Larry Swedroe: Valuations Too High?

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Random Walker
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Larry Swedroe: Valuations Too High?

Post by Random Walker » Wed Aug 08, 2018 3:33 pm

http://www.etf.com/sections/swedroe-val ... nopaging=1

Excellent article placing current CAPE in perspective. Larry reviews multiple reasons for CAPE to have drifted upwards over the decades. When we talk mean reversion, what mean do we revert to? Equities may be generously valued, implying lower future expected returns, but not at all necessarily overvalued.

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Wed Aug 08, 2018 3:45 pm

I agree with Larry that there are good reasons for CAPE to be higher today than in the past.

Where I disagree with him is that I am not convinced by the data that we should expect lower future returns going forward. For instance, CAPE has been above its average since 1992, but real returns from then until now have been slightly higher than the historic average. Some say that this is merely due to valuations having gone higher, but it demonstrates that returns can at least a very loose relationship with valuations for a very long time, long enough to have little predictive value.
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:00 pm

"For example, as of June 30, 2018, the earnings yield (E/P) of the Shiller CAPE 10 (the best predictor of future real returns we have) for the U.S. was just 3.2%. "

He never tells us why CAPE 10 is "the best predictor of future real returns we have." I personally believe that current or near term forecast P/E is the best predictor, while quickly adding that nobody has ever been able to predict the future in this realm with any meaningful degree of accuracy. Why is looking ten years into the past the best way to predict the future?

Current P/E: as reported earnings = 4.4%, operating earnings = 5.0%

Forecast 2019 P/E: as reported earnings = 5.8%, operating earnings = 6.3%

:confused
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Re: Larry Swedroe: Valuations Too High?

Post by vineviz » Wed Aug 08, 2018 4:08 pm

FIREchief wrote:
Wed Aug 08, 2018 4:00 pm
"For example, as of June 30, 2018, the earnings yield (E/P) of the Shiller CAPE 10 (the best predictor of future real returns we have) for the U.S. was just 3.2%. "

He never tells us why CAPE 10 is "the best predictor of future real returns we have."
Regardless of WHY it's the best predictor, CAPE10 is the best predictor of future real returns.

Image

Your one-year PE is a close second for 10 year returns but not, interestingly, for one year returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:11 pm

vineviz wrote:
Wed Aug 08, 2018 4:08 pm
FIREchief wrote:
Wed Aug 08, 2018 4:00 pm
"For example, as of June 30, 2018, the earnings yield (E/P) of the Shiller CAPE 10 (the best predictor of future real returns we have) for the U.S. was just 3.2%. "

He never tells us why CAPE 10 is "the best predictor of future real returns we have."
Regardless of WHY it's the best predictor, CAPE10 is the best predictor of future real returns.
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
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Re: Larry Swedroe: Valuations Too High?

Post by vineviz » Wed Aug 08, 2018 4:14 pm

FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:15 pm

vineviz wrote:
Wed Aug 08, 2018 4:14 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
Exactly!! :sharebeer (so, in other words, CAPE 10 isn't useful for anything)

Put another way, if I can go back in time 40, 50, 60 years, and I already know the future outcomes; I can develop a metric which is 43% accurate for predicting a future outcome that is already established. Makes the whole thing sound kind of silly, doesn't it?
Last edited by FIREchief on Wed Aug 08, 2018 4:17 pm, edited 1 time in total.
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Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Wed Aug 08, 2018 4:16 pm

vineviz wrote:
Wed Aug 08, 2018 4:08 pm
Regardless of WHY it's the best predictor, CAPE10 is the best predictor of future real returns.
A tool can be the BEST tool, but still a POOR tool.

If I only have a hammer, and a chainsaw, you can accurately say the hammer is BEST tool I have for removing screws from my deck.

But that doesn't make it a GOOD tool for removing screws from my deck.
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vineviz
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Re: Larry Swedroe: Valuations Too High?

