore be used only at the margin. That is, if your optimal strategic allocation is 65 percent stocks, limit any change to no more than 15 percentage points (50 to 80 percent stocks), and implement the change gradually. The prospect of having the skill, insight, and luck to eliminate your stock position overnight and restore it "when the time is right" is, in my opinion, patently absurd. Cautious tactical asset allocation may have a lure for the bold. Full-blown tactical allocation lures only the fool.

What might dictate moderate shifts in tactical asset allocation? One example: concern that stocks are substantially overvalued relative to bonds. Then, investors with conviction, courage, and discipline might benefit from a bow toward caution. I say "bow", not "capitulation." In an inevitably uncertain world, the reduction should not exceed 15 percentage points in your equity position. If you have 65 percent of your portfolio in equities, retain at least 50 percent; if 50 percent, at least 35 percent, and so on. A little caution may represent simple prudence, and, if you are relatively risk-averse, may enable you to sleep better, a blessing that is hardly trivial. One doesn't have to have investment experience to to recognize the wisdom in this saying, from a remarkably parallel field: "There are old pilots and there are bold pilots, but there are no old bold pilots."

- John C. Bogle, Common Sense on Mutual Funds
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by livesoft » Sun May 08, 2016 3:27 pm

I can never tell when equities like those in the S&P500 are going to go down substantially in price.

I can always tell when equities like those in the S&P500 have gone down substantially in price.

I base my investing tactics on the above two statements.
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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by nedsaid » Sun May 08, 2016 3:42 pm

You and others affected my decision making as I have been on a mild rebalancing program since
about July 2013. I was at 69% stocks and have worked my way down to 67% stocks. The next time my portfolio works back to all-time highs, I will trim some more. If I had done nothing, I would be somewhere in the low to mid 70's, my guess is about 73%. So at least I am rebalancing and gradually working down my allocation to stocks.

I am checking the Vanguard Institutional Index (which tracks the S&P 500), that I hold in a workplace savings plan. Forward P/E is 18.14 and dividend yield is 2.4%. That doesn't look wildly overvalued to me. I also own the Fidelity Spartan Total Market Index, forward P/E is 18.33 and dividend yield is 2.30%. In recent years, the market has had a dividend yield of 2% plus or minus maybe 20 basis points. That looks pretty normal to me. It wasn't too long ago when forward P/E for the market was 19.

Just for fun, I looked at the yield of Vanguard Total Bond Market Index and that is at 2.47%. Hmmm. Just seven basis points more than Vanguard Institutional Index.

Caution with the stock market is always warranted particularly after the big run-up since early 2009. A correction or a mild bear would not surprise me here. Wildly overvalued? No.
A fool and his money are good for business.

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JoMoney
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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by JoMoney » Sun May 08, 2016 3:52 pm

Rx 4 investing wrote:...
--Markets rarely trade at “fair value”. I like to think of it as a risk/reward measure providing an investor a totally objective reading of where the US equity market trades versus the long-term relationships. ...
"Fair value" is what a willing buyer and willing seller can agree to on price, which is clearly whatever the current market price is. Maybe there are situations where margin calls and squeezes push people into positions they'd rather not be selling at, but most of the time the market price is "fair value".
You're free to have your own subjective opinion on what you're willing to pay, but that doesn't make it fair or "totally objective". If there was some simple metric that provided a clear risk/reward metric across all businesses, we'd all know about it and use it, but it's more complex than that. All of these valuation techniques have been gone over en masse.
BTW, I would be willing (and I'm sure many others too) to buy as much of the S&P500 you'd be willing to sell at $1,539 since you think that's "fair".
"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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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by mmcmonster » Sun May 08, 2016 5:01 pm

I'm guessing is that this "fair value" is based on lower P/E ratios?

What if P/E rations never dramatically come down in the future?

If a large percentage of the entire market's money is in index funds, and the total dollar amount added to these index funds goes up every year, doesn't that imply that P/E ratios will steadily increase in the future?

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by NMJack » Sun May 08, 2016 5:48 pm

I'm guessing this is based upon that backward looking 10 year average earnings based P/E. I pay so little attention to this that I'm not even sure what it is called. 10 years in the rear view mirror currently includes the great recession, with severely depressed earnings (many companies had losses). If we just maintain the status quo, in 3 or 4 more years that will drop out and the ratio will improve regardless.

