Extreme Valuations, and why you should reconsider

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Extreme Valuations, and why you should reconsider

Post by dcarste »

Hi Everyone,

I would like to first give everyone a gem of a link - and you can start reading each weekly commentary starting around early December till now. I have been crunching data and couldn't figure out how I keep seeing prognosticators saying PE's aren't too stretched. I finally came across someone that was rolling through the same type of analysis as me. Nothing special but I suggest you read it, along with the graph he produces following subsequent 10-12 year annual returns based on current valuations. The valuation metrics he uses are 94% correlated with subsequent TEN year stock returns. Currently valuations are showing a TEN year return around 1% annually for stocks, if bought at these prices.

http://www.hussmanfunds.com/weeklyMarketComment.html

US stocks specifically have only been this expensive in 1929, and 1999. I never suggest getting out of the stock market, but if you are coming up on retirement within 10 years or are in retirement, please check your risk tolerance. If you are 60% stocks - take some profits and go to 40%. Something like that. Let someone else hold the bag - and be fearful when others are greedy.

I really don't know what else to say but don't be greedy. I usually am 60% stocks, and sold off to 40% because I feel blessed that I have done so well.

I just can't sit here and say nothing...a tactical allocation strategy is something I don't like to do - except in extreme circumstances. This IS extreme circumstances in valuation. It isn't valuation that causes the market to tank - it is something that happens WHILE the stock market is grossly overvalued that causes extremely large drops. Nobody is taking into account so many risks, and the VIX is sitting at a 10 handle - while there are tons of risks out there geopolitcally and policy wise.

Come on guys - if you've made some good money don't be greedy. Unless you don't care about going on a exteme roller coaster ride to make 2% a year over the next decade. or 4% - either way the risk/reward profile for stocks is perverse.

If anyone reads the past 6 posts or so from Hussman I'd like to hear from you...Can someone ignore a 94% correlation to subsequent 10 year stock market returns? This isn't magic - as we all know the 10 year CAPE (Shiller PE) is saying the same thing. Also Buffet's favorite indicator ... total market cap / GNP. Take some profits and buy yourself a new sweater. Unless you are 25 and have plenty of time to keep DCA'ing into poor markets to take advantage of bear markets. I just don't want to see anyone above age 40 with 80% stocks for example. Take 20% off the table and into Total Bond Market or Short Term Bond Index (3 year duration).

I know, you can't time the market. I'm not timing, I'm just need being greedy. I participated in the past 8 year bull. The risk reward is way out of whack in equities.

Thoughts?
BrklynMike
Posts: 87
Joined: Wed Oct 05, 2016 1:38 pm

Re: Extreme Valuations, and why you should reconsider

Post by BrklynMike »

Interesting post but I did not see any reference to the fact that current PE ratios are largely impacted by accounting rules requiring R&D to be expensed rather than capitalized as an asset, which is exacerbated by the large amount of R&D undertaken by firms in the last 30 years versus the decades before. I recently read an article by some fed banker economist, who's name I can't remember other than his last name sounded japanese, which argued if you account for this difference the PE ratios fall much more in line with historical trends. Sorry I couldn't find the article.
"In a world of uncertainty, one should focus more on the consequences than the probabilities." - Benjamin Graham
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Extreme Valuations, and why you should reconsider

Post by livesoft »

@dcarste, so did you actually make your trade and sell equities? If so, then you went from 60/40 to 40/60? Or something else?
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

"I guess this time is different"

and I really honestly hope so, I will still stand to benefit - and I don't want to see retail investors fleeced again. But is this time really different? Valuations always have and always will matter on future returns. I really do hope I'm wrong. I just don't want people within 10 years of retirement, or new to retirement have much more than 40% in stocks and screw yourself out of your hard earned money. The other 60% I recommend either Total Bond Index or Vanguard Short Term Bond Index. The short term bond index now yields 1.6%, whereas a year ago it was under 1%. The short term index has an equivalent yield to a 5 year CD ladder also FYI.

:-(
AlohaJoe
Posts: 6609
Joined: Mon Nov 26, 2007 1:00 pm
Location: Saigon, Vietnam

Re: Extreme Valuations, and why you should reconsider

Post by AlohaJoe »

dcarste wrote:I would like to first give everyone a gem of a link
Instead of a "gem" I would call Hussmann worthless and proven incompetent. If you think he has anything of value to say, you're just hearing what you want to hear.

He has published articles every single year saying that a massive stock market collapse is due in the next 3-6 months:

November 2010: Bubble, Crash, Bubble, Crash, Bubble...
March 2011: Anatomy of a Bubble
March 2012: A False Sense of Security
November 2013: A Textbook Pre-Crash Bubble
July 2014: Yes, This Is An Equity Bubble
October 2015: Not The Time To Be Bubble-Tolerant
October 2016: Sizing Up the Bubble
Since the publication of that November 2010 article, the S&P 500, which Mr. Hussman has repeatedly warned us has been in a bubble, has returned over 100% on a total return basis. It must be exhausting - not to mention humbling - to be so dedicated to an idea that, despite all your evidence to support it, is repeatedly rejected by investors who have continued to bid shares higher and higher.

In fact, since the current bull market began in March of 2009, Mr. Hussman has repeatedly called for a titanic decline in the S&P 500, but, in a twist of irony, it has been his own fund, Hussman Strategic Growth (HSGFX), that has suffered a disastrous bear market all its own with a peak-to-trough decline of almost 50%

Mr. Hussman's mania over perceived bubbles has almost a sinister aspect to it. This obsession with prophesying doom no matter what makes Mr. Hussman resemble the naysayer of which Pascal Bruckner has written, "[H]e becomes intoxicated with his own words and claims a legitimacy with no basis...Catastrophe is not [his] fear, but his joy. It is a short distance from lucidity to bitterness, from prediction to anathema."
source: http://www.fortunefinancialadvisors.com ... -and-pride
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Yes I did about a month ago...it depends on your age...a bear market the next ten years is great for someone in the accumulation phase as they dollar cost average at lower prices. I just don't want to see my fellow friends get screwed out of retirement by taking on this much risk with so little reward potential going forward.

again I really don't advocate tactical asset allocation except in EXTREME circumstances.

if you are age 40 or above and have saved a good amount of money, take some off the top.

If 80% equities move to 60%

If 60 go to 40

I don't see a need to go under 40% equities, as long as your other component is a Total Bond Market Index or the Vanguard Short Term Bond Index.

Enjoy your gains and take some off the table.

If your long term plan is for instance to be 60% stocks and 40% bonds, wait until the next bear...I've got a set price of 30% drop from whatever the high is...I don't need to time the bottom - thats impossible.

I just feel queezy at these levels.
coldav
Posts: 58
Joined: Wed Apr 18, 2012 2:35 pm

Re: Extreme Valuations, and why you should reconsider

Post by coldav »

I have read a few of John Hussman's weekly commentaries and don't have the depth of knowledge to completely understand what he is talking about. He is obviously a brainy type when it comes to investing and also refers to himself as a perma bear. What shocked me was looking at one of his funds, HSGFX (strategic growth), and seeing how terrible it has performed in the past 4 or so years. While immersed in the world of doom and gloom Mr. Hussman has missed out on the current bull market.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Hi Aloha Joe - I don't base all of my decisions on Hussman. I base on valuations - which is why I have been at my normal allocation until recently.

