Risk on or Risk off? An NYU professor's take

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BuyAndHoldOn
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Risk on or Risk off? An NYU professor's take

Post by BuyAndHoldOn » Sat Jun 17, 2017 7:33 pm

This guy puts out a lot of free content, FYI.

Quick takeaway: Largely because of historically low interest rates, equities do not *appear* significantly overvalued by historical standards. He is referring to the risk premium, or extra compensation [theoretically] demanded by investors for holding equities.

https://www.youtube.com/watch?v=7WnAkX4fFNI

http://people.stern.nyu.edu/adamodar/pd ... arkets.pdf

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nisiprius
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Re: Risk on or Risk off? An NYU professor's take

Post by nisiprius » Sat Jun 17, 2017 8:26 pm

It is always the case, at any instant in stock market history, that there is a fairly even division of opinion, even among the people I consider reliably and knowledgeable, as to the direction of the market. It is not the case that as the market goes up, opinion gradually shifts from bullish to bearish. The split of opinion is always there, and always roughly balanced.

Damodaran actually misses the whole point of his own lead-off quotation by failing to give all of it. After describing the division of opinion between those who thought it was the best of times versus those who thought it was the worst, etc. Dickens concludes his paragraph by saying (my emphasis)
in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.
It is always like that.

As the Dow began recovering in 2009, for several years we were told it was a "value trap" and a "dead cat bounce." In 2011, there was a -20% correction that lasted almost half a year and a lot of people were quite sure the run-up was ended. Conversely, even at the height of the 1999-2000 tech mania, there were quite a lot of people willing to explain at length, with numbers, why the stock market was not overvalued; Glassman and Hassett first wrote an article in 1999 called "Stock prices are still far too low," and followed it up in 2000 with a book called "Dow 36,000," which said "A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier."

I never know what to do with the continuing streams of split opinion, other than ignore them.
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TigerNest
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Re: Risk on or Risk off? An NYU professor's take

Post by TigerNest » Sat Jun 17, 2017 10:36 pm

nisiprius wrote:Glassman and Hassett first wrote an article in 1999 called "Stock prices are still far too low," and followed it up in 2000 with a book called "Dow 36,000," which said "A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier."


And one of the author of that book, the economist Kevin Hassett, is now the Chair of the White House's Council of Economic Advisers.
:D

jbranx
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Re: Risk on or Risk off? An NYU professor's take

Post by jbranx » Sun Jun 18, 2017 3:32 am

"Damodaran on Valuation" is one of the better books on stock analysis, and he has trained a lot of the analysts on Wall Street. His conclusion is essentially the same as Buffet's recent comments that stocks are not overvalued if interest rates remain this low. Problem with that is short-term market forecasting is no better than 50/50 odds, and, as the Wall Street Journal found in the years they tracked economist's interest rate forecasts, they not only couldn't guess where the rates were going, they got the direction wrong!

I've watched the performance of all the market forecasting formulas for years, and my impression is that there simply isn't one that always works. Following them only leads to market timing, which Bogle says he's never seen anyone do successfully. I do occasionally look at the market "earnings yield," and compare that to the bond market yield. Gives me some comfort when I see dire forecasts, but the only sure fire thing that works is to buy when everyone else is selling, like 2001 and 2008, for ex. And do that only with index funds or ETFs.

It is good to see computations of the equity risk premium, and this professor does a good job at that. Probably useful over the long term but not a market timing signal for sure.

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Re: Risk on or Risk off? An NYU professor's take

Post by Valuethinker » Sun Jun 18, 2017 7:33 am

TigerNest wrote:
nisiprius wrote:Glassman and Hassett first wrote an article in 1999 called "Stock prices are still far too low," and followed it up in 2000 with a book called "Dow 36,000," which said "A sensible target date for Dow 36,000 is early 2005, but it could be reached much earlier."


And one of the author of that book, the economist Kevin Hassett, is now the Chair of the White House's Council of Economic Advisers.
:D


The expression that is often used (it was first used, that I know of, by Paul Krugman about trade economists proposing "strategic trade theory") is "policy entrepreneurs". A revolving door between think tanks and government.

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Re: Risk on or Risk off? An NYU professor's take

Post by Grt2bOutdoors » Sun Jun 18, 2017 8:14 am

Nobody knows nuthin!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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