Post by vineviz » Wed Aug 08, 2018 4:18 pm

FIREchief wrote:
Wed Aug 08, 2018 4:15 pm
vineviz wrote:
Wed Aug 08, 2018 4:14 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
Exactly!! :sharebeer (so, in other words, CAPE 10 isn't useful for anything)

Put another way, if I can go back in time 40, 50, 60 years, and I already know the future outcomes; I can develop a metric which is 43% accurate for predicting a future outcome that is already established. Makes the whole thing sound kind of silly, doesn't it?
It only sounds silly if you don’t understand it.
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:21 pm

HomerJ wrote:
Wed Aug 08, 2018 4:16 pm
vineviz wrote:
Wed Aug 08, 2018 4:08 pm
Regardless of WHY it's the best predictor, CAPE10 is the best predictor of future real returns.
A tool can be the BEST tool, but still a POOR tool.

If I only have a hammer, and a chainsaw, you can accurately say the hammer is BEST tool I have for removing screws from my deck.

But that doesn't make it a GOOD tool for removing screws from my deck.
I'm thinking the chain saw would be best for removing. Installing screws? Definitely the hammer. :beer
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:21 pm

vineviz wrote:
Wed Aug 08, 2018 4:18 pm
FIREchief wrote:
Wed Aug 08, 2018 4:15 pm
vineviz wrote:
Wed Aug 08, 2018 4:14 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
Exactly!! :sharebeer (so, in other words, CAPE 10 isn't useful for anything)

Put another way, if I can go back in time 40, 50, 60 years, and I already know the future outcomes; I can develop a metric which is 43% accurate for predicting a future outcome that is already established. Makes the whole thing sound kind of silly, doesn't it?
It only sounds silly if you don’t understand it.
touche' I guess I just need to become "smarter." :beer
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Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Wed Aug 08, 2018 4:26 pm

vineviz wrote:
Wed Aug 08, 2018 4:18 pm
FIREchief wrote:
Wed Aug 08, 2018 4:15 pm
vineviz wrote:
Wed Aug 08, 2018 4:14 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
Exactly!! :sharebeer (so, in other words, CAPE 10 isn't useful for anything)

Put another way, if I can go back in time 40, 50, 60 years, and I already know the future outcomes; I can develop a metric which is 43% accurate for predicting a future outcome that is already established. Makes the whole thing sound kind of silly, doesn't it?
It only sounds silly if you don’t understand it.
They keep changing the model to use ex post facto data.

Look at actual predictions from the past. They are all hilariously wrong. Then they change the model today so it fits the data better and looks like it would have had a good prediction in the past.

But look up the actual predictions from the past, before you proclaim that the CAPE model makes a good prediction tool.

Note however, the predictors will proclaim, rightly, that they are not making exact predictions, but just a center point on a wide dispersion of outcomes.

For instance, they will predict 5% expected returns, but note there's a plus/minus of 7%. So the fact that we actually get 10% returns doesn't mean they were wrong. It fell inside their -2% - 12% range.

Of course, it doesn't take a PhD for anyone to predict that long-term returns for stocks will likely fall in the -2% - 12% range. That's not a hugely useful prediction.
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Re: Larry Swedroe: Valuations Too High?

Post by marcopolo » Wed Aug 08, 2018 4:31 pm

vineviz wrote:
Wed Aug 08, 2018 4:18 pm
FIREchief wrote:
Wed Aug 08, 2018 4:15 pm
vineviz wrote:
Wed Aug 08, 2018 4:14 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm
I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Why would I need to forecast past returns when I can just look them up on Yahoo Finance?
Exactly!! :sharebeer (so, in other words, CAPE 10 isn't useful for anything)

Put another way, if I can go back in time 40, 50, 60 years, and I already know the future outcomes; I can develop a metric which is 43% accurate for predicting a future outcome that is already established. Makes the whole thing sound kind of silly, doesn't it?
It only sounds silly if you don’t understand it.
I don't know the answer to this, but how predictive has it been since it was first proposed by Schiller?

