Larry Swedroe: Valuations Too High?

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FIREchief
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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Fri Aug 10, 2018 7:50 pm

GAAP wrote:
Fri Aug 10, 2018 7:27 pm
FIREchief wrote:
Fri Aug 10, 2018 6:48 pm
GAAP wrote:
Fri Aug 10, 2018 6:36 pm
FIREchief wrote:
Fri Aug 10, 2018 6:11 pm
12 month actual returns and near term forecasts have much more validity, but even those don't allow us to predict the future with any useable degree of accuracy.
I'm curious, how do you define "useable degree of accuracy" keeping in mind that we're considering a 12-15 year period CAGR?
Accurate enough to make it useable for investment decisions (i.e. actionable). These valuation based predictions have such wide dispersion, and their means have been so far from the actual results enough times that they are highly questionable inputs to any meaningful life planning.
Ok, sounds like your needs are different than mine -- perhaps precision would be a better term for what you need. I don't really care about precision for what I'm doing, but I'm also not making investment decisions based upon CAPE10. I do make other decisions, utilizing CAPE10 as a simulation input.
That makes sense. I would never rely on any analytical valuation predictions to make any life changing decisions (major purchases, early retirement, etc., including asset allocation choices or choices between US and foreign). Now, when it comes to things like tax planning (e.g. Roth conversions now versus larger RMDs later,) then one does need to use "something" for equity returns. I personally think the CAPE10 predictions are too conservative, and that actual returns will be higher. Not +6% higher, but maybe +2% higher. I don't need precision for that. It really doesn't matter if I'm wrong and either pay too much in taxes on Roth conversions now or too much in taxes on RMDs later. I just need to pick a number and turn the crank. I'll update everything at least annually. I've been using 6% real for equities for several years, and of course that has been wrong (but less wrong than if I had been basing it upon CAPE10). Actual returns have been somewhat higher. Doesn't matter. These exercises usually just give a person an idea of which tax bracket to max out. Precision is not important, just using a reasonable number. My exception is with those who preach that a change in CAPE10 from 33 to 25 (i.e. E/P 3.0 versus 4.0) is meaningful as an input to financial planning, asset allocation or asset location.
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 nedsaid » Sat Aug 11, 2018 9:36 am

HomerJ wrote:
Fri Aug 10, 2018 10:05 am
nedsaid wrote:
Fri Aug 10, 2018 9:19 am
I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practiced should be renamed risk control. Maybe that will help the medicine go down a bit easier.
Great post. :)

Nothing wrong with taking a bit off the top, even beyond normal rebalancing, since your need to take risk has decreased with a larger portfolio, and another year closer to retirement.
I think HomerJ, that your approach of erring towards conservatism and having modest expectations of returns is a good one as it seems you have mostly won the game and are getting closer to retirement. What you have posted is pretty sensible.

There is a problem with getting too focused on valuations. Pretty much there is disagreement over the claim that stocks are expensive here. Larry seems to think that stocks are still expensive whereas I am starting to get excited about lower P/E's. It all depends upon whether the trend of faster economic growth will continue. If you want 4 different ideas, just consult 3 economists. :happy So it isn't easy to get consensus on much of anything in regards to the market and the economy. Differing opinions are what make the markets.

The other thing is that we all have more foibles and inconsistencies than we want to admit. I got a kick out of Larry when he admitted that his shift to Value stocks in about 1997 was market timing. It was an astonishing admission but he was 100% truthful. If I see that the bridge is out, I will pull over and stop the car. Lots of folks here would rather careen over an abyss rather than be accussed of market timing and not staying the course.

Larry made the right call but he was 2-3 years too early. He trailed the market until the 2000-2002 bear market which then made him look absolutely brilliant. The question could be asked what would have happened if he just stayed the course and rode out the volatility. But he cut perceived risk and moved to where he saw greater opportunity. Too bad he can't post his actual investment results, compliance won't let him, but he has posted the investment results of the portfolio recommended in his first book. In fact, I posted that for him somewhere.

It isn't easy to say who is right and who is wrong. Sometimes there is no 100% clear answer.
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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Sat Aug 11, 2018 9:44 am

willthrill81 wrote:
Fri Aug 10, 2018 9:46 am
nedsaid wrote:
Fri Aug 10, 2018 9:19 am
I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practice should be renamed risk control. Maybe that will help the medicine go down a bit easier.
It is interesting indeed that the 'market timing' label carries such negative connotations. I think that much of this is because we tend to associate it with people who are making portfolio changes on the basis of emotional, gut reactions. That's clearly what a lot of people do, but it's not what everyone who isn't 'buy-and-hold' does either.

