You Can Market Time At Valuation Extremes

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Park
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You Can Market Time At Valuation Extremes

Post by Park » Tue Jun 12, 2018 7:31 am

https://www.starcapital.de/fileadmin/us ... imling.pdf

See Fig. 6. When CAPE less than 10, historical real returns over the next 10-15 years have been a minimum of 5%. When CAPE greater than 50, returns have been negative on average. If you exclude the Danish and Swedish stock markets, returns have been modest at best, when CAPE greater than 40. For a well diversified investor, I question how relevant the data from the Danish and Swedish stock markets is. For them, the S&P500 data is more appropriate. When S&P500 CAPE is more than 40, there hasn't been a positive return.

See. Fig 13. When PB less than 1, historical real return over the next 10-15 years have been a minimum of 5%. When PB more than 5, returns on average have been negative. If you exclude the Danish and Swedish stock market data, returns have been negative when PB less than 4.

Fig 13 doesn't give PB data for US stocks. The link below shows US data from 1964 to 2014, although it doesn't correlate it with return. When PB greater than 4, which is around the dotcom bubble, real returns were poor over the next 10-15 years.

http://investorfieldguide.com/the-origi ... e-to-book/

Figures 8 and 14 show the link between valuation and drawdown risk. At high valuations, the equity risk premium comes with increased risk. So you're getting modest expected returns at best, with increased risk. Is the expected return worth the risk?

http://www.multpl.com/shiller-pe/

These extreme valuations are uncommon, but do occur. At the end of 1989, the Japanese stock market had a CAPE of about 90, and returns have been poor since. The S&P500 CAPE was 44 in December 1999, with a PB of around 4.8. Conversely, the US stock market reached a PB of around 1 and a CAPE less than 10 in 1982.

PFInterest
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Re: You Can Market Time At Valuation Extremes

Post by PFInterest » Tue Jun 12, 2018 8:13 am

What's your question?

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bottlecap
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Re: You Can Market Time At Valuation Extremes

Post by bottlecap » Tue Jun 12, 2018 8:50 am

You sure can. So long as you are a computer and you are back-testing.

JT

alfaspider
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Re: You Can Market Time At Valuation Extremes

Post by alfaspider » Tue Jun 12, 2018 11:03 am

Sure, in hindsight the 90 CAPE in Japan was insane. But Black Tuesday happened at around 30 CAPE. If you had been Japanese during the boom and sold all your equities when CAPE hit 30, where would that have left you?

Successfully market timing doesn't mean just correctly saying that the market is overvalued- that's relatively easy. The problem is getting in and out at precisely the right time, and without buying/selling emotionally if there's a big move right after you switched positions. That's where most people fail.

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Tue Jun 12, 2018 11:28 am

Timing at market extremes is easy in theory but more difficult in practice. Markets can be overvalued for a long time. One common example is Alan Greenspan's "Irrational Exuberance" speech given on December 5, 1996. This would have been a great "sell" signal as few know more about the markets and economy than the Federal Reserve Chairman. Problem is, the bull market zoomed for another three years past that. Another example is Vanguard's John Neff, who famously shorted the NASDAQ. Neff took a lot of losses on paper until the NASDAQ ultimately crashed in 2000. He had the staying power and the wealth to do what few individuals have. This bet would have broken many investors. It is the old being right too early problem.
A fool and his money are good for business.

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Tue Jun 12, 2018 11:42 am

The problem is that what is considered "extreme" has changed over the years...
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msk
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Re: You Can Market Time At Valuation Extremes

Post by msk » Tue Jun 12, 2018 11:51 am

HomerJ wrote:
Tue Jun 12, 2018 11:42 am
The problem is that what is considered "extreme" has changed over the years...
Really? Humans, in seemingly all countries where records are available, seem to have demanded 5+% as real return on capital for the past 300 years. If you believe that we are not going to get that in the present environment then the market(s) is over valued. I do not claim to know, but comapanies are still investing and re-investing, so they seem to believe that level of real return is still available...

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Re: You Can Market Time At Valuation Extremes

Post by balbrec2 » Tue Jun 12, 2018 4:18 pm

Park wrote:
Tue Jun 12, 2018 7:31 am
https://www.starcapital.de/fileadmin/us ... imling.pdf

See Fig. 6. When CAPE less than 10, historical real returns over the next 10-15 years have been a minimum of 5%. When CAPE greater than 50, returns have been negative on average. If you exclude the Danish and Swedish stock markets, returns have been modest at best, when CAPE greater than 40. For a well diversified investor, I question how relevant the data from the Danish and Swedish stock markets is. For them, the S&P500 data is more appropriate. When S&P500 CAPE is more than 40, there hasn't been a positive return.

See. Fig 13. When PB less than 1, historical real return over the next 10-15 years have been a minimum of 5%. When PB more than 5, returns on average have been negative. If you exclude the Danish and Swedish stock market data, returns have been negative when PB less than 4.

Fig 13 doesn't give PB data for US stocks. The link below shows US data from 1964 to 2014, although it doesn't correlate it with return. When PB greater than 4, which is around the dotcom bubble, real returns were poor over the next 10-15 years.

http://investorfieldguide.com/the-origi ... e-to-book/

Figures 8 and 14 show the link between valuation and drawdown risk. At high valuations, the equity risk premium comes with increased risk. So you're getting modest expected returns at best, with increased risk. Is the expected return worth the risk?

http://www.multpl.com/shiller-pe/

These extreme valuations are uncommon, but do occur. At the end of 1989, the Japanese stock market had a CAPE of about 90, and returns have been poor since. The S&P500 CAPE was 44 in December 1999, with a PB of around 4.8. Conversely, the US stock market reached a PB of around 1 and a CAPE less than 10 in 1982.
Pure market timing based on valuations is a fools game. About the most value
you can derive from valuation metrics is to tweak your AA a little bit. If you were
60/40 in 2009 then of course you must have rebalanced several times by now. But instead
of getting back to 60/40 you see the market has being overvalued by some metric. You might rebalance
down to 50/50 instead. Wholesale changes such as going from 100% stocks to 100% cash are impossible to get right
except by luck.

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Wed Jun 13, 2018 1:38 am

msk wrote:
Tue Jun 12, 2018 11:51 am
HomerJ wrote:
Tue Jun 12, 2018 11:42 am
The problem is that what is considered "extreme" has changed over the years...
Really? Humans, in seemingly all countries where records are available, seem to have demanded 5+% as real return on capital for the past 300 years. If you believe that we are not going to get that in the present environment then the market(s) is over valued. I do not claim to know, but comapanies are still investing and re-investing, so they seem to believe that level of real return is still available...
The OP talks about CAPE over 40 being "extreme". Before 2000, a CAPE of 25-30 would been considered "extreme". Someone could have written the exact same post in 1996, except they would be showing charts that "prove" that a CAPE of 25-30 means poor returns going forward.

