CAPE Fear: Why CAPE Naysayers Are Wrong

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
HomerJ
Posts: 11055
Joined: Fri Jun 06, 2008 12:50 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by HomerJ » Fri Jan 19, 2018 1:52 pm

Look, it absolutely makes sense that high valuations mean it's more likely to see lower 10-year returns going forward.

But it's not actionable at all.

If you have more than 10 years to retirement, there's no need to care about valuations. You care about long-term returns, not 10-year returns. And a stretch of bad returns is (so far) usually followed by a stretch of good returns.

If you have less than 10 years to retirement, there's no need to care about valuations. You're going to start using a more conservative AA anyway.

No one should plan around high returns anyway. Plan around low returns (because you might get them), and be pleasantly surprised.

See, I don't care about low expected returns because I'm already planning for low expected returns ALL THE TIME. Someone saying "Oh, our chances of low returns are higher now" doesn't affect me, because I was already planning around low returns.

It's like driving somewhere important. You don't plan around driving conditions being perfect. You plan around bad driving conditions, and leave a little early. If the drive is uneventful, you get there early. If the bad conditions appear, you were already ready.

Just like investing. I'm not planning on getting 10% returns for the next 7 years to retire. If I get them, hurray! I may retire in 4 years instead. But I don't have to worry about some academic predicting low returns going forward (AGAIN, for at least the FIFTH straight year), because I'm already prepared for that.

User avatar
HomerJ
Posts: 11055
Joined: Fri Jun 06, 2008 12:50 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by HomerJ » Fri Jan 19, 2018 2:17 pm

There's another old thread where a poster I respect very much made a post declaring valuations are very important, and one absolutely should reduce their stock allocations when valuations are high.

He went on to state:
Now right now, U.S. stocks are about at all time highs. My portfolio is at an all time high. Valuations are elevated and expected return is below the historical average.
That was on Jan 22, 2014, when the DOW was at 16383. It has since risen more than 60%.

We've seen AT LEAST 4-5 years of people talking about how high valuations are, and how expected returns are low, and that people should lower their stock allocations.

If the market crashes tomorrow, people 10 years from now will say how "obvious" it was that it was about to crash in 2018 based on CAPE. The new back-tested models will fit the curve perfectly.

They won't mention that it was also "obvious" that stocks were over-valued to many people in 2014, 4 years before the crash.

Market-timing is hard.

User avatar
willthrill81
Posts: 4041
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by willthrill81 » Fri Jan 19, 2018 2:21 pm

HomerJ wrote:
Fri Jan 19, 2018 1:52 pm
Look, it absolutely makes sense that high valuations mean it's more likely to see lower 10-year returns going forward.

But it's not actionable at all.
Even though I think there is a little value in valuation metrics like CAPE, I agree that they do not seem to be accurate enough to be actionable. Even in the historic record, there has simply been too much variation in the predictions to make it worthwhile. Further, despite the U.S. having had an above average CAPE for 26 years and counting, inflation-adjusted returns have actually been slightly better than the long-term average. That could be a fluke, but if so, it seems like a big one from a statistical perspective.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

mffl
Posts: 76
Joined: Wed Dec 06, 2017 7:25 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by mffl » Fri Jan 19, 2018 5:22 pm

I echo some of the other posters who are surprised/frustrated/mortified that so many Bogleheads subscribe to things like CAPE. Forget all your numbers and backtested data. Any chart enthusiast or financial advisor can come up with numbers to support a strategy. I suppose even Bogleheads are susceptible to the tantalizing draw of greater than average returns and that the Boglehead strategy is just too darn simple.

Is it possible returns will be lower over the next several years due to higher valuations? Let's just say I give you that fact as a baseline. (I'd refute that too, but it's irrelevant to my overall point.)