I mean seriously Aloha - 1929 and 1999 valuations, with huge policy uncertaintly not priced in. And you want to continue to not take "SOME" off the table?

That is actually totally fine if you can stomach it though. I just said re-evaluate your risk profile. I made enough money that money stomach would churn even with just a 25% account drawdown. I feel proud of the money I've saved and don't really need to make 10% a year to reach my goals. But yes if you have the willingness to stay the course over the next 10 years I see nothing wrong with that. I just want people to question if they can or want to be greedy? All circumstances are different.

Especially people within 10 years of retirement or have just started retirement. It's not worth the risk/reward profile.

30% total stock index, 10% International Index, 60% total Bond.

or

30% total stock index, 10% international Index, and 60% Vanguard Short Term Bond index.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

I don't follow Hussman's funds which have to compete with a benchmark, so they don't reflect his actual holdings.

My point is I DID participate in the 8 year bull with 60% stocks...and last month decided I've made enough money staying the course that it was time to take some off the table.

All you really need to see is the chart showing 10 year future stock returns based on current valuations (he shows 4 different valuation metrics). They all pretty closely follow TEN year returns.

Before I got sick I was head managing analyst at Time Warner, so I am a brainy type. It is pointless to 'Time' the market unless I see totally rediculous valuations. I haven't seen then except in the past year, and I still didn't act. After this past 3 month run, I decided I was lucky enough to participate and I myself don't need to risk a large accumulation, when I've been blessed to participate all the way up until now.

"This time is different"

If you've made your money why not de-risk? If you can stand a 30% drawdown, then that is perfectly fine to stay the course. I don't think I can stomach it after my account balance has grown so much by participating in the bull market. I actually only went from 60% stocks to 40% stocks though...I'll still participate in the upside if there is some.
NibbanaBanana
Posts: 247
Joined: Sun Jan 22, 2017 9:34 pm

Re: Extreme Valuations, and why you should reconsider

Post by NibbanaBanana »

November 2010: Bubble, Crash, Bubble, Crash, Bubble...
March 2011: Anatomy of a Bubble
March 2012: A False Sense of Security
November 2013: A Textbook Pre-Crash Bubble
July 2014: Yes, This Is An Equity Bubble
October 2015: Not The Time To Be Bubble-Tolerant
October 2016: Sizing Up the Bubble

If he keeps going this way, eventually he's going to be right.

One example that hasn't been mentioned: Someone with a highly appreciated stock portfolio much of which will be capital gains if sold and is in the 28% tax bracket or higher. That will be a huge hit to the net worth. Just like a 28% stock market crash.

Edit: Oh, and another thing I forgot. If you don't want to permanently keep your defensive allocation to bonds, then you're going to have to know when to get back in the stock market after it dives. How do you know when it's bottomed? Or close to bottom?

I agree that the market will probably be lower sometime in the future. I just don't know how to act on that in an intelligent way. I agree that it's unwise to completely ignore market levels and conditions. But it's not like bonds are selling at fire sale prices either.
Last edited by NibbanaBanana on Tue Feb 21, 2017 9:35 am, edited 1 time in total.
livesoft
Posts: 86075
Joined: Thu Mar 01, 2007 7:00 pm

Re: Extreme Valuations, and why you should reconsider

Post by livesoft »

dcarste wrote:Yes I did about a month ago...
[...]
Enjoy your gains and take some off the table.
People will / should be hitting rebalancing trigger points, but the degree of "some off" is different for everyone. I cannot imagine that changing equities by 20% of total portfolio value make any sense. You wrote "Yes I did ....", but actually neglected to say the amount of your shift. It could have been 0.1%, 1%, 10%, 20%, ... whatever. A shift of under 5% could be considered a normal rebalancing move and nothing tactical.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Extreme Valuations, and why you should reconsider

Post by nisiprius »

Valuations are not even close to what they were in 2000. The CAPE was 44 then, now it's about 29.

It's just a crude and perhaps meaningless analogy, but in the physical world, if you think about springs, there is a certain point at which they break, but below that point they can flex large amounts over and over again with no harm.

I don't see any reason to give Hussman's opinions any particular credence over anybody else's. To begin with, I think you always need to takes opinions with a large grain of salt when they are coming from someone who is managing an active fund or is otherwise an interested party. There may be something to them, but there is bound to be spin.

Hussman manages four funds:
Hussman Strategic Growth, HSGFX, $417 million AUM, inception about 7/24/2000
Hussman Strategic Total Return, HSTRX, $401 million AUM, inception about 9/12/2002
Hussman Strategic International, HSIEX, $32 million AUM (!), inception about 1/1/2010
Hussman Strategic Value, HSVLX, $7 million AUM (!!!!!), inception about 2/26/2012

It seems fair to call HSGFX and HSTRX his oldest and largest funds, so it's reasonable to look at those and ignore the others. Morningstar classifies HSGFX as "market neutral," gives it one star for past performance, and a "negative" analyst rating (and I must say "negative" analyst ratings are pretty rare at Morningstar). Morningstar shows us that it underperformed their market neutral benchmark and far underperformed the Bloomberg Barclay's aggregate index.

Source
Image

Since Morningstar thinks the Bloomberg Barclay's Aggregate Index is a fair comparison, then the Vanguard Total Bond Market Index Fund, VBMFX is reasonable, too. PortfolioVisualizer tells me that over the range Jan 2001 - Jan 2017, compared to VBMFX, HSGFX managed the neat trick of having much lower return, 0.35% versus 3.53%, a much higher standard deviation, 7.76%, and, yes, lack_ey, I know Sharpe ratios should come with a warning label, but still, my goodness, a negative Sharpe ratio, -0.09 compared to 0.90 for Total Bond.

That's very impressive, but not in a good way.

Hussman Strategic Total Return is a shrug. Morningstar gives it three stars for past performance, and did not give it an Analyst rating. They call it a "tactical asset allocation fund" but it's hard to know what to compare it to. It's only 9% in stocks right now.

Source
Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Please go to the 3rd chart down on this link. (and guys I really hope I'm wrong here)

http://www.hussmanfunds.com/wmc/wmc170213.htm

subsequent 10 year annual stock returns based on current valuations with a 94% correlation. This correlation of subsequent returns also holds true to the same chart he has posted that has 4 different valuation metrics plotted. Shiller CAPE 10 is also pretty closely correlated if you look at some more of the previous posts. I haven't always looked at his data, I came across it after doing my own research. I couldn't find any time valuations were this high since 1929 and 1999. In full market cycles, valuations always matter. I happen to come across this research after being baffled with my own data showing ridiculous levels.