In fact, Shiller himself, the inventor of CAPE, did exactly that. He predicted 0% 10-year real returns in 1996 based on the "extreme" CAPE numbers. But instead the market more than doubled before it crashed 40%. The market never dropped below the 1996 point. 1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.

1996 at "extreme" valuations, turned out to be a good time to buy. We've gotten nearly 9% annualized nominal returns from 1996 to 2018.
The J stands for Jay

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Wed Jun 13, 2018 8:32 am

HomerJ wrote:
Wed Jun 13, 2018 1:38 am
msk wrote:
Tue Jun 12, 2018 11:51 am
HomerJ wrote:
Tue Jun 12, 2018 11:42 am
The problem is that what is considered "extreme" has changed over the years...
Really? Humans, in seemingly all countries where records are available, seem to have demanded 5+% as real return on capital for the past 300 years. If you believe that we are not going to get that in the present environment then the market(s) is over valued. I do not claim to know, but comapanies are still investing and re-investing, so they seem to believe that level of real return is still available...
The OP talks about CAPE over 40 being "extreme". Before 2000, a CAPE of 25-30 would been considered "extreme". Someone could have written the exact same post in 1996, except they would be showing charts that "prove" that a CAPE of 25-30 means poor returns going forward.

In fact, Shiller himself, the inventor of CAPE, did exactly that. He predicted 0% 10-year real returns in 1996 based on the "extreme" CAPE numbers. But instead the market more than doubled before it crashed 40%. The market never dropped below the 1996 point. 1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.

1996 at "extreme" valuations, turned out to be a good time to buy. We've gotten nearly 9% annualized nominal returns from 1996 to 2018.
There was a pretty good thread that discussed book value. What is happening is that intangible assets such as intellectual property are getting to be a larger and larger share of the assets of companies. Property, plant, and equipment are vital assets for manufacturing firms but less so for firms like Microsoft and Google. My thought is that the very concept of book value is less important as accountants are having a difficult time measuring and booking the value of intangible assets.

Also the definition of earnings has become more conservative over time, that is how the Accountants measure earnings. A price to earnings ratio of 20 today would have been more like 16 or 17 in 1970. Two examples are amortization of goodwill and the accounting for employee stock options.

So here are two issues that are causing stocks to appear to be getting more expensive over time when the reality is somewhat different. In other words, the market is adjusting for changes in accounting and for the limitations of accounting.
A fool and his money are good for business.

afan
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Re: You Can Market Time At Valuation Extremes

Post by afan » Wed Jun 13, 2018 8:51 am

There have been plenty of studies that show valuation-based timing does not work.

Valuations do predict long term returns. But not well enough to compensate for all the errors one makes when trying to use them for timing.

Fun to think about, I suppose, but don't try to beat the market.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

B. Wellington
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Re: You Can Market Time At Valuation Extremes

Post by B. Wellington » Wed Jun 13, 2018 9:33 am

alfaspider wrote:
Tue Jun 12, 2018 11:03 am
Sure, in hindsight the 90 CAPE in Japan was insane. But Black Tuesday happened at around 30 CAPE. If you had been Japanese during the boom and sold all your equities when CAPE hit 30, where would that have left you?

Successfully market timing doesn't mean just correctly saying that the market is overvalued- that's relatively easy. The problem is getting in and out at precisely the right time, and without buying/selling emotionally if there's a big move right after you switched positions. That's where most people fail.
+1 yep, we can look at valuations but moving money in and out at the right time instead of buying and holding in an effort to increase returns (or avoid losses) is a very difficult thing to do.

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Re: You Can Market Time At Valuation Extremes

Post by jeffyscott » Wed Jun 13, 2018 4:21 pm

HomerJ wrote:
Wed Jun 13, 2018 1:38 am
1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.
Uh, no. That would be March 2009.

The return from 1996 to then was less than cash (short term treasuries) or bonds. Shiller was correct, the S&P 500 was priced to deliver low long term returns and that's just what it did.
press on, regardless - John C. Bogle

thx1138
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Re: You Can Market Time At Valuation Extremes

Post by thx1138 » Thu Jun 14, 2018 3:30 am

jeffyscott wrote:
Wed Jun 13, 2018 4:21 pm
HomerJ wrote:
Wed Jun 13, 2018 1:38 am
1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.
Uh, no. That would be March 2009.

The return from 1996 to then was less than cash (short term treasuries) or bonds. Shiller was correct, the S&P 500 was priced to deliver low long term returns and that's just what it did.
Sorry, Schiller was “wrong”. He estimated a ten year real return of zero percent starting from January 1996. The actual annualized ten year return with dividends reinvested over that period was 6.58% real.

You cherry picked the market low for which the 1/1996 to 3/2009 annualized return was 0.89 real and renamed it “long term returns”. Well, if you are going ignore the actual prediction (10 year returns) and substitute “long” for “10 year” why not make it one year longer to 3/2010 and now it is 3.86 real annualized. Or two years longer and then it is 4.41.

Or heck let’s try the same analysis for the Great Recession. Jan 2008 just before the crash CAPE was 24, the same as his 1996 prediction and indeed the market crashed horribly soon after. And yet the 10 year annualized real returns from Jan 2008 to Jan 2018 were 7.91% even with the crash in there.

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Re: You Can Market Time At Valuation Extremes

Post by cjking » Thu Jun 14, 2018 4:28 am

The way to market-time is not to switch into cash when the market is expensive and wait for a fall. Because it's entirely possible than even expensive equities will return more than cash over the amount of time you spend waiting for that fall.

What you need to do, if you want to time, is change your asset allocation in response to changes in expected returns.

There will have been reasonable timing (dynamic asset allocation) strategies that would have reduced or eliminated exposure to Japanese or US stocks at the peaks of their bubbles. In the late 90's, the yield on TIPS was higher than the smoothed earnings yield of equities, E10/P. Also, I remember once seeing some data that towards 2000 the yield on REITs was something like double E10/P.

US stocks seem expensive to me right now, but stocks being expensive doesn't necessarily mean there will be a crash. It just means poor long-term returns relative to other available assets. I have E10/P at 3.2% for US stocks and 5.0% for world-excluding US. That is a huge difference.