I should be diversified in international because it's diversification, not because valuations are lower. Ask yourself this. WHY are international valuations lower? What do YOU know that the market doesn't? Further, if this works internationally, surely it works at a sector/factor/whatever level domestically. Pick the sectors with lower CAPE. Or, perhaps even individual stocks! You know, if only some fund manager could package this up as a product, he'd beat the market in the long run. But the same proof that it doesn't work domestically (i.e. active fund managers simply don't beat the market) can be used to disprove any other use of CAPE other than perhaps using it to suggest being out of stocks (for now), or to have a lower stock allocation (for now). But if you're not in stocks, what are you in? Bonds? Don't bond buyers know the same things we do? Is CAPE a secret? If not, then isn't all this priced in already to your alternative investments? Or do you really know something everyone else doesn't?

stlutz
Posts: 4378
Joined: Fri Jan 02, 2009 1:08 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by stlutz » Fri Jan 19, 2018 9:14 pm

Look, it absolutely makes sense that high valuations mean it's more likely to see lower 10-year returns going forward.

But it's not actionable at all.
Generally in discussions on PE-10 I've been on Homer's "side" of the debate. I fully agree that using a single valuation metric to make an all-in or all-out market timing call generally is not wise.

But, to whack away at a straw man just a bit, is there no price at which you'd say that the risk of stocks is "not worth it"? What if the CAPE was 100x? Would it have been a bad move to have unloaded your Japanese stocks in 1986 and missed on all of those great-but-very-temporary gains before the '89 peak?

The price that one pays for an investment is never not relevant. Price is an important component of the risk of an investment. All other things being equal, a T-bond yielding 5% is less risky than one yielding 2.5%.

In constructing an investment portfolio, one should be trying to find an appropriate balance between the potential gains that are being offered and the risks involved. "High Price Risk" is a real risk.

The challenge for an investor is that the price of an investment often reflects a bunch of other risks. Stocks in January of 2009 did not have much "high price risk", but they had a huge amount of other risks and the prices reflected that. Ex ante, the stock market in 2009 was not offering a free lunch.

A lot of people on this board have made a lot of money over the past 8 years. Many folks are now in a position where return of capital is as important as return on capital. If that is the case, it's probably wise to re-evaluate that 90/10 stock/bond mix for whether it's appropriate.

None of the fundamental risks of investing in the stock market have gone away in the last couple of years. Furthermore, I don't know of anyone who is making a case that long-term earnings growth will significantly accelerate from what it has been. Certainly there's a one-time bump that will happen b/c of the tax law, but the corporate tax rate isn't going to drop to 7% in the next 10 years, so we aren't getting that benefit again.

In short, right now we are paying more despite the fact that the fundamental risks are still there and that there is not more growth potential. Does that make stocks look less attractive? Yes it does. Given where the stock market has gotten us, I think this is a great time to re-evaluate one's need and willingness to take risk if one has not done so the past few years.

Certainly one can do this and say, go from 75/25 to 60/40 without being labeled a market timer.

staythecourse
Posts: 5640
Joined: Mon Jan 03, 2011 9:40 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by staythecourse » Fri Jan 19, 2018 9:26 pm

stlutz wrote:
Fri Jan 19, 2018 9:14 pm
Certainly one can do this and say, go from 75/25 to 60/40 without being labeled a market timer.
Do as you want, but making a choice on your asset allocation based on valuations IS market timing. Okay to do, but keep your eyes wide open and don't lie to yourself when doing it. If you believe in it do it.

I don't as I have not found ONE piece of concrete evidence it has high correlations WITH causation and/or is actionable (tells me exactly when to exit, when to cut back, when to increase equities, or when to get back in). Without the latter it becomes an academic exercise.

I can't speak on others feelings who are also not valuation guys, but I can say it is lot like any other active management technique in that I would LOVE to find something to give me an edge, but in all good conscience believe in the one's out there with the lack of clear cut data to support it. So, I am left with the only reasonable investing approach which the bogleheads approach.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
willthrill81
Posts: 4041
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by willthrill81 » Sat Jan 20, 2018 12:38 am

stlutz wrote:
Fri Jan 19, 2018 9:14 pm
The price that one pays for an investment is never not relevant.
I agree 100%. This is one of my biggest problems with buy-and-hold; it is built on the assumption that today's price is irrelevant. No businessperson would ever believe that. Yes, I know that the analogy isn't perfect, but it's still applicable.