I am NOT advocating Hussman, I am advocating hard statistics that show the RISK/REWARD profile for holding large percentages of stock in your portfolio do not make sense. There are caveats like taxable capital gains in taxable accounts. There are caveats if you are young and in the accumulation phase (as bear markets allow you to keep buying at lower levels. But if you are within 10 years of retirement or just in retirement and can't take a 25 to 30% drawdown, I suggest you rethink your risk profile. And just to note, the 2008 meltdown drew down a 60% stock / 40% bond portfolio ~30%.

My point is just saying I feel very good at participating in this rally, and I think a lot of us feel really good right now. Why not take some gains off the table? You can always take the gains off the table in your 401k/ROTH/IRA and not change your taxable account. No need to go below 40% stock though...
User avatar
Johnnie
Posts: 597
Joined: Sat May 28, 2016 3:18 pm
Location: Michigan

Re: Extreme Valuations, and why you should reconsider

Post by Johnnie »

It would obviously be foolish to say valuations don't matter, but there does appear to be a lot of noise in the data, and whenever I see an investor (especially a permabear) leaning so heavily on one indicator or even a few it makes me think of two related concepts, Bastiat's "the seen vs. the unseen" and Hayek's "Pretense of Knowledge" from his Nobel speech of that title. Excerpt:
...Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.

It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world.
Friedrich Hayek, "The Pretense of Knowledge," 1974
http://www.nobelprize.org/nobel_prizes/ ... cture.html


Again, I'm not saying this doesn't matter, I'm just wondering about all the things not touched on that may matter more. Maybe animal spirits will increase top-line revenue and bottom-line earnings, for example. <shrug>

I know nothing. Nuh-thing.
"I know nothing."
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Yea I never made a decision to take profits until last month when I moved from 60% stock to 40%:

1) Extreme valuations above around 95 percent of all time periods
2) Triple tops all time highs in SP500, Russell 2000, Nasdaq multiple times
3) "Animal Spirits" Talk and hopium about
4) AAII Bullish Sentiment Hit 62%...very very high historic sentiment
5) No Bears in sight. Well hardly any.
6) VIX (implied volatility) at 10 and holding at this low of a level for a very long time
7) Absolutely no policy risk, or geo-political risk priced in at all - even when risk is extremely high of disruption.

It's just my opinion that I'm happy with the money I've made the past 8 years, no reason I can't take profits in my tax sheltered accounts and feel good about it.

My main concern regards people within 10 years of retirement and those in retirement. If you've participated in the 8 year bull...and you have a substantial equity allocation (60% or above)...why not take the profits and go to 40% equities / 60% total bond. Now is not the time to risk what you've already made. Caveats about, like if you can stand a 30% drawdown...stay the course, and can wait 5 years for your balance to recover. I just don't have the stomach after my balance getting up to where it is. I feel fortunate I guess and its time to be fearful when others are greedy. It's not that I am trying to time the market to get in at a lower price...more so that that I am not getting stock prices that are worth the risk I would be taking.
selters
Posts: 702
Joined: Thu Feb 27, 2014 8:26 am

Re: Extreme Valuations, and why you should reconsider

Post by selters »

If you go to the Morningstar Vanguard Diehards forums and read the posts from 17 years ago at the top of the tech bubble, the members were the saying the exact same thing as people on this forum are saying now: "stay the course", "don't market time", "what do you know that the market doesn't know?" For a long term investor I agree, but consider this: What was the expected return in the stock market five years ago? I don't know exactly, but you can certainly make the case that the stock market has returned ten years worth of expected returns in the last five years. A zero percent nominal return over the next five years is not unthinkable at all. I'd say it would be perfectly reasonable for people who want to retire in the next five or ten years to lower their stock allocation by 20% of 30% right now.
Last edited by selters on Tue Feb 21, 2017 9:29 am, edited 2 times in total.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

In 2011 expected 10 year average annual return was around 10% per year for any new money invested during that year. See 3rd chart down on link below. 4 other valuation metrics are similar...its not just his model..I ran into his model after doing my own modeling and being baffled at the prices I was seeing. I'm fine if the Shiller PE 10 is under 25. I'm NOT fine with it at 28.

http://www.hussmanfunds.com/wmc/wmc170213.htm

For any new money invested now at these valuations in the stock market - your average annual return over TEN YEARS is projected to be around 1%. And that will include a lot of gut wrenching volatility. Say its way better and is 4%. So what big deal...not worth the risk.

Hard to bet against a 60 year chart with 94% correlation to subsequent 10 year stock market returns.

It's not just his chart. it is Buffets favorite valuation metric (total market cap / GNP)...price to sales, Shiller 10 year CAPE, Shiller 5 year CAPE, Shiller 3 year CAPE. actual earnings per share are distorted by the new phenomenon of reporting "adjusted" earnings per share. LOL. There was a reason for Sarbanes Oxley in early 2000's. GAAP.

Oh BTW the Russell 2000 small cap index has a regular TTM PE of around 80-85. LOL.

Why all the blinders everyone? I'm still 40% stocks...

<SHRUG>
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Extreme Valuations, and why you should reconsider

Post by larryswedroe »

Bit amusing as Huffman has about the worst forecasting record of anyone for last several years--

the following is from a piece I wrote back in 2014 when he was screaming about overvaluations

John Hussman runs the Hussman family of mutual funds. He’s also a former professor of economics and international finance at the University of Michigan, and has a Ph.D. He’s perhaps best known for his persistent criticism of the U.S. Treasury and the Federal Reserve. Since late 2009, he has been calling for another financial crisis due to bad policy choices made by the US government.

Hussman writes a weekly column on his website. He’s highly regarded by many, and often quoted. He clearly is a very smart man who provides thoughtful analysis. With that said, I always advise people to ignore his forecasts because they don’t have any value. One investor recently asked me to comment on Hussman’s latest musings, which had made him quite nervous. Now I knew that Hussman had been persistently bearish for quite some time, having been asked about his columns fairly frequently. So I went back into my files and dug up what I had written about his market commentary of January 14, 2013. It provides a great example of why he should be ignored, along with all other forecasters. http://www.hussmanfunds.com/wmc/wmc130114.htm
Quoting from his column: “Present overvalued, overbought, overbullish, rising-yield conditions fall within a tiny percentage of market history that is associated with dismal market outcomes, on average. It’s true that we’ve observed extreme conditions since about March 2012 with little resolution aside from short-term declines. But the S&P 500 remains only a few percent from its March 2012 high, and if history is any guide, the extension of these unfavorable conditions is not likely to reduce the depth of the market loss that can be expected to resolve them.”

Given how well regarded Hussman is by so many, this type of analysis could cause even disciplined investors to be tempted to stray from a well-developed plan. Of course, we know now that the S&P 500 went on to return 32.4 percent in 2013, and the MSCI Small Cap Index returned 39.1 percent. And they have both continued higher through July 2014, despite continued strong warnings by Hussman.