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jeffyscott
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Re: You Can Market Time At Valuation Extremes

Post by jeffyscott » Thu Jun 14, 2018 7:16 am

cjking wrote:
Thu Jun 14, 2018 4:28 am
The way to market-time is not to switch into cash when the market is expensive and wait for a fall. Because it's entirely possible than even expensive equities will return more than cash over the amount of time you spend waiting for that fall.

What you need to do, if you want to time, is change your asset allocation in response to changes in expected returns.
...
And the way to interpret and use estimates of expected returns, that may be stated as 10 year expected returns (e.g. Schiller, RA, Bogle), or 7 year expected returns (e.g. GMO), is the same. Treating them them as precise predictions of what is going to happen over exactly 120 months, would be foolish.
US stocks seem expensive to me right now, but stocks being expensive doesn't necessarily mean there will be a crash. It just means poor long-term returns relative to other available assets. I have E10/P at 3.2% for US stocks and 5.0% for world-excluding US. That is a huge difference.
As your figures imply, the result of high US stock valuations could be permanently lower long term returns. That could be the path, rather than, say, 0-1% over the next 10 years, which seems to be about the consensus here: http://www.morningstar.com/articles/842 ... rns-2.html

To me your 3.2% real and the estimates of 0-1% real over 10 years are saying the same thing.
press on, regardless - John C. Bogle

Park
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Re: You Can Market Time At Valuation Extremes

Post by Park » Fri Jun 15, 2018 3:20 pm

Thanks for your comments.

There are those pointing out that there are many bear markets, where market timing based on valuation extremes wouldn't have helped you.

I agree. The sensitivity of market timing based on valuation extremes isn't high.

But the specificity is high. At low valuations, the probability of high future returns is high. Conversely, at high valuations, the probability of low future returns is high.

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Re: You Can Market Time At Valuation Extremes

Post by david1082b » Fri Jun 15, 2018 3:53 pm

thx1138 wrote:
Thu Jun 14, 2018 3:30 am
jeffyscott wrote:
Wed Jun 13, 2018 4:21 pm
HomerJ wrote:
Wed Jun 13, 2018 1:38 am
1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.
Uh, no. That would be March 2009.

The return from 1996 to then was less than cash (short term treasuries) or bonds. Shiller was correct, the S&P 500 was priced to deliver low long term returns and that's just what it did.
Sorry, Schiller was “wrong”. He estimated a ten year real return of zero percent starting from January 1996. The actual annualized ten year return with dividends reinvested over that period was 6.58% real.

You cherry picked the market low for which the 1/1996 to 3/2009 annualized return was 0.89 real and renamed it “long term returns”. Well, if you are going ignore the actual prediction (10 year returns) and substitute “long” for “10 year” why not make it one year longer to 3/2010 and now it is 3.86 real annualized. Or two years longer and then it is 4.41.

Or heck let’s try the same analysis for the Great Recession. Jan 2008 just before the crash CAPE was 24, the same as his 1996 prediction and indeed the market crashed horribly soon after. And yet the 10 year annualized real returns from Jan 2008 to Jan 2018 were 7.91% even with the crash in there.
Shiller's actual prediction from 1996 seemed to be this:
The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38.07%.
http://www.econ.yale.edu/~shiller/data/peratio.html

This was using the January 1996 market values, published in July. So it was a minus 38% ten year real return prediction if that paper is the only place Shiller made a prediction. It also seemed to be based on 30-year average trailing earnings (inflation-adjusted I imagine). At some point Shiller switched to 10 year average inflation-adjusted trailing earnings. I don't know why this was done. Maybe 10 year earnings started to give better back-tests compared to the 30 year model that seemed to fail rather badly after that 1996 paper.

thx1138
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Re: You Can Market Time At Valuation Extremes

Post by thx1138 » Fri Jun 15, 2018 9:38 pm

david1082b wrote:
Fri Jun 15, 2018 3:53 pm
thx1138 wrote:
Thu Jun 14, 2018 3:30 am
jeffyscott wrote:
Wed Jun 13, 2018 4:21 pm
HomerJ wrote:
Wed Jun 13, 2018 1:38 am
1996, when valuations were "extreme" was actually the CHEAPEST point-in-time to buy stocks in the past 22 years.
Uh, no. That would be March 2009.

The return from 1996 to then was less than cash (short term treasuries) or bonds. Shiller was correct, the S&P 500 was priced to deliver low long term returns and that's just what it did.
Sorry, Schiller was “wrong”. He estimated a ten year real return of zero percent starting from January 1996. The actual annualized ten year return with dividends reinvested over that period was 6.58% real.

You cherry picked the market low for which the 1/1996 to 3/2009 annualized return was 0.89 real and renamed it “long term returns”. Well, if you are going ignore the actual prediction (10 year returns) and substitute “long” for “10 year” why not make it one year longer to 3/2010 and now it is 3.86 real annualized. Or two years longer and then it is 4.41.

Or heck let’s try the same analysis for the Great Recession. Jan 2008 just before the crash CAPE was 24, the same as his 1996 prediction and indeed the market crashed horribly soon after. And yet the 10 year annualized real returns from Jan 2008 to Jan 2018 were 7.91% even with the crash in there.
Shiller's actual prediction from 1996 seemed to be this:
The fitted value for today of the regression is –.479, implying an expected decline in the real Standard and Poor Index over the next 10 years of 38.07%.
http://www.econ.yale.edu/~shiller/data/peratio.html

This was using the January 1996 market values, published in July. So it was a minus 38% ten year real return prediction if that paper is the only place Shiller made a prediction. It also seemed to be based on 30-year average trailing earnings (inflation-adjusted I imagine). At some point Shiller switched to 10 year average inflation-adjusted trailing earnings. I don't know why this was done. Maybe 10 year earnings started to give better back-tests compared to the 30 year model that seemed to fail rather badly after that 1996 paper.
Yes most back tested timing indicators get continued “fine tuning” as they fail to be predictive going forward.

Of course Schiller isn’t just some investment letter hack and his 1996 paper includes a properly broad warning and caveat:
The conclusion of this paper that the stock market is expected to decline over the next ten ears and to earn a total return of just about nothing has to be interpreted with great caution.

Our search over economic relations that us to study the price divided by 30-year moving average of earnings may have stumbled upon a chance relation with no significance. In other words, the relation studied here might be a spurious relation, the result of data mining. Neither the statistical tests nor the monte carlo experiments take account of the search over other possible relations.