I only buy an investment that I have a strong belief will increase in value over time. Consequently, I refuse to buy or own stocks that are in a clear downward trend (i.e. below 7 month moving average); the historic data are very clear that returns are very low during this period and volatility is substantially higher than normal. Put those together, and I say "No way."
stlutz wrote:
Fri Jan 19, 2018 9:14 pm
Certainly one can do this and say, go from 75/25 to 60/40 without being labeled a market timer.
Though I agree with the rest of your post and am a self-proclaimed trend follower myself, I must here agree with staythecourse: changing your AA on the basis of any aspect of market performance is indeed market timing. But who cares what label anyone gives you? Market timing is not necessarily the evil thing that many purport it to be; if it's accomplished with objective rules, it can be effective. But valuations are poor metrics for market timing, and introducing subjectivity into market timing is, IMHO, a bad idea.

Do what you truly believe is most appropriate for you and don't look back.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
HomerJ
Posts: 11055
Joined: Fri Jun 06, 2008 12:50 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by HomerJ » Sat Jan 20, 2018 1:33 am

stlutz wrote:
Fri Jan 19, 2018 9:14 pm
I think this is a great time to re-evaluate one's need and willingness to take risk if one has not done so the past few years.

Certainly one can do this and say, go from 75/25 to 60/40 without being labeled a market timer.
Because of the run-up and being a few years older and closer to retirement, one's need and willingness to take risk may indeed have changed. That's a good reason to change your AA.

But valuations are not the reason to change your AA even though the massive growth of one's portfolio and higher valuations probably go hand-in-hand. But it's the growth of your portfolio that is the key factor that may change your need and willingness to take risk.

If valuations did indeed go all the way to 100x, I'd lock in a ton of gains from rebalancing back to my normal 50/50 every so often on the way up.

Most CAPE proponents would be almost all the way out of stocks at 40x. Meanwhile, I'd keep selling stocks and pocketing the gains until when the market finally crashed, I'd have so much in bonds I wouldn't even care that much about the stock side of my portfolio.
Last edited by HomerJ on Sat Jan 20, 2018 1:37 am, edited 1 time in total.

User avatar
HomerJ
Posts: 11055
Joined: Fri Jun 06, 2008 12:50 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by HomerJ » Sat Jan 20, 2018 1:36 am

willthrill81 wrote:
Sat Jan 20, 2018 12:38 am
I only buy an investment that I have a strong belief will increase in value over time.
Umm... That's what we all do too.. We believe the stock market, as a whole, will increase in value over time. Long-term time.
Consequently, I refuse to buy or own stocks that are in a clear downward trend (i.e. below 7 month moving average); the historic data are very clear that returns are very low during this period and volatility is substantially higher than normal. Put those together, and I say "No way."
I assume you are talking about specific single stocks? And specific short periods of time?

User avatar
unclescrooge
Posts: 2090
Joined: Thu Jun 07, 2012 7:00 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by unclescrooge » Sat Jan 20, 2018 1:53 am

Nate79 wrote:
Sun Jan 07, 2018 5:17 pm
letsgobobby wrote:
Sun Jan 07, 2018 12:23 pm
Nate79 wrote:
Sun Jan 07, 2018 12:12 pm
How well did CAPE predict 2017 return?
has anyone ever claimed CAPE predicts one year returns?
Read the article. People have been crying about CAPE10 for a while now. If you made it actionable and changed your asset allocation you lost out on a nice year. Myself, I'm enjoying the 2017 20% gain.
All these CAPE enthusiasts have been on the sidelines since 2014. If not, then they're just posers jumping on the bandwagon. :mrgreen:

Da5id
Posts: 2034
Joined: Fri Feb 26, 2016 8:20 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by Da5id » Sat Jan 20, 2018 9:04 am

HomerJ wrote:
Sat Jan 20, 2018 1:33 am
Most CAPE proponents would be almost all the way out of stocks at 40x.
Citation needed. This thread, like many, seems dedicated to the slaying of straw men. How many advocates are you seeing here of tactical asset allocation based on CAPE?