Best wishes
Larry
User avatar
Aptenodytes
Posts: 3786
Joined: Tue Feb 08, 2011 7:39 pm

Re: Extreme Valuations, and why you should reconsider

Post by Aptenodytes »

dcarste wrote: I mean seriously Aloha - 1929 and 1999 valuations, with huge policy uncertaintly not priced in. And you want to continue to not take "SOME" off the table?
It has already been pointed out to you that 1929 PEs are not comparable to 2017 PEs. So I'd drop that red herring from your analysis, otherwise you risk making a bad decision. 1999 may be fair, but then you end up with a different conclusion, don't you? And if you are worried about price then why not invest in value stocks rather than dumping a chunk of equities across the board.

Here's a comparison of small-value versus total stock market for 1999-present. This graph doesn't tell me that dumping stocks in 1999 would have been wise.
Image
User avatar
CyclingDuo
Posts: 6006
Joined: Fri Jan 06, 2017 8:07 am

Re: Extreme Valuations, and why you should reconsider

Post by CyclingDuo »

dcarste wrote:My main concern regards people within 10 years of retirement and those in retirement. If you've participated in the 8 year bull...and you have a substantial equity allocation (60% or above)...why not take the profits and go to 40% equities / 60% total bond. Now is not the time to risk what you've already made. Caveats about, like if you can stand a 30% drawdown...stay the course, and can wait 5 years for your balance to recover. I just don't have the stomach after my balance getting up to where it is. I feel fortunate I guess and its time to be fearful when others are greedy. It's not that I am trying to time the market to get in at a lower price...more so that that I am not getting stock prices that are worth the risk I would be taking.
Many technical analysts would place the start of this bull market in 2013 after a 13 year secular bear market.

http://thereformedbroker.com/2016/10/13 ... begin-irl/

The largest demographic in the US - millennials - just had the oldest in that age group demographic hit age 34-36, with a total of about 75-81 Million (depending on the source) of them to follow. More in number than the baby boomer generation. Will it lead to a secular bull market move akin to the baby boomer generation secular bull market from 1982-2000?

There is a lot to chew on for investors, the short term, intermediate term, and the long term when all is viewed together - even if one is of the belief the market has overcooked itself on this latest leg up since the election. Certainly, being in the age group you mentioned that I bolded above - about 10 years or so away from retirement - the move does leave one thinking about AA, positioning for the future, and striving to find a comfort level, or risk/reward tolerance level with it all. It's been so long since we have had a powerful leg up that it is easy to forget how it feels when it happens.

As we know, there will be pullbacks - some sharp, quick, and severe - along the way. So, I guess that means that Hussman will eventually be right.

Losing sleep over gains certainly is a more fruitful loss of sleep than losing sleep over losses...
"Save like a pessimist, invest like an optimist." - Morgan Housel | "Pick a bushel, save a peck!" - Grandpa
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Extreme Valuations, and why you should reconsider

Post by delamer »

I will ask the classic question - if your long-term plan is to have a 60% allocation to stocks and you reduce that to 40% now because of high valuations (or any other reason), how will you know when it is time to move your allocation back to 60%?

How many posts have we read here from folks who took their money out of the market for whatever reason, and now are afraid/unsure about how/when to get back in?

If you are in this for the long-run -- and you should only be in stocks to begin with if that is the case -- then pick an allocation that meets your needs and satisfies your risk tolerance, and stay the course. I am a retiree with 70% allocated to stocks and leaving things as is, because that is the right plan long-term for me.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

I would like small caps except their PE is around 85 :shock:

wowsers. Some websites have the gull to give you the small cap PE EXCLUDING those companies with NO and negative earnings...like Vanguard. Go ahead and google the Russell 2000 PE...Man nothing is cheap.

It's all to each their own man. My main point again is I don't want anyone screwing up their retirement date by being greedy right now...and I guess by greedy is if you are 55+, no reason to take some off the table IF you have been lucky enough to participate in the past 8 years. I don't think the stock market ever gets hit because of valuations alone - it is the concurrent shock or realization of some other risk not priced in while valuations are extremely high - that precipitates big losses.

Is anyone looking at the 3rd chart down on the link from my previous post with 94% correlation to the next 10 year annualized return? Again, its not just that metric he uses, I've modeled, and so has he in some of his previous posts - 4 other valuation metrics posting very similar results. Just don't feel that I will be compensated for equity risk. I am willing to take a lower return.

I hope I am totally wrong, because I will still have 40% in the stock market in which I can participate.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Hi Delamer - as I will still be 40% equities...My re-entry point is at a 25% drop - knowing full well I will not time the bottom by any means. I have dry powder to put to work. If I don't get a 25% lower re-entry point to bump back up to 60% stocks - I am fine with staying 40% stocks. When the facts change, I change my mind, what do you do sir (just a quote).

i do know it goes against almost all people here on their investment philosophy. I just don't want people who are close to or in retirement to get hurt and panic - just as I saw so many of my older friends get screwed in 2000 and 2008. It just seems so many people over-estimate their risk tolerance.

If the Fed can keep interest rates down below say 2.8-3 percent...that will keep a floor on equities. At around 3% on the 10 year - that yield seeking will revert back to bonds and out of stocks...as the risk free treasury would be much more attractive than S&P 500 yields. Odd thing is the bond market is acting totally different than the stock market right now...watch the bond market...not the stock market...
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Extreme Valuations, and why you should reconsider

Post by delamer »

dcarste wrote:Hi Delamer - as I will still be 40% equities...My re-entry point is at a 25% drop - knowing full well I will not time the bottom by any means. I have dry powder to put to work. If I don't get a 25% lower re-entry point to bump back up to 60% stocks - I am fine with staying 40% stocks. When the facts change, I change my mind, what do you do sir (just a quote).

i do know it goes against almost all people here on their investment philosophy. I just don't want people who are close to or in retirement to get hurt and panic - just as I saw so many of my older friends get screwed in 2000 and 2008. It just seems so many people over-estimate their risk tolerance.

If the Fed can keep interest rates down below say 2.8-3 percent...that will keep a floor on equities. At around 3% on the 10 year - that yield seeking will revert back to bonds and out of stocks...as the risk free treasury would be much more attractive than S&P 500 yields. Odd thing is the bond market is acting totally different than the stock market right now...watch the bond market...not the stock market...
My main point is that the facts haven't changed for me -- I know my risk tolerance (kept to my stock allocation during bear markets) and I know what my goals are. So nothing that happens in the short run is going to change that.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
bigred77
Posts: 2049
Joined: Sat Jun 11, 2011 4:53 pm

Re: Extreme Valuations, and why you should reconsider

Post by bigred77 »

dcarste wrote:Yea I never made a decision to take profits until last month when I moved from 60% stock to 40%:

1) Extreme valuations above around 95 percent of all time periods Other experts have written numerous times that they interpret the data differently than Hussman, and they believe the market might be valued above historical means or medians, but not in an extreme way.
2) Triple tops all time highs in SP500, Russell 2000, Nasdaq multiple times If you expect the stock market to be positive over time, and I certainly do, then I expect different indices to hit all time tops frequently. Putting any significance into "triple tops" sounds like technical analysis to me. You are simply torturing data until you can find a pattern.
3) "Animal Spirits" Talk and hopium about I'm not sure what this means
4) AAII Bullish Sentiment Hit 62%...very very high historic sentiment I admittedly don't know what this is
5) No Bears in sight. Well hardly any. lol you need to read this board more then. Everyone here is a perma-bear!! sub 2% SWR... planning for 0% real returns over the next couple of decades for a balanced portfolio... Hussman may need to come here for some positive vibes :mrgreen:
6) VIX (implied volatility) at 10 and holding at this low of a level for a very long time I don't see the significance here. Are you implying low volatility leads to crashes?
7) Absolutely no policy risk, or geo-political risk priced in at all - even when risk is extremely high of disruption. How do you know it's not priced in? I think it is priced in, as would almost anyone who believes in efficient markets.