I believe the 40% number that gets thrown around is based on all available historical data. But, much of that would have essentially been the training set for developing the metric. To really measure how effective the metric is, you have to then look at how predictive it is on a test set that was not used for the training.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Wed Aug 08, 2018 4:34 pm

FIREchief wrote:
Wed Aug 08, 2018 4:11 pm

I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Huh? CAPE 10 correlates reasonably well to future returns over 10-15 year periods. IOW, calculate it today to have a general idea of CAGR over the next 10-15 years. Yes, I know that "reasonably well" and "general idea" are fairly vague...

"Somebody" got a Nobel prize for figuring this out... "Robert J. Shiller - Facts". Nobelprize ... cts.html>

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Wed Aug 08, 2018 4:36 pm

GAAP wrote:
Wed Aug 08, 2018 4:34 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm

I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Huh? CAPE 10 correlates reasonably well to future returns over 10-15 year periods. IOW, calculate it today to have a general idea of CAGR over the next 10-15 years. Yes, I know that "reasonably well" and "general idea" are fairly vague...

"Somebody" got a Nobel prize for figuring this out... "Robert J. Shiller - Facts". Nobelprize ... cts.html>
He means that we should use past-tense terminology rather than present-tense or future-tense. We do not know whether CAPE or any other metric will be a "good" predictor of market returns going forward.

I wouldn't resort to an appeal-to-authority argument to try to justify CAPE as an appropriate tool for anything.
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 4:42 pm

GAAP wrote:
Wed Aug 08, 2018 4:34 pm
FIREchief wrote:
Wed Aug 08, 2018 4:11 pm

I believe that you are saying that CAPE 10 "was" the best predictor for "past returns" (based upon whatever academic methodology somebody dreamt up to make that chart). That's really not the same thing....
Huh? CAPE 10 correlates reasonably well to future returns over 10-15 year periods. IOW, calculate it today to have a general idea of CAGR over the next 10-15 years. Yes, I know that "reasonably well" and "general idea" are fairly vague...

"Somebody" got a Nobel prize for figuring this out... "Robert J. Shiller - Facts". Nobelprize ... cts.html>
People have received Nobel prizes for a lot of things, and I'm not going out on a limb to suggest that it's not all "science."

That said, nobody knows how the current CAPE 10 correlates with future returns from this point simply because nobody knows the future. There is zero guarantee that it will look anything like the composite returns from 1926 to present. The world is a world of variables, and we have little or no control over most of them. The last several posters have done a good job of further explaining my comments regarding past versus future.

"Reasonably well" and "general idea" don't sound very actionable to me, espectially considering how poorly all such academic approaches have predicted actual outcomes in the past.
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Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Wed Aug 08, 2018 4:57 pm

willthrill81 wrote:
Wed Aug 08, 2018 4:36 pm
I wouldn't resort to an appeal-to-authority argument to try to justify CAPE as an appropriate tool for anything.
That was more a response to "(based upon whatever academic methodology somebody dreamt up to make that chart)" than an appeal to authority.
FIREchief wrote:
Wed Aug 08, 2018 4:42 pm
That said, nobody knows how the current CAPE 10 correlates with future returns from this point simply because nobody knows the future. There is zero guarantee that it will look anything like the composite returns from 1926 to present. The world is a world of variables, and we have little or no control over most of them. The last several posters have done a good job of further explaining my comments regarding past versus future.

"Reasonably well" and "general idea" don't sound very actionable to me, espectially considering how poorly all such academic approaches have predicted actual outcomes in the past.
I don't need to "know" the future -- but a general idea of what to expect is helpful. As a general model it makes sense to me that your likely returns are somewhat inversely proportional to what you pay to get the stocks. CAPE 10 simply provides a means to quantify that relationship. It's not perfect, but R2 of .43 isn't bad either.