Being a trend follower helps me sleep better at night, and all but the most die-hard buy-and-holder would say that I'm likely to do no worse over the long-term than a balanced, static AA. I think that finding a strategy that makes sense to you personally and you are very confident you will stick with is more important than whether one is a buy-and-holder or a trend follower. I've little doubt that many proclaimed buy-and-holders (not necessarily anyone in this thread) would abandon their position if stocks dropped 50%. We even this somewhat with bond holders who are understandably not pleased with the returns of TBM over the last few years.
I remember seeing an analysis of the different factors. It seemed that momentum not only had the highest returns but was the most reliable of the factors. Wish I could easily find that thread again, but quite frankly I was very surprised by this. I would have expected Profitability/Quality to be the most reliable and Value to have the highest returns. Wrong! Momentum beat the other factors on both counts. So maybe you are onto something here.
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Re: Larry Swedroe: Valuations Too High?

Post by Park » Sat Aug 11, 2018 9:50 am

The following is my $0.02, and I may be overvaluing that :-).

There is security selection and there is market timing. But the boundary between the two isn't exact, and to some extent, there is a continuum.

Security selection is a zero sum game. But there are some factors, which historically have been associated with a premium. The premium may be due to behavior which can't be arbitraged away and/or risk. To come out ahead with security selection, compared to market cap indexing, is difficult after taking into account costs.

Market timing can be divided into between asset classes and within asset classes. I'm defining asset class as either stocks, bonds or cash. Market timing between asset classes is almost always a negative sum game. For example, there is almost always an equity risk premium. But as Larry has pointed out, there are rare occasions when that isn't true. Nevertheless, it almost always is. To beat a buy and hold strategy with market timing and its associated tailwind and increased costs, is very difficult.

Value investing based on price ratios is usually associated with security selection, and can be a successful strategy. To a great extent, DFA got its $580 billion in assets, due to its success with value investing. Value investing works at the level of individual stocks, sectors and countries; "Behavioural Investing" by James Montier discusses this. But it works best at the level of individual stocks. As the size and complexity of value investing increases to sectors and countries, it works less well, as the value signal gets weaker. For example, individual stocks within a country will be likely be exposed to similar government policies. But when you use price ratios to compare between countries, the value signal may be influenced by government policies, and less by the companies themselves.

I've never seen data as to how well it works at the level of USA versus rest of developed world versus emerging markets, which is what we're talking about here. My guess is that there is a premium based on value investing at such a level. William Bernstein advocates for it, and Jonathan Clements looks like he uses it in his own portfolio. But both look like they would do it modestly. This is a low return strategy with a high dispersion of returns. Occasionally, I think you can make a case for doing it more than modestly. An example would be Japan at the end of 1989, when it was about 40% of world stocks by market cap and had a CAPE of around 90.

If you tilt between USA vs. rest of developed vs. emerging markets based on value, is that security selection or market timing with an asset class or both? I would make the case that it is both, but possibly more market timing.

Value investing is a bet on reversion to mean, and is a noisy signal. When you value invest at the level of stocks, you have hundreds/thousands to chose from, and that helps with noisy signals. When you value invest at the level of USA versus rest of developed markets versus emerging market, you have 3 subasset classes, and that doesn't help with noisy signals. Also the time horizon differs, with value investing at the level of stocks being shorter. When you value invest at the level of USA versus rest of developed markets versus EM, reversion to mean probably takes longer, and may be related more to the business cycle. Also, there is a tendency to assume that price ratios will revert to historical means, when you value invest at the level of USA vs DM vs. EM. But as Larry has shown with CAPE, there are good reasons why CAPE may change with time. When someone value invests at the level of individual stocks, there is less of an assumption of reversion to historical means. So value investing at the level of US vs. DM vs. EM starts to look more like market timing. OTOH, it's a zero sum game, which is an improvement over the negative sum game of market timing between asset classes.

So the following is my strategy, FWIW. I plan to do some very modest market timing between stock subasset classes based on valuations. However, if valuations are extreme, it will be more than modest.
Last edited by Park on Sat Aug 11, 2018 10:27 am, edited 3 times in total.

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Sat Aug 11, 2018 9:56 am

nedsaid wrote:
Sat Aug 11, 2018 9:44 am
willthrill81 wrote:
Fri Aug 10, 2018 9:46 am
nedsaid wrote:
Fri Aug 10, 2018 9:19 am
I guess the worst thing you can say to another poster on this forum is to accuse them of market timing. So we have to come up with euphemisms like aggressive rebalancing or opportunistic reallocation. Most all of us have done some form of market timing, though probably in its very mildest forms. Probably something like aggressive rebalancing. There is another poster here who does trend following but most of us in our hearts of hearts realize markets are fairly efficient and don't aggressively time the market. Even the Boglemeister himself made adjustments to his portfolio back in 2000 when stock valuations got to be extreme. But it seems verboten here to even take a profit, which at one time was considered prudent, but now is a capital offense around here. Taking a bit off the top, which I have done at least twice, is hardly market timing.

It is okay on this forum to have differing opinions. Folks aren't always going to agree. Let's agree to disagree here. I guess the very mild market timing that many of us have practice should be renamed risk control. Maybe that will help the medicine go down a bit easier.
It is interesting indeed that the 'market timing' label carries such negative connotations. I think that much of this is because we tend to associate it with people who are making portfolio changes on the basis of emotional, gut reactions. That's clearly what a lot of people do, but it's not what everyone who isn't 'buy-and-hold' does either.