User avatar
siamond
Posts: 3867
Joined: Mon May 28, 2012 5:50 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by siamond » Sat Jan 20, 2018 10:07 am

CAPE critic: no valuation metric can predict next year's return or the year after
CAPE curious: nobody having looked at corresponding numbers would make such a claim
CAPE critic: market timing is bad, bad, bad
CAPE curious: yup, making decisions based on guessing short-term returns is indeed a bad idea, I can demonstrate that with CAPE numbers if you want
CAPE critic: CAPE is for market timers! Therefore CAPE is bad, bad, bad
CAPE curious: sigh

User avatar
willthrill81
Posts: 4041
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by willthrill81 » Sat Jan 20, 2018 10:50 am

HomerJ wrote:
Sat Jan 20, 2018 1:36 am
Consequently, I refuse to buy or own stocks that are in a clear downward trend (i.e. below 7 month moving average); the historic data are very clear that returns are very low during this period and volatility is substantially higher than normal. Put those together, and I say "No way."
I assume you are talking about specific single stocks? And specific short periods of time?
No, the S&P 500.

Image

That's using the 200 DMA instead of the 7 month moving average, but they both produce similar results over the long-term. When the S&P 500 is below its 200 DMA, the average 2.1% annual return with greater than average volatility (std. dev. 22.2%) isn't for me; I'll take bonds during that period.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

staythecourse
Posts: 5640
Joined: Mon Jan 03, 2011 9:40 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by staythecourse » Sat Jan 20, 2018 12:27 pm

siamond wrote:
Sat Jan 20, 2018 10:07 am
CAPE critic: no valuation metric can predict next year's return or the year after
CAPE curious: nobody having looked at corresponding numbers would make such a claim
CAPE critic: market timing is bad, bad, bad
CAPE curious: yup, making decisions based on guessing short-term returns is indeed a bad idea, I can demonstrate that with CAPE numbers if you want
CAPE critic: CAPE is for market timers! Therefore CAPE is bad, bad, bad
CAPE curious: sigh
No, what the critics are saying is there is POOR data to NO data on an ex ante basis CAPE or any other metric gives better returns then buy and hold. I am one who would LOVE to believe there is some magical formula that gives better returns then buy and hold. All the better if it is some simple number. But then again if there is some simple number that is readily available then wouldn't everyone be using it and thus it would no longer be the magical number. Then folks would front run that number and just sell at 0.001 more then the magical number. See where this is going?

This simply comes down to the old story of the professor and financial student walking down the street and seeing the $20 bill. The finance professor already knows it CAN'T be a $20 bill because if it was it would have already been picked up as opposed to the finance student who somehow thinks he is the ONLY person who saw the $20.

Good luck.

p.s. If there is some valuation metric I can GUARANTEE that holy grail is not some simple number that is A. Can be figured out by the masses and B. Is readily available to the masses. At that point it would be proprietary as it would be worth TRILLIONS of dollars.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

User avatar
siamond
Posts: 3867
Joined: Mon May 28, 2012 5:50 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by siamond » Sat Jan 20, 2018 1:40 pm

staythecourse wrote:
Sat Jan 20, 2018 12:27 pm
No, what the critics are saying is there is POOR data to NO data on an ex ante basis CAPE or any other metric gives better returns then buy and hold. I am one who would LOVE to believe there is some magical formula that gives better returns then buy and hold. All the better if it is some simple number. But then again if there is some simple number that is readily available then wouldn't everyone be using it and thus it would no longer be the magical number. Then folks would front run that number and just sell at 0.001 more then the magical number. See where this is going?
Oh yes, I see it very clearly, I'm afraid you're stuck in a straw man argument. Which was my entire point. You're assuming that people interested in valuation metrics like CAPE would use it to tactically change their Asset Allocation. And this doesn't work, I ran corresponding numbers myself a while ago, no disagreement here. I can rephrase my little dialog a tiny bit if you wish... I actually agree more with you than you think. Except for the logical fallacy at the end.