It's far more reasonable to me to use this tool than simply relying upon averages of past performance. You pays your money and takes your chances, regardless.

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 5:03 pm

GAAP wrote:
Wed Aug 08, 2018 4:57 pm
It's far more reasonable to me to use this tool than simply relying upon averages of past performance. You pays your money and takes your chances, regardless.
I rarely if ever see anybody on the forum suggesting that we rely on averages of past performance. More typically, I see posters suggesting that it is unreasonable to try to predict future stock market returns using any approach, as the future is unknowable. Those who suggest otherwise may be trying to sell books, sell "financial management," win awards, get papers published or many other things which have zero value to the individual investor.
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 5:04 pm

GAAP wrote:
Wed Aug 08, 2018 4:57 pm
R2 of .43 isn't bad either.
No, it's not bad. It's AWFUL. :twisted:
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corn18
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Re: Larry Swedroe: Valuations Too High?

Post by corn18 » Wed Aug 08, 2018 5:08 pm

Other than that spikey bit, I don't see too much here to get excited about:

Image

But, the CAPE does always finds its way home:

Image

Rudder amidships, steady as she goes!

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Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Wed Aug 08, 2018 5:10 pm

FIREchief wrote:
Wed Aug 08, 2018 5:03 pm
GAAP wrote:
Wed Aug 08, 2018 4:57 pm
It's far more reasonable to me to use this tool than simply relying upon averages of past performance. You pays your money and takes your chances, regardless.
I rarely if ever see anybody on the forum suggesting that we rely on averages of past performance. More typically, I see posters suggesting that it is unreasonable to try to predict future stock market returns using any approach, as the future is unknowable. Those who suggest otherwise may be trying to sell books, sell "financial management," win awards, get papers published or many other things which have zero value to the individual investor.
Funny, I see a lot of examples -- nearly every discussion involving SWR, for example. For another, most discussions involving any form of PMT-based withdrawal method, since they depend upon an internal rate estimate. Multiple comments that the stock market/bonds, fill-in-the-blank have provided average returns of x% in the past.

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Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Wed Aug 08, 2018 5:17 pm

GAAP wrote:
Wed Aug 08, 2018 5:10 pm
FIREchief wrote:
Wed Aug 08, 2018 5:03 pm
GAAP wrote:
Wed Aug 08, 2018 4:57 pm
It's far more reasonable to me to use this tool than simply relying upon averages of past performance. You pays your money and takes your chances, regardless.
I rarely if ever see anybody on the forum suggesting that we rely on averages of past performance. More typically, I see posters suggesting that it is unreasonable to try to predict future stock market returns using any approach, as the future is unknowable. Those who suggest otherwise may be trying to sell books, sell "financial management," win awards, get papers published or many other things which have zero value to the individual investor.
Funny, I see a lot of examples -- nearly every discussion involving SWR, for example. For another, most discussions involving any form of PMT-based withdrawal method, since they depend upon an internal rate estimate. Multiple comments that the stock market/bonds, fill-in-the-blank have provided average returns of x% in the past.
SWR use worst-case historical past performance, not average past performance.

Stock market average long-term returns are 10%. I don't think anyone here ever has said we should count on average returns, 10%, for planning purposes.

Most people here are more conservative than that.

For instance, I only need 3%-4% to get to my goals, and that's if I don't save another cent. So, when someone tells me that valuations are super high, and we're probably only going to get 4.5%, I say "Really? Awesome."
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Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Wed Aug 08, 2018 7:12 pm

FIREchief wrote:
Wed Aug 08, 2018 5:03 pm
GAAP wrote:
Wed Aug 08, 2018 4:57 pm
I rarely if ever see anybody on the forum suggesting that we rely on averages of past performance. More typically, I see posters suggesting that it is unreasonable to try to predict future stock market returns using any approach, as the future is unknowable.
I think most who advocates 4% safe withdrawal rate are basically depending on historical returns.