Being a trend follower helps me sleep better at night, and all but the most die-hard buy-and-holder would say that I'm likely to do no worse over the long-term than a balanced, static AA. I think that finding a strategy that makes sense to you personally and you are very confident you will stick with is more important than whether one is a buy-and-holder or a trend follower. I've little doubt that many proclaimed buy-and-holders (not necessarily anyone in this thread) would abandon their position if stocks dropped 50%. We even this somewhat with bond holders who are understandably not pleased with the returns of TBM over the last few years.
I remember seeing an analysis of the different factors. It seemed that momentum not only had the highest returns but was the most reliable of the factors. Wish I could easily find that thread again, but quite frankly I was very surprised by this. I would have expected Profitability/Quality to be the most reliable and Value to have the highest returns. Wrong! Momentum beat the other factors on both counts. So maybe you are onto something here.
I certainly hope so!

I've been surprised that even Larry Swedroe has come around on trend following, at least in certain asset classes like managed futures. And the finance literature is increasing espousing the benefits of trend following.

I do not expect to outperform the market with this strategy, although I think that there is a realistic possibility of that occurring. My main intent is to minimize downside risk and smooth out returns. For instance, most trend followers did very well from 2000-2009; it wasn't a 'lost decade' for them 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 nedsaid » Sat Aug 11, 2018 10:20 am

willthrill81 wrote:
Sat Aug 11, 2018 9:56 am
nedsaid wrote:
Sat Aug 11, 2018 9:44 am

I remember seeing an analysis of the different factors. It seemed that momentum not only had the highest returns but was the most reliable of the factors. Wish I could easily find that thread again, but quite frankly I was very surprised by this. I would have expected Profitability/Quality to be the most reliable and Value to have the highest returns. Wrong! Momentum beat the other factors on both counts. So maybe you are onto something here.
I certainly hope so!

I've been surprised that even Larry Swedroe has come around on trend following, at least in certain asset classes like managed futures. And the finance literature is increasing espousing the benefits of trend following.

I do not expect to outperform the market with this strategy, although I think that there is a realistic possibility of that occurring. My main intent is to minimize downside risk and smooth out returns. For instance, most trend followers did very well from 2000-2009; it wasn't a 'lost decade' for them at all.
That has been my take on Small/Value tilting. Might help, won't hurt. I do want to beat the market but with Value on a decade long vacation, this hasn't happened.
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Re: Larry Swedroe: Valuations Too High?

Post by GAAP » Sat Aug 11, 2018 1:56 pm

FIREchief wrote:
Fri Aug 10, 2018 7:50 pm
I personally think the CAPE10 predictions are too conservative, and that actual returns will be higher. Not +6% higher, but maybe +2% higher.

I came up with 1.93% low on average, when looking at 15-year returns using CAPE10 from 1881 to 1998. I was too lazy to bother adding 2014-2017 data to the source Shiller data...

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Re: Larry Swedroe: Valuations Too High?

Post by danielc » Sat Aug 11, 2018 7:00 pm

FIREchief wrote:
Wed Aug 08, 2018 10:01 pm
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?
Yes... there is a correlation between past earnings and future earnings. A lot of people in this forum take the "future is uncertain" to a ridiculous extreme. Company earnings are not produced by a random number generator.
FIREchief wrote:
Wed Aug 08, 2018 10:01 pm
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?
All your questions have been somewhere between strawmen and red herrings. PE rations are clearly not irrelevant. The fact that PE ratios are correlated with higher future earnings is not data mining or an odd mathematical curiosity. There is a correlation between past earnings and future earnings, and PE ratios, if anything, have mean-reversion tendency so the fact that valuations change is only a further argument in support of the correlation between PE ratios and earnings.

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Re: Larry Swedroe: Valuations Too High?

Post by FIREchief » Sat Aug 11, 2018 7:16 pm

danielc wrote:
Sat Aug 11, 2018 7:00 pm
FIREchief wrote:
Wed Aug 08, 2018 10:01 pm
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?
All your questions have been somewhere between strawmen and red herrings. PE rations are clearly not irrelevant. The fact that PE ratios are correlated with higher future earnings is not data mining or an odd mathematical curiosity. There is a correlation between past earnings and future earnings, and PE ratios, if anything, have mean-reversion tendency so the fact that valuations change is only a further argument in support of the correlation between PE ratios and earnings.
Strawman or not, you failed to answer the question "why not just buy the individual stocks that have the lowest P/E ratios?" (I've known people that actually used that strategy) :annoyed

Also, I'm guessing you understand that a strong correlation does not establish a cause and effect relationship, right?
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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Sat Aug 11, 2018 10:13 pm