It is also dangerous to assume that historical relations are necessarily applicable to the future. There could be fundamental structural changes occurring now that mean that the past of the stock market is no longer a guide to the future.
So while we might talk of Schiller’s “predictions” or term them “wrong” it wasn’t as though he was initially making a strong claim. If you look at his caveats not to mention the performance of the indicator in the real market since it is pretty obvious it holds little to no practical value for timing asset allocations.

It is however another colored wiggly line that generates plenty of opportunity for talking heads to blather about on TV between advertisements so in that sense it has been very successful for the financial press.

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Re: You Can Market Time At Valuation Extremes

Post by Park » Sun Jun 17, 2018 2:34 pm

There have been some good criticisms of market timing at valuation extremes.

First of all, valuation metrics can change with time, resulting in "moving goal posts". Examples given include the increase in intangible assets in the value of a company, which changes price book. For PE10, there have been changes in how earnings are measured, with two examples being amortization of goodwill and accounting for employee stock options.

viewtopic.php?f=10&t=251522

" Stocks have had remarkably consistent 5%-6% real returns over four centuries."

The above is from a Bogleheads thread started by SimpleGift.

Assume a PE10 of 10. That's an earnings yield of 10%. Assume the historical 1.5% annual growth in earnings. PE10 reflects average earnings over the last 10 years. The average time lag is 5 years. Earnings went up 1.5% each year for the those 5 years, and are 1.075 times greater than they were 5 years ago. So multiply 10% by 1.075 and you get 10.75% earnings yield. The model predicts a real return of 10.75%, or about double the historical average. Your margin of safety is large; even if you're off by 50% due to changes in accounting rules, you'll get the historical return. And historically, bear market risk is less. Risk adjusted returns have been every better.

Assume a PE10 of 40. When you do the same calculations as in the last paragraph, the predicted real return is 2.69%, or about half the historical average. Where is your margin of safety? Stocks have to do about double what the model predicts to get the historical average. And the risk of exposure to a bear market has gone up considerably. It's not return free risk, but it's headed that way.

Th preceding paragraphs discussed history, and the moving goal posts argument is that history is less relevant. The following assumes that the 50%+ stock market declines historically observed will continue in the future. Ignore historical returns, but consider the following. Is an expected real return of 2.69% worth the possible risk of losing more than 50% of your investment? In other words, what expected return justifies the equity risk premium? I might/might not consider 2.69% enough, but it's getting near the edge. At a PE10 of 50, that's a 2.15% earnings yield. Only in the absence of reasonable alternatives would I want to be invested in stocks with such an earnings yield

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Re: You Can Market Time At Valuation Extremes

Post by stlutz » Sun Jun 17, 2018 3:11 pm

What you need to do, if you want to time, is change your asset allocation in response to changes in expected returns.

There will have been reasonable timing (dynamic asset allocation) strategies that would have reduced or eliminated exposure to Japanese or US stocks at the peaks of their bubbles. In the late 90's, the yield on TIPS was higher than the smoothed earnings yield of equities, E10/P. Also, I remember once seeing some data that towards 2000 the yield on REITs was something like double E10/P.

US stocks seem expensive to me right now, but stocks being expensive doesn't necessarily mean there will be a crash. It just means poor long-term returns relative to other available assets. I have E10/P at 3.2% for US stocks and 5.0% for world-excluding US. That is a huge difference.
Thoughtful comments.

To extend a bit in a way which you might or might not endorse ( :happy ), let me propose that valuation-based market timing is more about risk management than return maximization.

From a return maximization perspective, timing the market based on PE-10 just doesn't work. I don't know that anyone has ever really proposed a solution that works against backtested data (unlike other market-timing schemes).

On the other hand, stocks selling at relatively high multiples offer less potential payoff than they do when selling a lower multiples. Doesn't mean the payoff will be poor--it just means that there needs be a lot of earnings growth for the market to offer high returns from here. On the other hand, the risks of a big decline are always there. Same risk + less potential return makes stocks less attractive.

In the late 90s, you had a situation where most of the [cap-weighted] stock market was selling at a very high valuation. On the other hand, there were other assets that were very attractively priced, particularly in fixed income and certain smaller segments of the stock market. It would be hard to argue with the retiree or near-retiree who sold all of their stocks and loaded up on 30 year TIPS yielding between 3 and 4%. That may not have maximized their return over time, but it would have guaranteed them something like a 5.25% withdrawal rate over the course of their retirement. For many of them, the TIPS offered a better risk/reward tradeoff than sticking with the stock market.

People can opt to offer an opinion on market valuations by their own decisions or not. If one wasn't to express a completely neutral opinion they would of course weight their portfolios based on the global stock/bond weighting which is about 40/60.

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Re: You Can Market Time At Valuation Extremes

Post by cjking » Mon Jun 18, 2018 5:33 am

In my early days of exploring using CAPE, I tested timing strategies (that switched in and out of low return safe assets) which showed that in back-testing you could could get somewhere between 0.5% and 1% extra return for a given volatility. (Or equivalently, lesser volatility for given return.) (Figures from memory, my original posts from ten years ago are probably still here, somewhere.)

I eventually decided that just because such strategies had worked in the past was no reason to rely on them in future, given what could theoretically go wrong with them, and settled on my alternative approach of simply using expected returns as a guide for asset allocation.

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Re: You Can Market Time At Valuation Extremes

Post by Dandy » Mon Jun 18, 2018 7:51 am

Mr. Bogle says you can/should? He did around the 2000 meltdown. He cut back his equity allocation significantly. Around 2013 when the market was up 30% or so he reaffirmed the idea of taking action during extreme valuations -- but said at that time the equity market wasn't extremely overvalued.

I don't agree with everything Mr. Bogle says but many on this board either don't know about his idea about taking action on extreme valuation or chose not to agree with him. Maybe we should get more guidance from Mr. Bogle on this topic e.g. what measure of valuation he would suggest and how/when investors should deal with extreme valuations. Maybe he feels it should mostly apply to those near or in retirement? or may that group should take action earlier? or make a large adjustment?

This would be more useful than the response that it is a market timing no-no or stay the course.

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Re: You Can Market Time At Valuation Extremes

Post by asif408 » Mon Jun 18, 2018 8:16 am

I'm not quite clear if the OP is talking about timing among stock markets or switching between stocks and bonds. If he's talking about timing among stock markets, the evidence is much more supportive than going between stocks and bonds. And for those that say timing need to be perfect, I'm not so sure about that. Anyone who switched into laggard segments of the markets such as emerging markets, REITs, energy, precious metals equity (PME), or small cap value in the late 1990s:

1998: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
1999: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
2000: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
2001: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
2002: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D
2003: http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

eventually came out well ahead over the next several years relative to US stocks, though in some cases they lagged for a few years, so if your timing wasn't great in those cases you had to have the patience to wait it out for several years. In some cases the rewards were almost immediate, such as EM in late 1998, REITs, energy, and SCV in 2000, and PME in 2001. Sure you could have done exceptionally well if you timed it perfect, but you still improved your long-term portfolio performance even with timing that could have been off by several years.