Dave

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 7:27 pm

Random Walker wrote:
Wed Aug 08, 2018 7:12 pm
FIREchief wrote:
Wed Aug 08, 2018 5:03 pm
GAAP wrote:
Wed Aug 08, 2018 4:57 pm
I rarely if ever see anybody on the forum suggesting that we rely on averages of past performance. More typically, I see posters suggesting that it is unreasonable to try to predict future stock market returns using any approach, as the future is unknowable.
I think most who advocates 4% safe withdrawal rate are basically depending on historical returns.

Dave
Except, as HomerJ already pointed out a few posts back, it is not "averages of past performance," but typically either worst case scenario or something close.
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Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Wed Aug 08, 2018 8:14 pm

Good point. But still think one might be better off using best estimates of forward looking returns rather than that 4%.

Dave
Last edited by Random Walker on Wed Aug 08, 2018 8:59 pm, edited 1 time in total.

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Re: Larry Swedroe: Valuations Too High?

Post by danielc » Wed Aug 08, 2018 8:23 pm

FIREchief wrote:
Wed Aug 08, 2018 7:27 pm
Except, as HomerJ already pointed out a few posts back, it is not "averages of past performance," but typically either worst case scenario or something close.
Well... using PE ratios and CAPE is not simply about averages either. If you don't trust Nobel-Prize winning economists, maybe you'll trust the intuition that how much you pay for a company probably has some effect on your future returns. I would rather pay $10 to get $1/year of return than pay $30 for the same return from the same company. And if there is anything remotely like reversion to the mean, that would just make the $30 option that much less attractive.

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Re: Larry Swedroe: Valuations Too High?

Post by CantPassAgain » Wed Aug 08, 2018 8:39 pm

Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years? Doing away with depreciating goodwill was a big one. I'm sure there are several others. Does it also adjust for recent tax law changes? What about changes in demographics that effect demand for stocks in general? Technological progress? Or thousands of other factors that effect the future that we have to guess at?

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Wed Aug 08, 2018 9:13 pm

CantPassAgain wrote:
Wed Aug 08, 2018 8:39 pm
Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years?
No, it doesn't.
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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Wed Aug 08, 2018 9:16 pm

Random Walker wrote:
Wed Aug 08, 2018 8:14 pm
Good point. But still think one might be better off using best estimates of forward looking returns rather than that 4%.

Dave
But when we examine the historic periods where the '4% rule' worked, some of them involved very poor returns in the first decade of the 30 year period. Kitces found that when valuations were historically high, the initial SWR was still at least 4% for the subsequent 30 years.

Using valuations to cast doubt on the '4% rule' doesn't seem warranted at all.
“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

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 10:01 pm

danielc wrote:
Wed Aug 08, 2018 8:23 pm
FIREchief wrote:
Wed Aug 08, 2018 7:27 pm
Except, as HomerJ already pointed out a few posts back, it is not "averages of past performance," but typically either worst case scenario or something close.
Well... using PE ratios and CAPE is not simply about averages either. If you don't trust Nobel-Prize winning economists, maybe you'll trust the intuition that how much you pay for a company probably has some effect on your future returns. I would rather pay $10 to get $1/year of return than pay $30 for the same return from the same company. And if there is anything remotely like reversion to the mean, that would just make the $30 option that much less attractive.
I'm confused by your post. Is your $10 to get $1 implying a P/E of 10? Are you suggesting that average earnings over the past ten years tell you how much the company will earn next year? Are you suggesting that "return" is entirely dependent upon corporate earnings and has nothing to do with increasing demand for the stock due to perceived increasing value going forward? If it is all this simple, why not just buy the individual stocks that have the lowest P/E ratios?
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Wed Aug 08, 2018 10:04 pm

CantPassAgain wrote:
Wed Aug 08, 2018 8:39 pm
Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years? Doing away with depreciating goodwill was a big one. I'm sure there are several others. Does it also adjust for recent tax law changes? What about changes in demographics that effect demand for stocks in general? Technological progress? Or thousands of other factors that effect the future that we have to guess at?
No it doesn't. It also doesn't account for the fact that the world is ever changing. Companies come and go. Technologies change. Political environments change. World economies change. Everything changes. This is the number one reason that trying to use history to predict the future is a fool's game.
Last edited by FIREchief on Thu Aug 09, 2018 12:27 am, edited 1 time in total.
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Re: Larry Swedroe: Valuations Too High?