FIREchief wrote:
Sat Aug 11, 2018 7:16 pm
danielc wrote:
Sat Aug 11, 2018 7:00 pm
FIREchief wrote:
Wed Aug 08, 2018 10:01 pm
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?
All your questions have been somewhere between strawmen and red herrings. PE rations are clearly not irrelevant. The fact that PE ratios are correlated with higher future earnings is not data mining or an odd mathematical curiosity. There is a correlation between past earnings and future earnings, and PE ratios, if anything, have mean-reversion tendency so the fact that valuations change is only a further argument in support of the correlation between PE ratios and earnings.
Strawman or not, you failed to answer the question "why not just buy the individual stocks that have the lowest P/E ratios?" (I've known people that actually used that strategy) :annoyed

Also, I'm guessing you understand that a strong correlation does not establish a cause and effect relationship, right?
And the correlation between CAPE10 and stock returns has been weaker since Shiller proposed it than before, which makes it plausible that the 'true' strength of the correlation may be even weaker than originally believed (and still believed by many).

Even if the correlation between any valuation metric, CAPE10 or otherwise, and subsequent stock returns is truly there going forward to the same extent that it appears to have been in the past, this ignores the fact that, at best, over half of the variation of stock's returns is unexplained by the valuation metric. As a result, that leaves a fairly wide margin of error, Larry says around 6%. Even if that is true going forward, there's a big difference between -2% and +4% returns and between 1% and 7%. If I knew that stocks would return 7%, I'd stay in stocks. If I knew they'd return 1%, I'd be in TIPS. But I don't know that, and no one else does either. Experts can pontificate about the distribution, tails, statistical likelihood, etc. all they want; being well trained in statistics, I understand what they're talking about. But the bottom line is that many of us believe that even if the 6% range holds up, it's still too big to be meaningful to us.
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Re: Larry Swedroe: Valuations Too High?

Post by james22 » Sun Aug 12, 2018 2:08 am

sperry8 wrote:
Fri Aug 10, 2018 10:47 am
I think the issue is the concept around "need". For you (us) valuations aren't actionable because you (we) are so conservative that they don't really matter to us. But if we actually lived right up against our "plan" (let's say spending 5-6% WR), then this may change our minds re our NEED to take risk if we find valuations to be high. Because if we spent a higher number our margin for error would shrink and then we would constantly be shifting based on projections. Many may live/plan like this. But since we don't - valuations don't really matter to us. But they do to many who are not as conservative and/or have less vs their need.
Yep, with the additional reason:
vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
It'd sure be nice if those who didn't recognize the need would allow those of us who do, to discuss this on the Theory board.
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Re: Larry Swedroe: Valuations Too High?

Post by Call_Me_Op » Sun Aug 12, 2018 6:21 am

vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
But - by definition - you can never experience that realization because you will not be alive. So why worry about that?
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Re: Larry Swedroe: Valuations Too High?

Post by vineviz » Sun Aug 12, 2018 8:33 am

Call_Me_Op wrote:
Sun Aug 12, 2018 6:21 am
vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
But - by definition - you can never experience that realization because you will not be alive. So why worry about that?
[OT comment removed by admin LadyGeek] My goal is to balance two competing goals:

1) To spend as much of what I earn and save as I can during my lifetime.
2) To not spend ALL of what I've earned and saved during my lifetime.

Achieving that balance means taking into account the probabilities, however wide the dispersion, of multiple outcomes along with the realization that I will only encounter one of those outcomes. The reality is that the uncertainties involved dictate building in a margin of error, but I have no desire to make that margin of error any larger than is reasonable.
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Re: Larry Swedroe: Valuations Too High?

Post by LadyGeek » Sun Aug 12, 2018 9:23 am

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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Sun Aug 12, 2018 11:11 am

Park wrote:
Sat Aug 11, 2018 9:50 am
The following is my $0.02, and I may be overvaluing that :-).
Nedsaid: Join the club. I am only right about anything around here every six months or so. So every once in a while I say something memorable, otherwise just ignore everything ekse I say! :wink:
There is security selection and there is market timing. But the boundary between the two isn't exact, and to some extent, there is a continuum.
Nedsaid: I think there is a continuum between outright market timing and rebalancing. I know that I have crossed the line from rebalancing into let's say opportunistic reallocation between asset classes based upon valuations. You can no longer say "buy low, sell high" around here, that is another phrase that is strictly prohibited. (Roll the r in prohibited just as Dan Dierdorf on Monday Nigh Football used to in order to give it emphasis). Think I am joking? I got hammered pretty hard for saying "buy low, sell high". Just call it rebalancing and you will be okay, even if you don't quite mean it. We kind of, sort of, you know, have our own version of political correctness around here.
Security selection is a zero sum game. But there are some factors, which historically have been associated with a premium. The premium may be due to behavior which can't be arbitraged away and/or risk. To come out ahead with security selection, compared to market cap indexing, is difficult after taking into account costs.