It's just my opinion that I'm happy with the money I've made the past 8 years, no reason I can't take profits in my tax sheltered accounts and feel good about it.

My main concern regards people within 10 years of retirement and those in retirement. If you've participated in the 8 year bull...and you have a substantial equity allocation (60% or above)...why not take the profits and go to 40% equities / 60% total bond. Now is not the time to risk what you've already made. Caveats about, like if you can stand a 30% draw down...stay the course, and can wait 5 years for your balance to recover. I just don't have the stomach after my balance getting up to where it is. I feel fortunate I guess and its time to be fearful when others are greedy. It's not that I am trying to time the market to get in at a lower price...more so that that I am not getting stock prices that are worth the risk I would be taking.
What is your plan if markets go up 5% a year over the next 10 and never experience a full peak to trough 25% drop? Just permanently lower your equity allocation? What if stocks go up 15% a year over the next 3 and then drop 25%. You'll get back in more heavily then at higher prices than today just because there was a 25% drop? What if that drop occurs and PE values are still 28?

Tactical asset allocation is a sub optimal strategy. Will you lose all that much if your wrong if your only moving back and forth between 40% equities and 60% equities? Probably not. But I think you would be much better off with a boglehead approach of just stay the course no matter what.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by lack_ey »

dcarste wrote:In 2011 expected 10 year average annual return was around 10% per year for any new money invested during that year. See 3rd chart down on link below. 4 other valuation metrics are similar...its not just his model..I ran into his model after doing my own modeling and being baffled at the prices I was seeing. I'm fine if the Shiller PE 10 is under 25. I'm NOT fine with it at 28.

http://www.hussmanfunds.com/wmc/wmc170213.htm

For any new money invested now at these valuations in the stock market - your average annual return over TEN YEARS is projected to be around 1%. And that will include a lot of gut wrenching volatility. Say its way better and is 4%. So what big deal...not worth the risk.

Hard to bet against a 60 year chart with 94% correlation to subsequent 10 year stock market returns.

It's not just his chart. it is Buffets favorite valuation metric (total market cap / GNP)...price to sales, Shiller 10 year CAPE, Shiller 5 year CAPE, Shiller 3 year CAPE. actual earnings per share are distorted by the new phenomenon of reporting "adjusted" earnings per share. LOL. There was a reason for Sarbanes Oxley in early 2000's. GAAP.

Oh BTW the Russell 2000 small cap index has a regular TTM PE of around 80-85. LOL.

Why all the blinders everyone? I'm still 40% stocks...

<SHRUG>
There's a reason why double-y-axis graphs are generally frowned upon, especially when attempting to show the relationship between two things. It's even worse here as one axis is inverted and the other is not, and one is on a log scale and the other isn't. And he cherry picks 12-year nominal returns to prove a point rather than say 7-year real returns. Give me a break.

Once you start testing over that many possible variables on both sides, eventually you're going to find something that fits your past data and "explains" it so closely...

Most not-totally-overfit analyses of valuations vs. subsequent stock returns that aren't cheating using improper statistical tools will show that the relationship is a lot weaker than many claim. Historically we know 1999 was a freak-out point but objectively by many measures you should have made that call in 1998, 1997, 1996, probably 1995, likely 1994, and so on. Hindsight market timing is pretty nice, huh.


Now, what I do appreciate is that if you're going to tactically allocate, you
(1) size the bet according to the strength of the signal and consequences of being right and wrong
(2) have a plan for execution and making changes now and in the future

That doesn't mean you're still not wrong but it's better than going in unprepared and going 100% to cash on potentially noise.

I still don't really think valuations are predictive enough to generally warrant a kind of shift 60% stocks -> 40% stocks given the alternatives today, though. If you buy for example bonds, those are not cheap either.

Personally I would suggest keeping risk allocations relatively constant, as valuations are fairly poor timing indicators, and if you make a change at all, make it a shift from US to ex-US equity. So take that 20% in stocks and consider for example 15% to ex-US equities, 5% to bonds, if you're convinced that US stocks are too expensive.
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Extreme Valuations, and why you should reconsider

Post by larryswedroe »

Where do people get these numbers like 85 P/E for small stocks?
M* shows DFSTX has current P/E based on prospective earnings (which makes the P/E bit lower than if based on trailing) of about 20, that's high, but nowhere near excessively high and Vanguard's NAESX is about 21.

Best wishes
Larry
User avatar
Watty
Posts: 28859
Joined: Wed Oct 10, 2007 3:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by Watty »

dcarste wrote:The risk reward is way out of whack in equities.
You also have to compare the the risk in equities to your alternatives.

The real return on bonds is meager or negative and they may be hurt badly when interest rates and inflation increase so it does not automatically follow that bonds are better. The dollar is pretty high against most currencies so anything in dollars could be hurt if the dollar drops so even cash could be a problem.

You also have to time it right. During the Dot Com bubble a lot of people saw it was a bubble up to three years before it peaked.

Trying to time the market is a lot harder then just seeing when things are over priced, you would have to;

1) Correctly see a bubble.

2) Find an alternative that is actually better.

3) Time it right.

4) Avoid situations where the situation safely unwinds itself. For example if the stock market prices are flat for a few years that might give time for the earnings to catch up without a big crash.

5) Avoid unrelated and unpredictable market movers like wars, natural disasters, or unexpected trends.

I know that I can''t do that so I just try to keep my portfolio diversified to be able to muddle though whatever happens.

That said, a lot of newer investors that started after the financial crisis in 2008 have never seen even a normal bear market and might be over confident. It could be a good idea to reevaluate if you have the right long term asset allocation for your risk tolerance.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

Hi Larry!

The Russell 2000 earnings were actually "nill" back sometime in 2016.

It is very troubling the accounting gimmicks being pulled. Somehow, they choose to exclude "one time non-cash charges that must be reported because of GAAP".

The perversion of Earnings, as I'm sure you've noticed over the past 5 years - is to report your "Adjusted" Earnings per share. What is "Adjusted". Usually excluding one time charges and write downs. Well if that happens every year, why would you exclude it from your reported earnings? The index fact sheets are conveniently not reporting GAAP rules, even excluding companies in the calculations of PE with negative earnings.

More links will be found by googling what is going on in the perversion of FAKE earnings ("Reporting Adjusted Earnings"). What was GAAP created for anyways? Somehow it is now totally ignored and analysts eat the cake in the form of "Adjusted Earnings per Share were XXX excluding this and that".