CAPE critic: no valuation metric can predict next year's return or the year after
CAPE curious: nobody having looked at corresponding numbers would make such a claim
CAPE critic: tactical asset allocation (aka market timing) is bad, bad, bad
CAPE curious: yup, making decisions based on guessing short-term returns is indeed a bad idea, I can demonstrate that with CAPE numbers if you want
CAPE critic: CAPE is for market timers! Therefore CAPE is bad, bad, bad
CAPE curious: sigh

User avatar
nedsaid
Posts: 9443
Joined: Fri Nov 23, 2012 12:33 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by nedsaid » Sat Jan 20, 2018 5:17 pm

stlutz wrote:
Fri Jan 19, 2018 9:14 pm
Look, it absolutely makes sense that high valuations mean it's more likely to see lower 10-year returns going forward.

But it's not actionable at all.
Generally in discussions on PE-10 I've been on Homer's "side" of the debate. I fully agree that using a single valuation metric to make an all-in or all-out market timing call generally is not wise.

Nedsaid: I don't think PE-10 is an infallible indicator, I had never heard of it until I learned about the metric on this forum. I see it as another tool in the toolbox. But still, when you see the PE-10 or CAPE just keep zooming, a caution light, at least for me goes off. I follow forward P/E's on the US Total Stock Market and have seen them creep up from 17-18 to 21-22. Interest rates have stopped falling and have been creeping up. So I am getting concerned. I would say that with the headwinds of rising interest rates that the odds for P/E contraction are higher than for further P/E expansion. Short term interest rates are up and the intermediate and longer term rates have started to creep up as well.


But, to whack away at a straw man just a bit, is there no price at which you'd say that the risk of stocks is "not worth it"? What if the CAPE was 100x? Would it have been a bad move to have unloaded your Japanese stocks in 1986 and missed on all of those great-but-very-temporary gains before the '89 peak?

Nedsaid: Well for our mentor, Jack Bogle, stocks got too expensive back in early 2000. He said in an interview that he wondered why he owned stocks at all. He said that he cut back from a 70% stock portfolio to 30% stocks. Other accounts said that Bogle went to a 50% stock and 50% bond portfolio gradually over a couple of years. Nevertheless, Bogle saw something and even mentioned his uneasiness about stocks at a Morningstar Conference back in about 1999.

For the 10 year projection of returns, he looks at 10 year bond yields. Back then, you could get a 7% yield on bonds. Corporate earnings growth is about 5%-6% a year and dividend yields back then were 1%. His formula adds earnings growth to dividend yield to come up with a 10 year prediction for returns but then he factors in speculative return. Back then, he believed that P/E ratios would decline, in other words that speculative return would be negative. So that took him to a 2% return for stocks over the next 10 years. A potential 2% returns from stocks, which are already volatile and risky, but also because prices were far above historical norms, just didn't seem worth the risk. You could effortlessly earn 7% in bonds with much less volatility and bonds were downright cheap. Bogle said bonds were the steal of the century.

So if you pooh pooh the idea of projecting future returns, you have to ignore all of Mr. Bogle's comments on this. He has commented on future expected returns many times. Mr. Bogle, where he posting here under a pseudonym would likely be hooted off the forum as a market timer. Mr. Stay the Course didn't exactly stay the course.


The price that one pays for an investment is never not relevant. Price is an important component of the risk of an investment. All other things being equal, a T-bond yielding 5% is less risky than one yielding 2.5%.

In constructing an investment portfolio, one should be trying to find an appropriate balance between the potential gains that are being offered and the risks involved. "High Price Risk" is a real risk.

Nedsaid: Yes, indeed it is. We found this out in 1929, in 1968, and in 2000. After each of these manias, the market was essentially flat for years afterwards.

The challenge for an investor is that the price of an investment often reflects a bunch of other risks. Stocks in January of 2009 did not have much "high price risk", but they had a huge amount of other risks and the prices reflected that. Ex ante, the stock market in 2009 was not offering a free lunch.