Nedsaid: Factor investing, using a more passive approach, gives you a good shot at outperformance. I agree that factors are based upon human nature and human behavior. We have not repealed greed and fear just yet, so all of this still works. Hard to say if the robots will take this away, my guess is not, raw human emotion is just too powerful. I do believe that all factor funds engage in security selection, if you screen for stocks with certain characteristics, as DFA and the more passive factor funds do, you are still engaged in security selection even if you buy all the stocks that pass the screen. Thus I would say there is a continuum between passive investing and active management. Even the Small-Value Index had a turnover of about 18%, to me that stretches the definition of passive.
Market timing can be divided into between asset classes and within asset classes. I'm defining asset class as either stocks, bonds or cash. Market timing between asset classes is almost always a negative sum game. For example, there is almost always an equity risk premium. But as Larry has pointed out, there are rare occasions when that isn't true. Nevertheless, it almost always is. To beat a buy and hold strategy with market timing and its associated tailwind and increased costs, is very difficult.


Nedsaid: I will have to think on that one. Rebalancing is a very mild form of timing, you are selling relatively pricey asset classes to buy cheaper asset classes. In certain circumstances, there is a rebalancing bonus between stocks and bonds. I did some analysis on this, I took probably about an annual 35 basis point (0.35%) hit over 10 years from not rebalancing from bonds to stocks during the 2008-2009 bear market. My annual returns from 2007-2016 were 4.93%, if I had the courage to rebalance from bonds to stocks during the 2008-2009 period, my annual returns would have been 5.28%.
Value investing based on price ratios is usually associated with security selection, and can be a successful strategy. To a great extent, DFA got its $580 billion in assets, due to its success with value investing. Value investing works at the level of individual stocks, sectors and countries; "Behavioural Investing" by James Montier discusses this. But it works best at the level of individual stocks. As the size and complexity of value investing increases to sectors and countries, it works less well, as the value signal gets weaker. For example, individual stocks within a country will be likely be exposed to similar government policies. But when you use price ratios to compare between countries, the value signal may be influenced by government policies, and less by the companies themselves.


Nedsaid: I have to think really hard about these points. If the Value signal is strongest with individual stocks, I would think much of this would be offset by single stock risk. You do raise a good point of political risk from country to country. You would think if you picked thousands of Value stocks across sectors and countries that a lot of the unique risks you cite would be balanced out. One problem is that Value screens tend to concentrate on certain sectors. For example, Value funds tend to be heavy in the Financial sector. In recent years, energy stocks often showed up on these screens. Might be better to take the cheapest stocks in each sector rather than just taking the cheapest stocks across the whole market. You seem to be saying that more focused funds would outperform more broad based funds, not sure the research would back that up. But then again, I don't know.
I've never seen data as to how well it works at the level of USA versus rest of developed world versus emerging markets, which is what we're talking about here. My guess is that there is a premium based on value investing at such a level. William Bernstein advocates for it, and Jonathan Clements looks like he uses it in his own portfolio. But both look like they would do it modestly. This is a low return strategy with a high dispersion of returns. Occasionally, I think you can make a case for doing it more than modestly. An example would be Japan at the end of 1989, when it was about 40% of world stocks by market cap and had a CAPE of around 90.
Nedsaid: The research says that Value works everywhere, except for one country, which if I remember right is Italy. Larry Swedroe tilts very heavy to Small Value across the US, Developed Markets, and Emerging Markets.
If you tilt between USA vs. rest of developed vs. emerging markets based on value, is that security selection or market timing with an asset class or both? I would make the case that it is both, but possibly more market timing.
Nedsaid: To me, market timing is buying and selling based upon indicators, which may or may not be Value based. Lots of folks trend follow, that is momentum and not Value. In addition, market timing folks often use economic and not just market indicators. There is a playing of economic cycles too. I never really have thought of making portfolio adjustments based upon Value as being a timing strategy, it is simply buying low and selling high. But anything beyond just staying the course has been defined as market timing around here, so you really can't buy low and sell high or even rebalance more than once a year without being accused of timing.
Value investing is a bet on reversion to mean, and is a noisy signal. When you value invest at the level of stocks, you have hundreds/thousands to chose from, and that helps with noisy signals. When you value invest at the level of USA versus rest of developed markets versus emerging market, you have 3 subasset classes, and that doesn't help with noisy signals. Also the time horizon differs, with value investing at the level of stocks being shorter. When you value invest at the level of USA versus rest of developed markets versus EM, reversion to mean probably takes longer, and may be related more to the business cycle. Also, there is a tendency to assume that price ratios will revert to historical means, when you value invest at the level of USA vs DM vs. EM. But as Larry has shown with CAPE, there are good reasons why CAPE may change with time. When someone value invests at the level of individual stocks, there is less of an assumption of reversion to historical means. So value investing at the level of US vs. DM vs. EM starts to look more like market timing. OTOH, it's a zero sum game, which is an improvement over the negative sum game of market timing between asset classes.