Go down to the "Wall Street Journal Estimates" on this link:

https://mishtalk.com/2016/03/30/are-sto ... pe-ratios/

Here are some more interesting data points. Dig into it if you have some time and let me know your view.

http://seekingalpha.com/article/3325435 ... ubblicious
Theoretical
Posts: 1546
Joined: Tue Aug 19, 2014 10:09 pm

Re: Extreme Valuations, and why you should reconsider

Post by Theoretical »

I think that's part of why I like the move/focus on sales, cashflows, and shareholder yield rather than earnings or book values (or at least not exclusively) of some of the newer value funds. Still fudge-able, but they seem less vulnerable to this kind of thing.
User avatar
vitaflo
Posts: 1905
Joined: Sat Sep 03, 2011 3:02 pm

Re: Extreme Valuations, and why you should reconsider

Post by vitaflo »

I have a hard time understanding these types of posts. The reason you set an AA and a glide path is to manage risk. As you get older you're going to be more conservative. Anyone closing in on retirement by definition will already have a more conservative AA. And the reason you rebalance is to "take some off the table" when stocks go on a tear like they have been. Most people (such as myself) have been pouring money into bonds these last few years just because stocks have done so well so we can maintain our AA (risk). It already works on auto-pilot.

If you're making major shifts in your AA then what that tells me is your AA was wrong to begin with. If you want to go from 60/40 to 40/60 because of some outside valuation or blog you read, then you should have been 40/60 to begin with because it's obvious you can't stomach 60/40 in a downturn. You don't set your AA for the good times you set it for what you can stomach in the bad times.
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Extreme Valuations, and why you should reconsider

Post by KyleAAA »

dcarste wrote:"I guess this time is different"

and I really honestly hope so, I will still stand to benefit - and I don't want to see retail investors fleeced again. But is this time really different? Valuations always have and always will matter on future returns. I really do hope I'm wrong. I just don't want people within 10 years of retirement, or new to retirement have much more than 40% in stocks and screw yourself out of your hard earned money. The other 60% I recommend either Total Bond Index or Vanguard Short Term Bond Index. The short term bond index now yields 1.6%, whereas a year ago it was under 1%. The short term index has an equivalent yield to a 5 year CD ladder also FYI.

:-(
I don't think anybody is saying this time is different. I think what they are saying is that since the definition of E in P/E has changed over the years, you have to account for that change. An efficient market certainly would.
Topic Author
dcarste
Posts: 157
Joined: Mon Apr 27, 2015 4:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by dcarste »

I'm a big proponent of price to ttm sales ratio, especially now. Pretty much the only metric (sales) that you can't gimmick with accounting.

See Figure 7. See Figure 5 and 6 also interesting...Market cap to GNP (Buffet's fav valuation indicator). Note this isn't a stock timing indicator, but rather is it worth buying equities at today's prices.

http://www.yardeni.com/pub/valcapsales.pdf

I've tempered by return expectations, basically excepting lower returns for lower volatility - by moving into 40% stocks, and 60% VBISX Short Term Bond Index (Inflation Hedge). I'm not trying to "beat" anything. I am locking in gains now that my portfolio balance has reached a level I never expected. As my balance increased dramatically, I realized my risk profile changed to conservative from moderate. I feel blessed and don't need to risk just to MAYBE get a few extra percent. I'll change my mind if I am given an opportunity to buy lower than this, otherwise I am perfectly happy with the money/balance I have now after this bull run, and am ok with a lower return so I don't have to deal with any large volatility. So I'm encouraging would be soon to retire investors just to look at your balance now, and maybe just take a little bit of time to rethink how you would feel with a 25% drawdown...with a good possibility that it could take longer to recover your balance. Those with rock solid ability to stay the course with a high equity exposure (>60%) will be fine in the long run of course. My risk tolerance has changed now that I've amassed a much larger balance. To each his own...
MoonOrb
Posts: 1506
Joined: Thu Jan 24, 2013 5:58 pm

Re: Extreme Valuations, and why you should reconsider

Post by MoonOrb »

Talking about this in terms of 'being greedy' is a little frustrating. I think of the approach I've adopted as one that is geared to give me as much of the market's return as I can get. This means I need to be invested in the market during periods when it's making new highs rather than trying to anticipate when it might go up or down. Greed has nothing to do with this.
KyleAAA
Posts: 9498
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Extreme Valuations, and why you should reconsider

Post by KyleAAA »

dcarste wrote:I'm a big proponent of price to ttm sales ratio, especially now. Pretty much the only metric (sales) that you can't gimmick with accounting.
Sales can be easily gimmicked with accounting. I can assign revenue to this year, last year, or next year based on when I subjectively claim I "earned" it. Cash flow is more in line with what you're looking for. Of course, cash flow has its own problems in that, for example, everything can look great until I have to do a huge recall and give back 2 years of cash flow in a single year. GAAP is designed to be objective and you really can't get a good picture unless you look at all 3 financial statements together.
garlandwhizzer
Posts: 3565
Joined: Fri Aug 06, 2010 3:42 pm

Re: Extreme Valuations, and why you should reconsider

Post by garlandwhizzer »

I believe that US equity valuations are a bit stretched at present, but not in my view in bubble territory. Basically there is already a lot of future good news baked into stock prices now. Valuations currently are not based on what the current corporate profits are but on an optimistic view of anticipated future increases in corporate profits from infrastructure spending, repatriation of foreign assets held by US companies, reductions in corporate and personal income taxes, and reductions in corporate regulations, all of which are added on to an economy that clearly is near full employment now and already growing. If the economy grows at 3%+ and corporate profits get sufficiently juiced by tax changes, infrastructure spending, reduced regulatory environment, and bringing billions in foreign assets back to the USA, current valuations may be fully justified. If instead, economic growth remains sub-par, inflation takes off, and tariff protectionism initiates a global trade war, a significant market correction is likely.

I do not know which of these future scenarios will occur and I don't think anyone does with reliability, certainly not Mr. Hussman who has for years been shouting that the sky was falling even as markets relentlessly rose. His track record at predicting the future is far worse than a coin flip. Making tactical asset allocation changes is a tricky business, take it from one who has done it from time to time. It requires making not one but two correct decisions: when to sell and when to buy back in. Most who attempt timing these two decisions fail at one, often at both. Personally I do not believe we're in bubble territory presently and until I believe we are, I'm not going to change my all weather portfolio allocations which I consider to be a reasonable balance of risk and reward for my own particular situation. We certainly could have a market correction in the near term, but I see no sign of a secular bear market for the foreseeable future which suggests that even if we do have a marked correction, a cyclical bear, by and hold patience will be rewarded in time.

Garland Whizzer
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Extreme Valuations, and why you should reconsider

Post by delamer »

dcarste wrote:I'm a big proponent of price to ttm sales ratio, especially now. Pretty much the only metric (sales) that you can't gimmick with accounting.