Post by CyclingDuo » Wed Aug 08, 2018 10:22 pm

Random Walker wrote:
Wed Aug 08, 2018 3:33 pm
http://www.etf.com/sections/swedroe-val ... nopaging=1

Excellent article placing current CAPE in perspective. Larry reviews multiple reasons for CAPE to have drifted upwards over the decades. When we talk mean reversion, what mean do we revert to? Equities may be generously valued, implying lower future expected returns, but not at all necessarily overvalued.

Dave
Thanks for posting that link to Larry's article, Dave. :beer
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corn18
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Re: Larry Swedroe: Valuations Too High?

Post by corn18 » Wed Aug 08, 2018 10:28 pm

Yup, this time it's definitely different.

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Re: Larry Swedroe: Valuations Too High?

Post by sreynard » Wed Aug 08, 2018 10:33 pm

I've been hearing this "future long term returns are going to be lower" for years now.

The first I can recall was William Bernstein's July 1997 Efficient Frontier article, "Peter Bernstein Appraises the Expected Return of Stocks and Bonds". (I've recently been going back and reading them. A real pleasure. Love reading Dr. Bernstein.) There are probably a lot of earlier ones, but that's the first time I can remember seeing the "historic returns are 7%, but future expected returns are in the 5% range" story.

Maybe they will be and maybe they won't. Maybe something totally unexpected will happen. Actually, something totally unexpected probably will happen. That's about the most expected thing of all. :shock:

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Re: Larry Swedroe: Valuations Too High?

Post by sreynard » Wed Aug 08, 2018 10:34 pm

FIREchief wrote:
Wed Aug 08, 2018 10:04 pm
CantPassAgain wrote:
Wed Aug 08, 2018 8:39 pm
Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years? Doing away with depreciating goodwill was a big one. I'm sure there are several others. Does it also adjust for recent tax law changes? What about changes in demographics that effect demand for stocks in general? Technological progress? Or thousands of other factors that effect the future that we have to guess at?
No it doesn't. It also doesn't account for the fact that the world is ever changing. Companies come and go. Techologies change. Political environments change. World economies change. Everything changes. This is the number one reason that trying to use history to predict the future is a fool's game.
Or a Loser's Game. :wink:

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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Wed Aug 08, 2018 11:36 pm

HomerJ wrote:
Wed Aug 08, 2018 5:17 pm
Stock market average long-term returns are 10%. I don't think anyone here ever has said we should count on average returns, 10%, for planning purposes.
Most people here are more conservative than that.
For instance, I only need 3%-4% to get to my goals, and that's if I don't save another cent. So, when someone tells me that valuations are super high, and we're probably only going to get 4.5%, I say "Really? Awesome."
3%-4% is not conservative; it's consensus. If you really "need" it to get to your goals, you should save more. It sounds like you are doing that, which is smart. But not everyone can save more.

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Re: Larry Swedroe: Valuations Too High?

Post by james22 » Thu Aug 09, 2018 2:52 am

FIREchief wrote:
Wed Aug 08, 2018 10:04 pm
CantPassAgain wrote:
Wed Aug 08, 2018 8:39 pm
Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years? Doing away with depreciating goodwill was a big one. I'm sure there are several others. Does it also adjust for recent tax law changes? What about changes in demographics that effect demand for stocks in general? Technological progress? Or thousands of other factors that effect the future that we have to guess at?
No it doesn't. It also doesn't account for the fact that the world is ever changing. Companies come and go. Technologies change. Political environments change. World economies change. Everything changes. This is the number one reason that trying to use history to predict the future is a fool's game.
Yet you buy-and-hold?