With bonds your timing would have to have been more exact, as there was only about a year and a half period from late 1999 to late 2000 that going into bonds would have won.
Last edited by asif408 on Mon Jun 18, 2018 8:21 am, edited 1 time in total.

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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Mon Jun 18, 2018 8:18 am

Dandy wrote:
Mon Jun 18, 2018 7:51 am
Mr. Bogle says you can/should? He did around the 2000 meltdown. He cut back his equity allocation significantly. Around 2013 when the market was up 30% or so he reaffirmed the idea of taking action during extreme valuations -- but said at that time the equity market wasn't extremely overvalued.

I don't agree with everything Mr. Bogle says but many on this board either don't know about his idea about taking action on extreme valuation or chose not to agree with him. Maybe we should get more guidance from Mr. Bogle on this topic e.g. what measure of valuation he would suggest and how/when investors should deal with extreme valuations. Maybe he feels it should mostly apply to those near or in retirement? or may that group should take action earlier? or make a large adjustment?

This would be more useful than the response that it is a market timing no-no or stay the course.
What Mr. Bogle did back then was that he calculated the future expected returns for the US Stock Market. He expected returns for stocks to be about 2% over the next decade vs. 6%-7% for the US Bond Market. The big reason for his prediction was that forward P/E ratios for US Stocks got to be about 32, he thought that P/E ratios would contract thus depressing returns from stocks. Bogle was eerily right, stocks were essentially flat from 2000 through 2012, running in place for 12 years. Stocks were flat even though earnings about doubled.

The economic returns for stocks are relatively easy to calculate, earnings growth plus dividend yield. Historically, earnings grow at 5-6% and dividend yield is not quite 2%. So you are looking at 7%-8% returns. Unfortunately, there is also speculative return, which pretty much is how much the market is willing to pay for a dollar of earnings. In 1973-74, it was about $8 per $1 of earnings and in early 2000, it was about $32 per $1 of earnings. Over long periods of time, market Price/Earnings ratios are about 16. Bogle believes that there is a reversion to the mean.

Last I looked, the market pays $17.24 for every dollar of future estimated earnings. This does not suggest to me that US Stocks are overvalued. Remember also that the accountants have toughened up the definition of earnings. A P/E ratio of 16 back in 1970 might be a P/E ratio of 19 or 20 today. So stocks look pretty close to fair value. Earnings growth has been strong recently, take into account that future earnings projections are optimistic.

If you don't think there will be P/E contraction, future expected returns for US Stocks look fairly good at 7% to 8%. Bonds are yielding about 3%, over long periods of time returns from bonds are their yield. So a rough guess says that stocks will return 7% to 8% over the next decade and that bonds will return 3%. But again, P/E expansion boosts returns and P/E contraction depresses returns. No one knows what will happen with speculative return.
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Mon Jun 18, 2018 8:27 am

Keep in mind that Bogle advocated strategic asset allocation only at market extremes and that he limited portfolio shifts to maybe 15% to 20% of the total portfolio. So if you were 65% in stocks when the US Market was extremely overvalued, Bogle might say cut your stocks to 50% of your portfolio or down to 45% at most. He has never advocated an "all in" or "all out" position. He says that if valuations make you nervous, just cut back but don't get out of stocks completely.

Also when Bogle cut back on his stocks, his health was failing at the time and he wasn't sure that he was going to live much longer. Well, 18 years later, Mr. Bogle is still here. In interviews, Bogle has said that he cut back from 70% stocks down to 30% but later he seemed to indicate that he went down to 50% stocks, cutting back over a couple of years. So it sounded like his bark was worse than his bite and that he didn't cut back as much as he had earlier said. This would be a good topic to take up with him at the 2018 Boglehead's Conference.
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Re: You Can Market Time At Valuation Extremes

Post by Dandy » Mon Jun 18, 2018 8:39 am

thanks for the information. Don't you think Mr. Bogle should address in some detail what Bogleheads should do to determine extreme valuation and actions that should be considered? After all extreme valuation should be somewhat rare and the impact on equity assets when the "reversion to the mean" are usually quite considerable. The impact on retirees with little human capital can be significant and after a nice 8 or 9 year bull market the sense of risk seems to be dulled.

I am not especially anxious about this personally since I am in a good place financially and have an equity exposure of about 43%. I just think it is a topic little explored by Jack and other thought leaders and when people raise a concern about valuations they are usually met with stay the course or that's market timing or if it is too much risk dial back your equities.

There might be more to the topic of how to determine extreme valuations and what investors of different ages and financial circumstances should do? or at least consider. Something more fact based than fear, hype or generalizations.

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Re: You Can Market Time At Valuation Extremes

Post by Jags4186 » Mon Jun 18, 2018 8:46 am

Let’s ask Rob Bennett if you can market time at extreme valuations.

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Re: You Can Market Time At Valuation Extremes

Post by greg24 » Mon Jun 18, 2018 9:20 am

You Can Attempt to Market Time At Valuation Extremes, And Most Of The Time You'll Probably Get It Wrong.
Last edited by greg24 on Mon Jun 18, 2018 9:23 am, edited 1 time in total.

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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Mon Jun 18, 2018 9:20 am

Dandy wrote:
Mon Jun 18, 2018 8:39 am
thanks for the information. Don't you think Mr. Bogle should address in some detail what Bogleheads should do to determine extreme valuation and actions that should be considered? After all extreme valuation should be somewhat rare and the impact on equity assets when the "reversion to the mean" are usually quite considerable. The impact on retirees with little human capital can be significant and after a nice 8 or 9 year bull market the sense of risk seems to be dulled.

I am not especially anxious about this personally since I am in a good place financially and have an equity exposure of about 43%. I just think it is a topic little explored by Jack and other thought leaders and when people raise a concern about valuations they are usually met with stay the course or that's market timing or if it is too much risk dial back your equities.

There might be more to the topic of how to determine extreme valuations and what investors of different ages and financial circumstances should do? or at least consider. Something more fact based than fear, hype or generalizations.
The problem with market timing at valuation extremes are the "being right too early" problem that I posted about earlier and also the definition of "extreme valuations." The people that follow the Schiller P/E 10 are telling us that the US Stock Market is overvalued and that future returns will be very subdued. The market P/E based on estimated earnings seems pretty much to be in line with a fairly valued market. So who is right? Hard to know.