See Figure 7. See Figure 5 and 6 also interesting...Market cap to GNP (Buffet's fav valuation indicator). Note this isn't a stock timing indicator, but rather is it worth buying equities at today's prices.

http://www.yardeni.com/pub/valcapsales.pdf

I've tempered by return expectations, basically excepting lower returns for lower volatility - by moving into 40% stocks, and 60% VBISX Short Term Bond Index (Inflation Hedge). I'm not trying to "beat" anything. I am locking in gains now that my portfolio balance has reached a level I never expected. As my balance increased dramatically, I realized my risk profile changed to conservative from moderate. I feel blessed and don't need to risk just to MAYBE get a few extra percent. I'll change my mind if I am given an opportunity to buy lower than this, otherwise I am perfectly happy with the money/balance I have now after this bull run, and am ok with a lower return so I don't have to deal with any large volatility. So I'm encouraging would be soon to retire investors just to look at your balance now, and maybe just take a little bit of time to rethink how you would feel with a 25% drawdown...with a good possibility that it could take longer to recover your balance. Those with rock solid ability to stay the course with a high equity exposure (>60%) will be fine in the long run of course. My risk tolerance has changed now that I've amassed a much larger balance. To each his own...
It is reasonable that your risk tolerance has changed now that your portfolio is larger. But what you are recommending is that other people take profits in their portfolios because of the change in your risk tolerance, when you don't know anything about their risk tolerance or whether it has changed.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Extreme Valuations, and why you should reconsider

Post by HomerJ »

dcarste wrote:I don't follow Hussman's funds which have to compete with a benchmark, so they don't reflect his actual holdings.

My point is I DID participate in the 8 year bull with 60% stocks...and last month decided I've made enough money staying the course that it was time to take some off the table.

All you really need to see is the chart showing 10 year future stock returns based on current valuations (he shows 4 different valuation metrics). They all pretty closely follow TEN year returns.

Before I got sick I was head managing analyst at Time Warner, so I am a brainy type. It is pointless to 'Time' the market unless I see totally rediculous valuations. I haven't seen then except in the past year, and I still didn't act. After this past 3 month run, I decided I was lucky enough to participate and I myself don't need to risk a large accumulation, when I've been blessed to participate all the way up until now.
His charts are crap. For a brainy type, I find it interesting you can so easily ignore the conflicting data presented to you. Hussman has been calling for a crash since 2010. He's been wrong over and over and over. So his posts now are completely discredited.

We may indeed be due for a crash. It could happen tomorrow.

But Hussman has PROVEN he has no idea what he's talking about. There is no 94% correlation. He's been wrong over and over and over.

If you want to take risk off the table, that's fine. There are many reasons to do so. Your age to retirement is one reason to go with a lower stock allocation. Your need to take risk is much lower, since you've made a bunch of money over the past 7 years and you now have "enough".
If you've made your money why not de-risk? If you can stand a 30% drawdown, then that is perfectly fine to stay the course. I don't think I can stomach it after my account balance has grown so much by participating in the bull market. I actually only went from 60% stocks to 40% stocks though...I'll still participate in the upside if there is some.
Yep, this is a very good reason to lower your stock allocation. Many of us will agree with you and your actions.

But no one will take you seriously if you continue to defend Hussman and his "94% accurate correlations for predicting the future!" model.
Last edited by HomerJ on Tue Feb 21, 2017 2:01 pm, edited 1 time in total.
lack_ey
Posts: 6701
Joined: Wed Nov 19, 2014 10:55 pm

Re: Extreme Valuations, and why you should reconsider

Post by lack_ey »

dcarste wrote:I've tempered by return expectations, basically excepting lower returns for lower volatility - by moving into 40% stocks, and 60% VBISX Short Term Bond Index (Inflation Hedge).
Wait, how are 1-5 yr maturity nominal bonds an inflation hedge? Relative to long-term nominal bonds they likely wouldn't be as bad with inflation but this is a matter of less-bad rather than being actually a hedge.
User avatar
HomerJ
Posts: 21281
Joined: Fri Jun 06, 2008 12:50 pm

Re: Extreme Valuations, and why you should reconsider

Post by HomerJ »

vitaflo wrote:I have a hard time understanding these types of posts. The reason you set an AA and a glide path is to manage risk. As you get older you're going to be more conservative. Anyone closing in on retirement by definition will already have a more conservative AA. And the reason you rebalance is to "take some off the table" when stocks go on a tear like they have been. Most people (such as myself) have been pouring money into bonds these last few years just because stocks have done so well so we can maintain our AA (risk). It already works on auto-pilot.

If you're making major shifts in your AA then what that tells me is your AA was wrong to begin with. If you want to go from 60/40 to 40/60 because of some outside valuation or blog you read, then you should have been 40/60 to begin with because it's obvious you can't stomach 60/40 in a downturn. You don't set your AA for the good times you set it for what you can stomach in the bad times.
Good post.
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Extreme Valuations, and why you should reconsider

Post by larryswedroe »

dcarste
Few things. First one should avoid SG stocks anyway, or at least the ones with high investment and low profitability as they have underperformed market by like 8% a year. A figure I'm sure most are unaware of. So at very least if buying small stocks should find funds that screen them out IMO.

Second, p/s not a good measure IMO, as you don't buy sales but profits. But profits can be distorted by accounting gimmicks so better to use p/CF. And currently even using M* data NAESX has lower p/cf than VFINX. Now you cannot distort cash flow.

Third, values in small do look relatively high but nowhere near the bubble you are talking about.

Finally IMO simply better to buy SV and avoid those problems with SG. That way you get both exposures in one fund, the best way to do a multi-factor strategy.
Larry
bigred77
Posts: 2049
Joined: Sat Jun 11, 2011 4:53 pm

Re: Extreme Valuations, and why you should reconsider

Post by bigred77 »

dcarste wrote:I'm a big proponent of price to ttm sales ratio, especially now. Pretty much the only metric (sales) that you can't gimmick with accounting.

See Figure 7. See Figure 5 and 6 also interesting...Market cap to GNP (Buffet's fav valuation indicator). Note this isn't a stock timing indicator, but rather is it worth buying equities at today's prices.

http://www.yardeni.com/pub/valcapsales.pdf

I've tempered by return expectations, basically excepting lower returns for lower volatility - by moving into 40% stocks, and 60% VBISX Short Term Bond Index (Inflation Hedge). I'm not trying to "beat" anything. I am locking in gains now that my portfolio balance has reached a level I never expected. As my balance increased dramatically, I realized my risk profile changed to conservative from moderate. I feel blessed and don't need to risk just to MAYBE get a few extra percent. I'll change my mind if I am given an opportunity to buy lower than this, otherwise I am perfectly happy with the money/balance I have now after this bull run, and am ok with a lower return so I don't have to deal with any large volatility. So I'm encouraging would be soon to retire investors just to look at your balance now, and maybe just take a little bit of time to rethink how you would feel with a 25% drawdown...with a good possibility that it could take longer to recover your balance. Those with rock solid ability to stay the course with a high equity exposure (>60%) will be fine in the long run of course. My risk tolerance has changed now that I've amassed a much larger balance. To each his own...
I don't want to put words in your mouth but if you are saying the current bull market has lifted your assets to a place where you no longer need, or are no longer willing, to bear as much risk with your portfolio than I think making a permanent change to your asset allocation is a prudent choice.