:?
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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FIREchief
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Thu Aug 09, 2018 3:02 am

james22 wrote:
Thu Aug 09, 2018 2:52 am
FIREchief wrote:
Wed Aug 08, 2018 10:04 pm
CantPassAgain wrote:
Wed Aug 08, 2018 8:39 pm
Does CAPE10 account for changes in the way earnings are reported due to changes in US GAAP accounting rules over the last 30 years? Doing away with depreciating goodwill was a big one. I'm sure there are several others. Does it also adjust for recent tax law changes? What about changes in demographics that effect demand for stocks in general? Technological progress? Or thousands of other factors that effect the future that we have to guess at?
No it doesn't. It also doesn't account for the fact that the world is ever changing. Companies come and go. Technologies change. Political environments change. World economies change. Everything changes. This is the number one reason that trying to use history to predict the future is a fool's game.
Yet you buy-and-hold?

:?
Of course. What's your strategy? :confused
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Larry Swedroe: Valuations Too High?

Post by james22 » Thu Aug 09, 2018 3:16 am

Of course?

Why do you believe buy-and-hold will deliver?
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Thu Aug 09, 2018 7:01 am

I'm willing to accept that CAPE10 can't tell us whether stocks are overpriced. But, I can't help but wonder what stock prices would look like if CAPE could do that? The point is, they'd look exactly the same, because the market would price-in the dire CAPE10 warning.

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Re: Larry Swedroe: Valuations Too High?

Post by Park » Thu Aug 09, 2018 7:45 am

http://www.crossingwallstreet.com/archi ... arket.html

"the blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks...superior to seven other well-known valuation indicators

This metric has an R-square of 0.61. Here are the seven others:

• The Q ratio, with an R-squared of 46%...

• The price/sales ratio, with an R-squared of 44%...

• with an R-squared of 39%. This indicator, which is the ratio of the total value of equities in the U.S. to gross domestic product...

• CAPE, the cyclically adjusted price/earnings ratio, came next in the ranking, with an R-squared of 35%...

• Dividend yield...sports an R-squared of 26%.

• Traditional price/earnings ratio has an R-squared of 24%.

• Price/book ratio...has an R-squared of 21%.

According to various tests of statistical significance, each of these indicators’ track records is significant at the 95% confidence level...

the differences between the R-squareds of the top four or five indicators I studied probably aren’t statistically significant, I was told by Prof. Shiller. That means you’re overreaching if you argue that you should pay more attention to, say, the average household equity allocation than the price/sales ratio."

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Thu Aug 09, 2018 8:55 am

Park wrote:
Thu Aug 09, 2018 7:45 am
That means you’re overreaching if you argue that you should pay more attention to, say, the average household equity allocation than the price/sales ratio."
The average household equity allocation has been very predictive of subsequent ten year returns since it was introduced. CAPE's predictive accuracy, by comparison, has been pretty bad since it's introduction.
“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

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Re: Larry Swedroe: Valuations Too High?

Post by CantPassAgain » Thu Aug 09, 2018 9:13 am

james22 wrote:
Thu Aug 09, 2018 3:16 am
Of course?

Why do you believe buy-and-hold will deliver?
Because when you are investing in public common stocks you are investing in enterprises that are attempting to be productive and profitable for their shareholders by offering products and services that are meant to improve lives and increase standards of living? Ie generating wealth in a capitalistic system.

What did you think you were investing in? Baseball cards?

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Re: Larry Swedroe: Valuations Too High?

Post by james22 » Thu Aug 09, 2018 9:26 am

CantPassAgain wrote:
Thu Aug 09, 2018 9:13 am
james22 wrote:
Thu Aug 09, 2018 3:16 am
Of course?