Nedsaid: There is a lot of noise in the markets. Hard to tell what data is truly useful and which data sets are not. Plus a lot of this seems to be time period dependent, depending upon the time periods you pick, the various factors appear and disappear. Again, you seem to be implying that rather focused portfolios with fewer securities will work better. You seem to be arguing for active management with low fees, which Vanguard does a lot of.
So the following is my strategy, FWIW. I plan to do some very modest market timing between stock subasset classes based on valuations. However, if valuations are extreme, it will be more than modest.
Rebalancing between sub-asset classes is a big part of the Paul Merriman strategy. He cuts the Pizza into enough slices that I wonder if any one slice can make a meaningful difference in the long term performance of a portfolio. Sort of like Yogi Berra saying, "Cut the pizza into four slices, I am not hungry enough to eat six." I wonder about how much slicing and dicing is too much.
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Re: Larry Swedroe: Valuations Too High?

Post by Park » Mon Aug 13, 2018 12:15 am

http://www.fortunefinancialadvisors.com ... t-rotation

"Consider the case of Sweden which, hit a Japan-like CAPE high of 79 in early 2000. At the same time, the U.S. was also at its all-time high, but seemingly a relative bargain at just 47. Since then through 2017, U.S. shares have indeed outperformed Swedish shares, but it would have taken the patience of saint to wait so long; despite the huge premium, MSCI Sweden outperformed the MSCI USA index by more than 240 basis points annually over the ten year period starting in March 2000"

Another example would be the case of Switzerland, which reached a peak CAPE of almost 60 in July of 1998, versus 40 for the U.S. Despite the discount, U.S. shares trailed Swiss shares by 1.7% per year over the next ten years.

It bears repeating that currency plays a huge role in relative returns between two global markets...the Swedish krona and the Swiss franc appreciated versus the dollar in the aftermath of the tech bust, helping Swedish and Swiss shares offset their rich valuation compared to the U.S."

https://blog.thinknewfound.com/2017/11/ ... al-equity/

"A quantitative value investor will try to identify the stocks exhibiting value characteristics (e.g. low P/E, P/B, P/S, et cetera) and then buy a large enough basket of them where the aggregate value signal remains strong, but there is sufficient diversification to limit idiosyncratic risk...for regional bets based upon valuation, there is not much to diversify: you’re effectively making one, big single bet.

First, in the traditional value factor, the dividing line is the characteristic in question: i.e. “cheapness.” All the stocks we buy are, by definition, relatively cheap. In the U.S. versus International case, both sides include both cheap and expensive stocks. We’re trying to express a valuation-driven trade but using very muddied instruments to do it.

Second, we’re using a dividing line that introduces a confounding risk factor. For the value factor, we generally expect both the cheap and the expensive portfolios to share similar characteristics...In the case of U.S. versus International, not only do we not expect the two baskets to share similar characteristics, but the construction of the trade ensures it.

valuation-driven market timing is really, really hard...Except – maybe – in the case where we’re seeing historically absurd, never-before-seen measures."

https://www.etf.com/sections/features-a ... nopaging=1

See Fig. 2 in link above. CAPE's ability to predict US stock market return is greatest at 1 years and progressively decreases with time. That's measured by the slope of the line. You'd expect that, as value investing is a reversion to the mean. By 30 years, returns will be similar to long term historical returns, which means that they'll be driven by earnings and not initial valuation. However, the problem is the dispersion at 1 year is great, and progressively decreases with time. For shorter time periods, factors other then valuation drive stock market returns. So there's a compromise between return and dispersion, with the sweet spot being 10-15 years?

The above is why value investing works best at the stock level, as opposed to industry or sector or country level or regional level. When you go to the industry/sector/country/regional level, you weaken the value signal. Also at the country level, it takes longer for the value signal to show up. CAPE works best around 10-15 years, whereas individual stocks maximally mean revert by 1 year and mean reversion is gone by 5 years. I believe that at the sector level, it takes a similar amount of time as at the country level, although I'm not as certain about that.

Edited to include the following: you can value invest, using price ratios, at the level of individual stocks. But you can also use such value investing to select individual sectors, individual countries, individual regions (what is being talked about here) and individual asset classes. An example of the last would be if the world stock market had a CAPE of 60 and you decided to sell your stocks and go to cash or bonds. Value investing at the level of individual stocks is security selection. Value investing at the level of individual asset classes is market timing. From what I can see, there's a continuum from security selection to market timing, as you go from individual stocks to individual asset classes.
Last edited by Park on Mon Aug 13, 2018 7:36 am, edited 1 time in total.

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Re: Larry Swedroe: Valuations Too High?

Post by packer16 » Mon Aug 13, 2018 7:34 am

I agree with Park here. You do see value at the individual security level (a cheap stock) more than you see in diversified groups of stocks. By definition this is the case. They key here is the idiosyncratic risk control. This risk control can be implemented by relative sizing based upon operational & financial risk & by diversifying to the extent that it does not dilute the value factor (across countries & industries). You will end up with a high active share portfolio that has more volatility than the market that hopefully over time will outperform. This is how I have invested for awhile now.

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Re: Larry Swedroe: Valuations Too High?