A lot of people on this board have made a lot of money over the past 8 years. Many folks are now in a position where return of capital is as important as return on capital. If that is the case, it's probably wise to re-evaluate that 90/10 stock/bond mix for whether it's appropriate.

Nedsaid: That is why many folks here are saying that valuations don't matter. Bull markets tend to make the meekest among us very aggressive. The pain from bear markets does get forgotten.

None of the fundamental risks of investing in the stock market have gone away in the last couple of years. Furthermore, I don't know of anyone who is making a case that long-term earnings growth will significantly accelerate from what it has been. Certainly there's a one-time bump that will happen b/c of the tax law, but the corporate tax rate isn't going to drop to 7% in the next 10 years, so we aren't getting that benefit again.

In short, right now we are paying more despite the fact that the fundamental risks are still there and that there is not more growth potential. Does that make stocks look less attractive? Yes it does. Given where the stock market has gotten us, I think this is a great time to re-evaluate one's need and willingness to take risk if one has not done so the past few years.

Nedsaid: That is what I have been saying as well.


Certainly one can do this and say, go from 75/25 to 60/40 without being labeled a market timer.
A fool and his money are good for business.

User avatar
HomerJ
Posts: 11055
Joined: Fri Jun 06, 2008 12:50 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by HomerJ » Sat Jan 20, 2018 11:45 pm

Da5id wrote:
Sat Jan 20, 2018 9:04 am
HomerJ wrote:
Sat Jan 20, 2018 1:33 am
Most CAPE proponents would be almost all the way out of stocks at 40x.
Citation needed. This thread, like many, seems dedicated to the slaying of straw men. How many advocates are you seeing here of tactical asset allocation based on CAPE?
I've seen plenty of posts where people say "Oh, CAPE doesn't really work for market-timing, but boy if it got REALLY high, like 40x... then I would definitely do something".

User avatar
willthrill81
Posts: 4041
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by willthrill81 » Sun Jan 21, 2018 12:17 am

HomerJ wrote:
Sat Jan 20, 2018 11:45 pm
Da5id wrote:
Sat Jan 20, 2018 9:04 am
HomerJ wrote:
Sat Jan 20, 2018 1:33 am
Most CAPE proponents would be almost all the way out of stocks at 40x.
Citation needed. This thread, like many, seems dedicated to the slaying of straw men. How many advocates are you seeing here of tactical asset allocation based on CAPE?
I've seen plenty of posts where people say "Oh, CAPE doesn't really work for market-timing, but boy if it got REALLY high, like 40x... then I would definitely do something".
I think the view there is that when CAPE values are so extreme as to be outliers that they have been or else will be more predictive of the future than otherwise. But I haven't seen real analysis of that presumption, and the sample size is probably far too small to draw any particularly meaningful conclusions anyway.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Da5id
Posts: 2034
Joined: Fri Feb 26, 2016 8:20 am

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by Da5id » Sun Jan 21, 2018 9:11 am

HomerJ wrote:
Sat Jan 20, 2018 11:45 pm
Da5id wrote:
Sat Jan 20, 2018 9:04 am
HomerJ wrote:
Sat Jan 20, 2018 1:33 am
Most CAPE proponents would be almost all the way out of stocks at 40x.
Citation needed. This thread, like many, seems dedicated to the slaying of straw men. How many advocates are you seeing here of tactical asset allocation based on CAPE?
I've seen plenty of posts where people say "Oh, CAPE doesn't really work for market-timing, but boy if it got REALLY high, like 40x... then I would definitely do something".
You made factual claims, "most" and "almost all the way out of stocks". I don't think they are demonstrated. You also had a term "CAPE proponent" that lacks definition. I believe that CAPE means something, am I "proponent"? I also believe that is applicability is extremely limited. Explaining 40% of the dispersion of returns, which is all that is claimed for CAPE, is inherently limiting. I am not personally using CAPE for anything other than as part of my own rationale for targeting a 3% SWR. Which I'm already at without working longer than I'm inclined, so no sacrifices needed. If the stock market climbs more, I'll at some point sell some stocks as part of rebalancing, but won't change my overall allocation which is 50/50.