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by NOVACPA » Mon May 09, 2016 8:20 am

When they refer to "fair value" they are likely taking the present value of the S&P 500, or cash, and factoring in the borrowing costs to own all of the stocks in the index, dividends and difference between the current day and front month future expiration in order to mathematically derive a fair value relationship between the cash and the future.

You can see here (http://www.cmegroup.com/trading/equity- ... dp500.html) that the longer dated contracts trade at a discount to the current month or even "spot" price (a.k.a cash price).

Basically, it's cheaper to own the underlying index after including the costs to carry and dividends.

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by Rx 4 investing » Mon May 09, 2016 7:30 pm

JoMoney wrote: “ You're free to have your own subjective opinion on what you're willing to pay, but that doesn't make it fair or "totally objective". If there was some simple metric that provided a clear risk/reward metric across all businesses, we'd all know about it and use it, but it's more complex than that. All of these valuation techniques have been gone over en masse.”
“Fair value” calculations are reasonably “objective” and are in keeping with the tenets of ‘intelligent investing’ as put forth by Graham. He said “investing is most intelligent when it is business-like.” It all depends on which side of the argument the investor falls. Is the value premium due to “risk” (the EMH perspective) or “mis-pricing” (the behaviorlist’s perspective)?

In his critique of EMH, Graham wrote:

“The market’s evaluation of the same data can vary over a wide range, dependent on bullish enthusiasm, concentrated speculative interest and similar influences, or bearish disillusionment. Knowledge is only one ingredient..the other ingredient, fully as important as information, is sound judgment.

“Sound judgment” is difficult to quantify, much less teach. This is why defensive investing is "complex" and there will never by a “simple metric.” Graham's The Intelligent Investor and Security Analysis are not pamphlets.

For some investors, "sound judgement" may have to be developed from years of trial-and-error. Human emotion during times of market stress is often associated with lapses in judgment. That’s why I believe it’s best for many of us to become cautious, and consider defensive action, when valuations are stretched. (see Doug Short’s chart below). As witnessed as recently as the ’08-’09 meltdown, and throughout history for that matter, investor emotion and bad judgments cause the pendulum to swing from “greed” to “fear.”

The analyst of the Investor’s Friend article walks the reader through his mathematical reasoning that led him to his valuation “ range.” (1,475-to-1,603, with a mid-point of 1,539). And yes, there were some subjective judgments made in his estimates. He explained the rationale for those were based on historical precedents.

I’m content with trying to capture and retain a decent portion of the 80% of the gains in the middle of bull markets, and I’ll leave it to other more adventuresome investors to worry about the first 10% and the last 10%.

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

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Words of wisdom

Post by Taylor Larimore » Mon May 09, 2016 7:44 pm

Bogleheads:

Please don't ignore this important advice from our mentor, Jack Bogle:
Stay the course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you. -- Common Sense on Mutual Funds
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by azanon » Mon May 09, 2016 7:55 pm

I'm going on memory here (hope I'm recalling right), but I believe I saw an old Bogle video where he claimed to have sold most of his stock in early 2000... so not just an adjustment at the margins. He tactically allocated most of his positions out of the US market. So if his mantra is Stay the Course now, it is do as he says now, not as he's always done.

OP, yeah I agree the S&P 500 has high valuations. I just hope you're aware that the rest of the world's stock is mostly fair valuation, if not below fair. EAFE is about historical average valuation. Emerging Market is below historical average valuation. But Bogle wouldn't consider either. He's probably just buy (US) bonds and wait....

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Re: Investor’s Friend “ fair value” est. for S & P 500: ‘1539’

Post by nedsaid » Fri May 13, 2016 6:28 pm

azanon wrote:I'm going on memory here (hope I'm recalling right), but I believe I saw an old Bogle video where he claimed to have sold most of his stock in early 2000... so not just an adjustment at the margins. He tactically allocated most of his positions out of the US market. So if his mantra is Stay the Course now, it is do as he says now, not as he's always done.

OP, yeah I agree the S&P 500 has high valuations. I just hope you're aware that the rest of the world's stock is mostly fair valuation, if not below fair. EAFE is about historical average valuation. Emerging Market is below historical average valuation. But Bogle wouldn't consider either. He's probably just buy (US) bonds and wait....
Yes, John Bogle is a lot more flexible in his thinking than his admirers would expect. Personally, I think that is a good thing and not a bad thing. When he sold most of his stocks, stock valuations were very high compared to even right now and bonds were in his words "the steal of the century." As I recall, he was facing health issues at the time and wasn't sure he was going to make it.
A fool and his money are good for business.

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