They key there is permanent though. I would not think it would be prudent to change your asset allocation back to 60/40 based solely on the next 25% drop in the equity markets. That would be the epitome of market timing.
User avatar
9-5 Suited
Posts: 1307
Joined: Thu Jun 23, 2016 12:14 pm

Re: Extreme Valuations, and why you should reconsider

Post by 9-5 Suited »

This thread is a great example of why staying the course seems so easy in theory but then can be fairly difficult in practice. When the chicken little type experts are finally right about impending doom (which if you predict it every year, you definitely will be eventually!), then confirmation bias will arrive with a fury and renew the cycle of belief that market collapse is predictable and one can time the market by just paying enough attention.

Thanks so much to folks like Larry for doing the research that keeps the predictions honest! I love the Lessons Learned series Larry does for this exact reason. Helps to tune out the noise and keep on track.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Extreme Valuations, and why you should reconsider

Post by willthrill81 »

Keep in mind that the market cannot be explained well even by the experts. Take a look at this quote.

"There is no doubt in anyone's mind that the market has become over extended and is due for a pullback," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"That said, when you have this kind of momentum, it is very hard to sit on the sidelines."
http://finance.yahoo.com/news/stock-fut ... 32177.html

If there's no doubt in anyone's mind that the market is overvalued, then the market should have already dropped. But it hasn't, so clearly this executive from Prudential has no clue what he's saying. And then he says that, despite the market being overvalued, he doesn't want to miss out on the rally. :oops:

I'm not offering this simply as an example of a mindless remark but as a demonstration that even the so-called experts cannot be relied upon.
The Sensible Steward
User avatar
BTDT
Posts: 783
Joined: Sun Aug 29, 2010 10:40 am
Location: Grand Lake OK

Re: Extreme Valuations, and why you should reconsider

Post by BTDT »

"A speculator is a man who observes the future, and acts before it occurs." Bernard Baruch :sharebeer
If past history was all that is needed to play the game of money, the richest people would be librarians.
minimalistmarc
Posts: 1636
Joined: Fri Jul 24, 2015 4:38 pm

Re: Extreme Valuations, and why you should reconsider

Post by minimalistmarc »

As somebody who has at least another 15 - 20 years ahead of me I would love 10 years of very low returns.

In the UK I could save 40k per year in our tax free accounts and build on our stash.

As Toons says, gotta be there when lightening strikes, could be in 10 - 20 years but the longer the better.
pkcrafter
Posts: 15461
Joined: Sun Mar 04, 2007 11:19 am
Location: CA
Contact:

Re: Extreme Valuations, and why you should reconsider

Post by pkcrafter »

dcarste wrote:
I do know it goes against almost all people here on their investment philosophy. I just don't want people who are close to or in retirement to get hurt and panic - just as I saw so many of my older friends get screwed in 2000 and 2008. It just seems so many people over-estimate their risk tolerance.
You are market timing, and it does go against Boglehead philosophy. But, at least you didn't make the decision in panic mode and sell everything without rational thought. We recommend buy and hold because that's the way to generate market return, which puts the investor way over average. Most here would also recommend investors approaching retirement trim back on risk, so your concern about that is valid. To be clear that decision is not timing, it's built into investment policy and occurs regardless of of any current "indicator." It also depends on ability and need. There are some who don't really need to cut equity because they can afford to take the hit.

Maybe you posted to warn people about high CAPE, but everyone knows about it. Is it a concern? I'm sure no one is comfortable with it, but true Bogleheads will ride it. You seem to be justifying your timing move by explaining that you have a plan and it's not really timing--you've reduced equity and will get back to 60% after a 25% drop, and if it doesn't drop by 25% you won't get back in--you're fine with 40% equity. But what if does drop 25%, you get back in and it drops another 25%? If you are worried about 60% in equity, drop it for the right reason and leave it there. How far from retirement are you?

Dip - 5-10%
Correction - 10-20%
Bear - 20-50%
Crash - 50%+

If the Fed can keep interest rates down below say 2.8-3 percent...that will keep a floor on equities. At around 3% on the 10 year - that yield seeking will revert back to bonds and out of stocks...as the risk free treasury would be much more attractive than S&P 500 yields. Odd thing is the bond market is acting totally different than the stock market right now...watch the bond market...not the stock
market...
Can you see what's going on here. You have created a scenario based on some information, but then you add IF. Then you finish by saying "Odd thing is..." Yeah, there's always one little odd thing that renders the whole thought process useless. There is no payoff in thinking about everything that might be.

If you keep playing with timing it will cost you. If you are going to do it just this once and remain at 40% equity, it's probably a reasonable move.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Good Listener
Posts: 927
Joined: Wed Dec 30, 2015 4:24 pm

Re: Extreme Valuations, and why you should reconsider

Post by Good Listener »

Interesting thread. OP knows a heck of a lot more than I do and I believe he/she is very well meaning and concerned for people nearing or in retirement. Many of us at that stage are already at 50/50 and some even at 40/60 or 30/70 based on risk tolerance. I am 50/50 with 10 of the bond 50 in money market. OP, I think nobody knows the future. However, one thing I absolutely know is that having 60% of a protfolio in a taxable short term bond fund yielding 1+% essentially guarantees that 60% of your portfolio will lose to inflation. You stated that it is an inflation hedge and with that, I disagree.
User avatar
willthrill81
Posts: 32250
Joined: Thu Jan 26, 2017 2:17 pm
Location: USA
Contact:

Re: Extreme Valuations, and why you should reconsider

Post by willthrill81 »

dcarste wrote:Hi Aloha Joe - I don't base all of my decisions on Hussman. I base on valuations - which is why I have been at my normal allocation until recently.

I mean seriously Aloha - 1929 and 1999 valuations, with huge policy uncertaintly not priced in. And you want to continue to not take "SOME" off the table?
The problem is that 99% of the people who talk about valuations are talking about Shiller's CAPE computed with GAAP data. It's simply bogus. Look up the accounting changes that took place back in 1994 and you'll start to see why valuations have been "high" for 25 years and counting with only one brief exception lasting a few months.

Siegel has been advocating for years that we use NIPA data, unaffected by the accounting changes, instead. It is more predictive of future returns than Shiller's old version and indicates that valuations are not anywhere near record highs.
The Sensible Steward
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 7:28 am
Location: St Louis MO

Re: Extreme Valuations, and why you should reconsider

Post by larryswedroe »

will
Would not say it's bogus, that's way too extreme
Just need to make adjustments like I explained in my articles, about 5 in the P/E. Which still places it very high historically, and predicts relatively low real returns, well below historical average.
But as I also explained that doesn't mean overvalued---just highly valued and there are very logical reasons for the drift up, as I explained.
But bogus? No
Post Reply