P/E 10 is based upon historical earnings whereas the P/E shown at Morningstar is based upon earnings estimates. Granted, earnings estimates are often too optimistic.

Disagreements are what make a market. There is always a compelling bullish case for the market and there is always a compelling bearish case.

I just don't see the euphoria in the markets now that there was in the late 1990's and into early 2000. Friends and acquaintances rarely talk about the markets, no one I know is day trading. I don't see euphoria in the financial press, no discussion of a new paridigm. In fact the market has been a bit below market highs since February. The bull market has hit a lull. So for that reason, I am not too worried about an overvalued market.
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Re: You Can Market Time At Valuation Extremes

Post by jeffyscott » Mon Jun 18, 2018 9:40 am

nedsaid wrote:
Mon Jun 18, 2018 8:18 am
Last I looked, the market pays $17.24 for every dollar of future estimated earnings. This does not suggest to me that US Stocks are overvalued. Remember also that the accountants have toughened up the definition of earnings. A P/E ratio of 16 back in 1970 might be a P/E ratio of 19 or 20 today. So stocks look pretty close to fair value. Earnings growth has been strong recently, take into account that future earnings projections are optimistic.

If you don't think there will be P/E contraction, future expected returns for US Stocks look fairly good at 7% to 8%. Bonds are yielding about 3%, over long periods of time returns from bonds are their yield. So a rough guess says that stocks will return 7% to 8% over the next decade and that bonds will return 3%. But again, P/E expansion boosts returns and P/E contraction depresses returns. No one knows what will happen with speculative return.
That seems a bit optimistic. Looking here (and make sure it is set to "yield and growth model" and "nominal", in order to match what I think is the model you are using):
https://interactive.researchaffiliates. ... e=Equities

They come up with 5.4% for US. Their valuation dependent model gives a significantly lower expected return (2.6% nominal), so your contention that valuations are fairly average is also questionable.

Note that Bogle's estimate of expected returns is fairly similar to RA. Last October, he was at 6% ignoring valuations or 4% over 10 years with some P/E contraction: http://www.morningstar.com/videos/83076 ... turns.html
(Stocks are up about 10% since Oct, so taking that into account would put him at about 3% over 10 years, rather than 4%.)
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Re: You Can Market Time At Valuation Extremes

Post by Dandy » Mon Jun 18, 2018 9:58 am

The problem with market timing at valuation extremes are the "being right too early" problem that I posted about earlier and also the definition of "extreme valuations."
First I am not making any case the current markets are overvalued or extremely overvalued. Just that the topic needs to be explored in more detail than essentially being dismissed with a few words of guidance.

There is a risk for "being early" and there is a risk in being late. The stage of live, the risk tolerance you think you have, and your investment goal e.g. growth vs asset preservation, etc. come into play as to which risk -- early or late is a bigger concern. For quite some time my goal has been asset preservation thus a rather modest equity allocation of 43%. If I was in my 30's or 40's I would still have growth as a goal and not want to be "early" I'd take a risk since I would have sufficient human capital to still reach my goals.

Jack, near retirement age (and in questionable health) reduced his equity allocation by 15 or 20% e.g. from say 70% to 50%. That is a major change. It turned out to be a great call. I don't expect any more detailed research, analysis etc to be right all the time. But, as valuations rise risk likely rises also - we need better information of when that rise in risk is becoming a problem that normal rebalancing isn't necessarily enough. Agreed it will not be with a very high degree of certainty. And we need that general guidance from a trusted source based on some reasonable analysis not from some media hype/analyst.

I agree this is not an easy task and may be relatively impossible. But, Mr. Bogle blessed it in rare occasions and I think it needs more analysis/discussion. Otherwise it seems we will only recognize extreme overvaluation after the fact when many have lost a significant amount.

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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Wed Jun 20, 2018 7:53 am

jeffyscott wrote:
Mon Jun 18, 2018 9:40 am
nedsaid wrote:
Mon Jun 18, 2018 8:18 am
Last I looked, the market pays $17.24 for every dollar of future estimated earnings. This does not suggest to me that US Stocks are overvalued. Remember also that the accountants have toughened up the definition of earnings. A P/E ratio of 16 back in 1970 might be a P/E ratio of 19 or 20 today. So stocks look pretty close to fair value. Earnings growth has been strong recently, take into account that future earnings projections are optimistic.

If you don't think there will be P/E contraction, future expected returns for US Stocks look fairly good at 7% to 8%. Bonds are yielding about 3%, over long periods of time returns from bonds are their yield. So a rough guess says that stocks will return 7% to 8% over the next decade and that bonds will return 3%. But again, P/E expansion boosts returns and P/E contraction depresses returns. No one knows what will happen with speculative return.
That seems a bit optimistic. Looking here (and make sure it is set to "yield and growth model" and "nominal", in order to match what I think is the model you are using):
https://interactive.researchaffiliates. ... e=Equities

They come up with 5.4% for US. Their valuation dependent model gives a significantly lower expected return (2.6% nominal), so your contention that valuations are fairly average is also questionable.

Note that Bogle's estimate of expected returns is fairly similar to RA. Last October, he was at 6% ignoring valuations or 4% over 10 years with some P/E contraction: http://www.morningstar.com/videos/83076 ... turns.html
(Stocks are up about 10% since Oct, so taking that into account would put him at about 3% over 10 years, rather than 4%.)
What makes this difficult is that the measurements keep changing, it is like trying to measure lengths with a ruler when the ruler itself changes in length constantly. My point is that accounting standards have changed over time, a P/E ratio back in 1970 is different from a P/E ratio today. There is also P/E based on historical earnings and forward P/E based on future estimated earnings. WIth intangible assets being a more and more important part of the corporate balance sheet, you can argue that book value per share is less and less important as a metric.

I did say that forward P/E's look very reasonable but cautioned that future earnings estimates might be too optimistic. Earnings growth has been strong recently but is that sustainable? A more conservative estimate of earnings growth would make forward P/E's higher. How optimistic is too optimistic? Are estimates optimistic enough? No one knows as the future cannot be predicted with precision.

It seems that actual stock market performance has exceeded past estimates of expected returns. This suggests that the metrics are making the stock market look more expensive than it really is.
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Re: You Can Market Time At Valuation Extremes

Post by Toons » Wed Jun 20, 2018 7:57 am

No, I am unable to do the aforementioned.