Why do you believe buy-and-hold will deliver?
Because when you are investing in public common stocks you are investing in enterprises that are attempting to be productive and profitable for their shareholders by offering products and services that are meant to improve lives and increase standards of living? Ie generating wealth in a capitalistic system.
So? "Everything changes."
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Thu Aug 09, 2018 9:29 am

james22 wrote:
Thu Aug 09, 2018 9:26 am
CantPassAgain wrote:
Thu Aug 09, 2018 9:13 am
james22 wrote:
Thu Aug 09, 2018 3:16 am
Of course?

Why do you believe buy-and-hold will deliver?
Because when you are investing in public common stocks you are investing in enterprises that are attempting to be productive and profitable for their shareholders by offering products and services that are meant to improve lives and increase standards of living? Ie generating wealth in a capitalistic system.
So? "Everything changes."
So why did buy-and-hold work in the past but will not going forward? What else do you propose to do?
“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

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Re: Larry Swedroe: Valuations Too High?

Post by CantPassAgain » Thu Aug 09, 2018 9:38 am

james22 wrote:
Thu Aug 09, 2018 9:26 am
CantPassAgain wrote:
Thu Aug 09, 2018 9:13 am
james22 wrote:
Thu Aug 09, 2018 3:16 am
Of course?

Why do you believe buy-and-hold will deliver?
Because when you are investing in public common stocks you are investing in enterprises that are attempting to be productive and profitable for their shareholders by offering products and services that are meant to improve lives and increase standards of living? Ie generating wealth in a capitalistic system.
So? "Everything changes."
Not sure if you are being disingenuous or what. The whole point is that you can't predict what returns are going to be because economies change. The profit motive still remains and we still expect some sort of a return premium to less risky investments. Yeah, we are banking on our capitalistic system/free enterprise to stick around. Does that make us hypocrites or something? "Oh, you said everything changes, but you still think stocks will provide a return, I guess you don't think everything changes hah hah got you"

It's not that hard to figure out is it? Do you think we are living in the same world and economic environment of the 1920's?

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Re: Larry Swedroe: Valuations Too High?

Post by Artsdoctor » Thu Aug 09, 2018 9:47 am

Vanguard also takes issues with the traditional CAPE metric:

https://investornews.vanguard/valuing-t ... alue-cape/

However, all Larry is really saying, and Vanguard will echo this, is that returns going forward over the next decade are likely to be muted. If you take a look at Larry's summary, he's basically saying that if you've anticipated a relatively high return (historical?) on your investments in an attempt to figure out how much to save, you might perhaps want to dial back those expectations and save more, or cut back on expenses. He also raises a question regarding equities' risk premium but leaves it up to the investor to gauge.

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Re: Larry Swedroe: Valuations Too High?

Post by james22 » Thu Aug 09, 2018 9:58 am

Are you arguing beta is persistent, pervasive, robust, and has a logical, risk-based and/or behavioral-based explanation?
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Larry Swedroe: Valuations Too High?

Post by Call_Me_Op » Thu Aug 09, 2018 10:01 am

Random Walker wrote:
Wed Aug 08, 2018 3:33 pm
http://www.etf.com/sections/swedroe-val ... nopaging=1

Excellent article placing current CAPE in perspective. Larry reviews multiple reasons for CAPE to have drifted upwards over the decades. When we talk mean reversion, what mean do we revert to? Equities may be generously valued, implying lower future expected returns, but not at all necessarily overvalued.

Dave
What does the term "overvalued" mean in this context? Overvalued relative to what? Isn't the best estimate of value what people are currently willing to pay?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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corn18
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Re: Larry Swedroe: Valuations Too High?

Post by corn18 » Thu Aug 09, 2018 10:11 am

I like to look at it like Mr. Bogle.

The line represents investors and can be used to predict very long term behavior of the market. The bumpy bits are traders/speculators that drive shorter term results. Alas, those shorter terms can sometimes be decades long. Thus the source of myriad discussions and a multi trillion dollar finance sector.

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