Post by Park » Mon Aug 13, 2018 8:09 am

Park wrote:
Sat Aug 11, 2018 9:50 am
So the following is my strategy, FWIW. I plan to do some very modest market timing between stock subasset classes based on valuations. However, if valuations are extreme, it will be more than modest.
I'd like to clarify the above. When you rebalance between stock subasset classes based on valuations, there's the possibility of a rebalancing bonus. But that's not my strategy, although it's a good strategy. Instead, I'm talking about overbalancing, as per William Bernstein. Instead of rebalancing to the original asset allocation between stock subasset classes, I plan to go a little further than that, based on stock subasset class valuations. The emphasis is on "a little". It should be noted that unlike the rebalancing bonus, I"ve never seen any data supporting an overbalancing bonus.

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Re: Larry Swedroe: Valuations Too High?

Post by Random Walker » Mon Aug 13, 2018 8:51 am

packer16 wrote:
Mon Aug 13, 2018 7:34 am
I agree with Park here. You do see value at the individual security level (a cheap stock) more than you see in diversified groups of stocks. By definition this is the case.
Packer
I think I disagree. I believe the performance of the small value asset class is almost fully explained by just a few winners, which we can’t predict in advance. To see the benefit of the few need to invest in the whole class.

Dave

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Re: Larry Swedroe: Valuations Too High?

Post by packer16 » Mon Aug 13, 2018 9:33 am

What evidence do you have? Most if not all small cap value funds are diversified & thus you have no test of the few good bargains hypothesis. I have experienced and seen others who have experienced just the opposite. IMO the reason SCV funds underperform is the diluting away of the value factor & fees.

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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Mon Aug 13, 2018 9:46 am

Random Walker wrote:
Mon Aug 13, 2018 8:51 am
packer16 wrote:
Mon Aug 13, 2018 7:34 am
I agree with Park here. You do see value at the individual security level (a cheap stock) more than you see in diversified groups of stocks. By definition this is the case.
Packer
I think I disagree. I believe the performance of the small value asset class is almost fully explained by just a few winners, which we can’t predict in advance. To see the benefit of the few need to invest in the whole class.

Dave
Another problem is that it is hard to distinguish the "value traps" from true bargains. I made a purchase of Ford this year, the stock was amazingly cheap, dirt cheap in fact, and it has just languished. I may have purchased a value trap. It seems better to buy Quality at a small discount than Value at a deep discount at the individual stock level. Single stock risk is both a big opportunity and potentially a big problem.
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Re: Larry Swedroe: Valuations Too High?

Post by cjking » Mon Aug 13, 2018 12:03 pm

happytrades wrote:
Fri Aug 10, 2018 6:17 pm
A recent WSJ article by Mark Hulburt is pertinent:

The Eight Best Predictors of the Long-Term Market

https://www.wsj.com/articles/the-8-best ... 1533521521
Am I the only one who followed this link? The gist is that there is a predictor far more accurate than CAPE, which is the percentage of investor financial assets held in stocks. I can't access the WSJ article, but I found what I think it was based on:-

https://www.philosophicaleconomics.com/ ... t-returns/

Then I googled for more on the metric, I found a link to what is apparently a self-updating chart for this metric:-

http://financial-charts.effingapp.com/

It gives SPX expected annualized return over ten years as 3.48% as of 10th August.

That isn't too different from CAPE, so I looked at the height of 2000, there it predicted something a little worse than -2%, when CAPE yield would have predicted in the region of +2%. Actual returns were -0.48%, according to latter graph.

Edit: After searching Bogleheads for previous threads on this I found a link to a subsequent article where the same author commented on his first one:-

http://www.philosophicaleconomics.com/2 ... e-fitting/

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Mon Aug 13, 2018 3:55 pm

cjking wrote:
Mon Aug 13, 2018 12:03 pm
happytrades wrote:
Fri Aug 10, 2018 6:17 pm
A recent WSJ article by Mark Hulburt is pertinent:

The Eight Best Predictors of the Long-Term Market

https://www.wsj.com/articles/the-8-best ... 1533521521
Am I the only one who followed this link? The gist is that there is a predictor far more accurate than CAPE, which is the percentage of investor financial assets held in stocks. I can't access the WSJ article, but I found what I think it was based on:-

https://www.philosophicaleconomics.com/ ... t-returns/

Then I googled for more on the metric, I found a link to what is apparently a self-updating chart for this metric:-

http://financial-charts.effingapp.com/

It gives SPX expected annualized return over ten years as 3.48% as of 10th August.

That isn't too different from CAPE, so I looked at the height of 2000, there it predicted something a little worse than -2%, when CAPE yield would have predicted in the region of +2%. Actual returns were -0.48%, according to latter graph.