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Re: You Can Market Time At Valuation Extremes

Post by David Jay » Wed Jun 20, 2018 8:35 am

Park wrote:
Fri Jun 15, 2018 3:20 pm
But the specificity is high. At low valuations, the probability of high future returns is high. Conversely, at high valuations, the probability of low future returns is high.
TRUE.

Now how does one monetize that information?
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Re: You Can Market Time At Valuation Extremes

Post by jeffyscott » Wed Jun 20, 2018 8:39 am

nedsaid wrote:
Wed Jun 20, 2018 7:53 am
It seems that actual stock market performance has exceeded past estimates of expected returns. This suggests that the metrics are making the stock market look more expensive than it really is.
Another factor could be that investing in stocks has become less risky (due to the ease of diversifying today) and less costly (due to the ready availability of low cost funds and ETFs).

I would tend to agree that these factors may mean that a P/E ratio of 16 back in 1970 might be a P/E ratio of 19 or 20 today, based on trailing P/E.

I had seen trailing P/E of about 25 at multpl.com, based on earnings of $111 and thought you were comparing current forward to historical trailing. But it appears that the most recent figure is about 20, with trailing earnings jumping to 140, a 26% increase :!: :?:

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Re: You Can Market Time At Valuation Extremes

Post by Random Walker » Wed Jun 20, 2018 8:56 am

If some structural change to equity investing occurs to make it less risky, then we would expect to see a one time increase in valuations and we would benefit from increased returns. Looking forward though, the higher valuations, representing less risky equity investing, would predict lower future returns. The market prices risk. If we have had a few stepwise innovations in investing that have caused an upward trend in valuations, then I would expect future returns to be less. I wouldn’t expect innovations to be a continuous source of rising valuations. We can practically buy TSM for free.

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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jun 24, 2018 12:03 am

jeffyscott wrote:
Wed Jun 20, 2018 8:39 am
nedsaid wrote:
Wed Jun 20, 2018 7:53 am
It seems that actual stock market performance has exceeded past estimates of expected returns. This suggests that the metrics are making the stock market look more expensive than it really is.
Another factor could be that investing in stocks has become less risky (due to the ease of diversifying today) and less costly (due to the ready availability of low cost funds and ETFs).

I would tend to agree that these factors may mean that a P/E ratio of 16 back in 1970 might be a P/E ratio of 19 or 20 today, based on trailing P/E.

I had seen trailing P/E of about 25 at multpl.com, based on earnings of $111 and thought you were comparing current forward to historical trailing. But it appears that the most recent figure is about 20, with trailing earnings jumping to 140, a 26% increase :!: :?:

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Stocks are less risky today? I don't know, I am so old that I remember "less risky" stocks were on their way to Dow 36,000 waaaaay back in the late 1990's. Somehow, two 50% down bear markets in the same decade got in the way of all of that. 50% down is plenty risky to me.

I am talking about forward P/E ratios, based on estimated earnings. Last I looked, forward P/E's on the US Total Stock Market were 17 or 18. A trailing P/E of 25 based upon historical earnings sounds about right. If trailing earnings are at 20 P/E, then stocks are starting to look relatively cheap. But we have to take into consideration that earnings have been surging, how sustainable is the surge? Also take into consideration that I look at the US Total Stock Market and not the S&P 500 and I use the forward earnings P/E calculated by Morningstar. So there might be a bit of difference between your numbers and mine, but we are in the same ballpark.
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Re: You Can Market Time At Valuation Extremes

Post by Park » Wed Jun 27, 2018 8:09 am

About stocks being overvalued or undervalued, there are the corrective mechanisms of supply and demand.

This can occur at the level of the investor. If stocks are cheap enough, investors will buy. Demand increases; buyers are more highly motivated than sellers; prices increase. If stocks are expensive enough, investors will short. Sellers are more highly motivated than buyers; prices decrease.

Shorting is not without its issues, which is probably a reason why stocks can get overpriced.

However, that isn't the only way to alter supply and demand.

Companies can be public or private. There are advantages and disadvantages to both. However, whether public companies are underpriced or overpriced can alter the equilibrium between public and private.

If stocks are cheap enough, then there may be an incentive to take a company private. Companies are priced more on profits than assets. Nervertheless, if the assets are cheap enough, then pricing on the basis of assets can make sense. This is the basis of Benjamin Graham's net nets. It doesn't occur often, but it was reasonably common in the Depression. When a company's assets are cheap enough, a company may be worth more breaking it up. The management may resist that. But if a company is taken private, then managment may not be able to prevent part or all of the company being broken up.

Similarly, if public companies are expensive enough, then it may make sense for a private company to go public. IIRC, a high point for the number of public companies in the USA was in 1999. That makes sense, based on valuations at that time.

Another corrective mechanism, that can alter supply and demand, is a company buying back or selling shares. For example, Warren Buffett has a policy of buying back Berkshire Hathaway shares, when they're cheap enough. Unfortunately, companies may not time buybacks as well as investors would like.

However, when company's stocks is overpriced, relative to its profits, it can issue shares. It can buy other companies, and use its overpriced shares to pay for them.

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Re: You Can Market Time At Valuation Extremes

Post by PhilosophyAndrew » Wed Jun 27, 2018 8:27 am

One can market time whenever one wishes. But can one reliably identify the valuations that justify leaving and entering the market? If so, that’s super. If not, the theoretical possibility of market timing likely carries more harm than value as investors try to market time and fail because they can’t reliably determine when to buy and sell.

BH investing heps me to fulfill my financial needs, and so I have no need to try out more complicated strategies. That said, I don’t mind if others decide differently: It isn’t as if the BH philosophy is valid only if we can prove theoretically that market timing is impossible — BH simplicity is sufficiently justified just in case it meet’s ones needs, and if non-Bogleheads wishto pursue market timing. I wish them every success.

Andy.

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Re: You Can Market Time At Valuation Extremes

Post by Park » Sun Jul 01, 2018 12:49 am

I'd like to go over in writing, what is presented graphically in Figures 8 and 14 in the link in the original post.

All data is in local currency, adjusted for inflation and takes into account dividends.

The following is maximum drawndown in relationship to CAPE, using CAPE data from all countries.
CAPE 0-10, average maximum drawdown over the next 3 years is -5.7%, average maximum drawdown over the next 15 years is -5.2%
10-15, -8.8%, -11.1%
15-20, -12.4%, -13.6%
20-25, -18.1%, -23.1%
25-30, -22.3%, -27.5%
30+, -28.8%, -39.5%

The following is very similar, except PB (price/book) is substituted for CAPE.
PB 0-1, -5.2%, -3.4%
1-1.5, -8.0%,-7.1%
1.5-2, -13.2%, -15.2%
2-2.5, -18.6%, -20.8%
2.5-3, -23.7%, -23.2%
3+, -29.8%, -41.5%

More emphasis is given on the returns associated with high valuations, than on the risk associated with such valuations. Historically, the average maximum drawdown over the next 3 years, when PB is 0-1, is around 5%. For PB 3 or more, it's around 30%.