InvestInPasta
Posts: 35
Joined: Sat Sep 16, 2017 12:42 pm
Location: Italy

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by InvestInPasta » Sun Jan 21, 2018 11:35 am

People here who do not believe in CAPE, do they not believe in "valuations matter" or do they not belive in CAPE as a good valuation metric?
When studying English I am lazier than my portfolio. Feel free to correct my English and Investng mistakes.

User avatar
nedsaid
Posts: 9443
Joined: Fri Nov 23, 2012 12:33 pm

Cape Fear: Do you feel vindicated?

Post by nedsaid » Mon Feb 05, 2018 8:59 pm

Those of you who have been watching the CAPE or PE10 and warning us about the market being overvalued, do you feel some vindication right now?
A fool and his money are good for business.

User avatar
willthrill81
Posts: 4041
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Cape Fear: Do you feel vindicated?

Post by willthrill81 » Mon Feb 05, 2018 9:15 pm

nedsaid wrote:
Mon Feb 05, 2018 8:59 pm
Those of you who have been watching the CAPE or PE10 and warning us about the market being overvalued, do you feel some vindication right now?
I'm not a big CAPE proponent (don't think it's accurate enough to be actionable), but I do think that the steam that's been blowing up this market may have been released a bit. Maybe the kettle as even been taken off of the heat. Could it be due to valuations, and the market is finally realizing that recent prices are just too high when compared to earnings? Possibly, but it's impossible to know for certain. Consequently, it's hard to feel vindicated.

The current downturn smells more like a flash crash to me, but obviously I don't know.

Edit: I just saw that Cramer thinks this is a flash crash too. Interesting.
Last edited by willthrill81 on Mon Feb 05, 2018 9:17 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
nedsaid
Posts: 9443
Joined: Fri Nov 23, 2012 12:33 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by nedsaid » Mon Feb 05, 2018 9:16 pm

Forward P/E's of the US Total Stock Market Index, at least as measured by the Fidelity product are about 20. They had crept up to almost 22. That seems more reasonable valuations.
A fool and his money are good for business.

zeugmite
Posts: 1005
Joined: Tue Jul 22, 2008 11:48 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by zeugmite » Mon Feb 05, 2018 9:18 pm

nedsaid wrote:
Mon Feb 05, 2018 9:16 pm
Forward P/E's of the US Total Stock Market Index, at least as measured by the Fidelity product are about 20. They had crept up to almost 22. That seems more reasonable valuations.
Isn't forward P/E all garbage and guesses?

zeugmite
Posts: 1005
Joined: Tue Jul 22, 2008 11:48 pm

Re: Cape Fear: Do you feel vindicated?

Post by zeugmite » Mon Feb 05, 2018 9:21 pm

willthrill81 wrote:
Mon Feb 05, 2018 9:15 pm
The current downturn smells more like a flash crash to me, but obviously I don't know.

Edit: I just saw that Cramer thinks this is a flash crash too. Interesting.
There is something you discover even in a flash crash, which is to say where the bids start to appear. From a buyer's perspective, that's a much better (or at least, safer) indication of value than the then current trading price.

User avatar
nedsaid
Posts: 9443
Joined: Fri Nov 23, 2012 12:33 pm

Re: CAPE Fear: Why CAPE Naysayers Are Wrong

Post by nedsaid » Mon Feb 05, 2018 9:25 pm

zeugmite wrote:
Mon Feb 05, 2018 9:18 pm
nedsaid wrote:
Mon Feb 05, 2018 9:16 pm
Forward P/E's of the US Total Stock Market Index, at least as measured by the Fidelity product are about 20. They had crept up to almost 22. That seems more reasonable valuations.
Isn't forward P/E all garbage and guesses?
Well, it is what we have to work with. Quite often, earnings forecasts are overoptimistic. I look at Forward P/E's because the market looks forward and not back. Even if earnings forecasts are ultimately wrong, they are a big part of what moves the market.
A fool and his money are good for business.

Post Reply