The disparity in risk adjusted returns, at extremes of valuation, is not small.

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Re: You Can Market Time At Valuation Extremes

Post by 3funder » Sun Jul 01, 2018 9:04 am

After reading through this thread, here's my takeaway:

Don't do anything extreme, regardless of valuations. That said, making moderate adjustments never killed anyone and might even help some folks sleep better at night.

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Re: You Can Market Time At Valuation Extremes

Post by Rick Ferri » Sun Jul 01, 2018 9:17 am

Most long-term investors should ignore valuations. However, there are exceptions:

If you’re approaching a life event such as transitioning into retirement, and you were planning to make an asset allocation change to less equity anyway, then considering valuations isn’t the worse thing you could do at either extreme. You would not make the change yet if valuation were low such as in 2008, and make the change if valuations were normal or high, such as now.

If you’re not approaching a life event, and were not considering an asset allocation change anyway, than forget about this stuff.

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Re: You Can Market Time At Valuation Extremes

Post by columbia » Sun Jul 01, 2018 12:15 pm

Shiller PE:

Code: Select all

Current: 32.30 +0.02 (0.06%)
4:00 pm EDT, Fri Jun 29
Mean:	16.85	
Median:	16.15	
Min:	4.78	
Max:	44.19
That 3.10% expected earnings for the next 10 years? Certainly not great.

Anyway, I guess you could try to time it, but that really depends on one’s confidence that they would correctly time it.

I’m confident that I would not properly time it. :)

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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 12:29 pm

I generally agree with Rick's advice above. Most investors need not obsess over market valuations. A couple of big reasons, first the Accountants' definition of earnings has gotten more conservative over time, thus stocks tend to look more expensive than they really are. Second, with a long enough time horizon, this evens out over time anyway. Markets go through valuation cycles, sometimes they look expensive and sometimes they look cheap.

I do think that as you get older, you should become more concerned about valuations. The more expensive stocks are, the higher the expectations built into them, and the more vulnerable stocks are to earnings disappointments. Higher valuations tend towards higher risk and lower future expected returns. As an older investor, your time horizons are shorter and you have less time to recover from bad markets.

I also believe that in a true market bubble, it is wise to cut back your allocation to stocks. The old saying about the shoe shine boys giving stock advice to Joe Kennedy or Bernard Baruch. Conversely, when the news is really, really bad; it might be wise to rebalance into stocks.

These events of valuation extremes are pretty rare. We had market euphoria in the late 1920's, in the mid to late 1960's, and again in the late 1990's. The 1930's might have been a great buying opportunity but few had any extra money. The aftermath of the 1973-74 bear market was a huge buying opportunity as P/E ratios got into single digits. 2008-2009 was a good buying opportunity but stocks weren't as cheap as they got in the 1970's. So maybe three times in 90 years we experienced true euphoria and maybe three great buying opportunities (that is if you actually had money to take advantage). Notice that the opportunities followed the crash after the euphoria. So this might have been actionable maybe three times in a lifetime, if that.

With these couple of exceptions, I would advise most advisors to not sweat valuations. We are not in a bubble here and stock and bond valuations here are reasonable given the economic environment. My friends and family don't discuss the stock market very much if at all.
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 12:30 pm

3funder wrote:
Sun Jul 01, 2018 9:04 am
After reading through this thread, here's my takeaway:

Don't do anything extreme, regardless of valuations. That said, making moderate adjustments never killed anyone and might even help some folks sleep better at night.
Yep, you got it.
A fool and his money are good for business.

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Jul 01, 2018 1:34 pm

nedsaid wrote:
Sun Jul 01, 2018 12:29 pm
...We are not in a bubble here and stock and bond valuations here are reasonable given the economic environment. My friends and family don't discuss the stock market very much if at all.
The "bubble" here is not being blown by people like you and me. This is a career risk "bubble." Put yourself in the position of a career trader or investment manager. What would you be doing now?

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Re: You Can Market Time At Valuation Extremes

Post by Boglegrappler » Sun Jul 01, 2018 1:58 pm

When I worked in the investment business years back, I had a colleague who made some pretty smart observations that are relevant to market timing.

It's fairly well known the the equity market is a leading indicator of recessions and recoveries. The lead time, I believe, is generally thought to be six to nine months.

So, in 1980, energy stocks began to slide, or at least stop going up. An accountant who audited a major contract drilling company asked me "What's wrong with the stock? Its off 20% in the past x months, and every day is a record revenue day for the company!!!

Well, the market was telling you that those records were the peak, for quite some time. The market was right, and was beginning to adjust.

Likewise, my colleague noted that at market bottoms, after pain has been inflicted, the stocks begin to rise, and the analysts who follow them will mostly tell you that it's a "false" rally, and the the fundamentals of the business are still awful. So it's too soon to buy. In fact, things might still be getting worse.

Its that problem that makes timing so difficult. Especially at the extremes.

gmaynardkrebs
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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Jul 01, 2018 2:16 pm

Boglegrappler wrote:
Sun Jul 01, 2018 1:58 pm
...It's fairly well known the the equity market is a leading indicator of recessions and recoveries. The lead time, I believe, is generally thought to be six to nine months. ...
If so, it's a pretty poor one, given the vast over-performance of the market vs the real economy over the last 10 years.

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 3:32 pm

gmaynardkrebs wrote:
Sun Jul 01, 2018 1:34 pm
nedsaid wrote:
Sun Jul 01, 2018 12:29 pm
...We are not in a bubble here and stock and bond valuations here are reasonable given the economic environment. My friends and family don't discuss the stock market very much if at all.
The "bubble" here is not being blown by people like you and me. This is a career risk "bubble." Put yourself in the position of a career trader or investment manager. What would you be doing now?
What bubble are you talking about? The US Stock Market has been stalled since January, trading in a range and getting close to the 10% correction. Bond prices are down in concert with interest rates ticking up. I am sure that there is a lot of churn in institutional portfolios like hedge funds but the markets haven't gone anywhere in months. No euphoria out there that I am aware of. As far as career risk of traders or managers, not sure that affects the markets themselves. They might be taking on more risk to outperform but they have always done that.
A fool and his money are good for business.

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