Edit: After searching Bogleheads for previous threads on this I found a link to a subsequent article where the same author commented on his first one:-

http://www.philosophicaleconomics.com/2 ... e-fitting/
Yes, investors' average equity allocation has indeed appeared to be a solid indicator of forward equity returns, far more so than CAPE. And its predictive value since it was proposed has held up remarkably well. I think it may have far more usefulness than any valuation metric alone. But time will tell.
“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 gmaynardkrebs » Mon Aug 13, 2018 4:12 pm

The blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. (From the recent WSJ article by Mark Hulburt)
So, the logical implication is that if everybody rebalanced (as we know they should :happy), the problem would go away This makes no sense to me. Nor does the article make any attempt to explain a mechanism for why this would be a valid indicator. Nor can I think of one. Complete nonsense. :thumbsdown

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Mon Aug 13, 2018 4:18 pm

gmaynardkrebs wrote:
Mon Aug 13, 2018 4:12 pm
The blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. (From the recent WSJ article by Mark Hulburt)
So, the logical implication is that if everybody rebalanced (as we know they should :happy), the problem would go away
Rebalancing has very little to do with average equity allocation. The latter is more of a function of investors trying to time the market, stuffing money into stocks during bull markets and clamoring for the exits in bear markets.

The first article he linked to gives a very in-depth explanation as to why this works.
“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 gmaynardkrebs » Mon Aug 13, 2018 4:33 pm

willthrill81 wrote:
Mon Aug 13, 2018 4:18 pm
gmaynardkrebs wrote:
Mon Aug 13, 2018 4:12 pm
The blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. (From the recent WSJ article by Mark Hulburt)
So, the logical implication is that if everybody rebalanced (as we know they should :happy), the problem would go away
Rebalancing has very little to do with average equity allocation. The latter is more of a function of investors trying to time the market, stuffing money into stocks during bull markets and clamoring for the exits in bear markets.

The first article he linked to gives a very in-depth explanation as to why this works.
Not convincing to me. A narrative is not an explanation.

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Re: Larry Swedroe: Valuations Too High?

Post by Park » Mon Aug 13, 2018 11:55 pm

cjking wrote:
Mon Aug 13, 2018 12:03 pm
happytrades wrote:
Fri Aug 10, 2018 6:17 pm
A recent WSJ article by Mark Hulburt is pertinent:

The Eight Best Predictors of the Long-Term Market

https://www.wsj.com/articles/the-8-best ... 1533521521
Am I the only one who followed this link? The gist is that there is a predictor far more accurate than CAPE, which is the percentage of investor financial assets held in stocks. I can't access the WSJ article, but I found what I think it was based on:-

https://www.philosophicaleconomics.com/ ... t-returns/

Then I googled for more on the metric, I found a link to what is apparently a self-updating chart for this metric:-

http://financial-charts.effingapp.com/

It gives SPX expected annualized return over ten years as 3.48% as of 10th August.

That isn't too different from CAPE, so I looked at the height of 2000, there it predicted something a little worse than -2%, when CAPE yield would have predicted in the region of +2%. Actual returns were -0.48%, according to latter graph.

Edit: After searching Bogleheads for previous threads on this I found a link to a subsequent article where the same author commented on his first one:-

http://www.philosophicaleconomics.com/2 ... e-fitting/
I cited it indirectly in a previous post on this thread. I linked to a blog post, which in turn was a summary of the WSJ article. It was a way of getting around the paywall.

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 » Tue Aug 14, 2018 12:44 am

This came up in another thread, and I think it's worth repeating here.

How many threads/posts were there back in 2008-2009, when CAPE was under its historic mean and median, where CAPE proponents were advocating that people dump everything they could into stocks and advocating 6% withdrawal rates for retirees?

The absence of such recommendations should give one pause. Perhaps some of these proponents are only interested in using CAPE and other valuation metrics as a crutch to do what they want to do anyway: build their portfolio even bigger and pontificate about the joys of a 2% withdrawal rate. This certainly isn't universal, but I think it's near the mark for most.
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Re: Larry Swedroe: Valuations Too High?

Post by MossySF » Tue Aug 14, 2018 2:34 am

We've got threads here saying valuations are too high and we should sell our stocks now.

And then we've got threads here saying "X stock" subclass has underperformed and we should bail and jump into the classes where valuations are too high.

It's time for Thunderdome!

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Re: Larry Swedroe: Valuations Too High?

Post by cjking » Tue Aug 14, 2018 2:41 am

Park wrote:
Mon Aug 13, 2018 11:55 pm
I cited it indirectly in a previous post on this thread. I linked to a blog post, which in turn was a summary of the WSJ article. It was a way of getting around the paywall.
Yes I see you did, thanks. Not sure why the other post caught my attention more.

This does look like an interesting metric, but it is more complex than CAPE, and only available for the US, where I mostly don't want to invest (because of valuations) so it's something for me to keep an eye on, but not use, for now.

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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Tue Aug 14, 2018 7:26 am

willthrill81 wrote:
Tue Aug 14, 2018 12:44 am
How many threads/posts were there back in 2008-2009, when CAPE was under its historic mean and median, where CAPE proponents were advocating that people dump everything they could into stocks and advocating 6% withdrawal rates for retirees?
The absence of such recommendations should give one pause. Perhaps some of these proponents are only interested in using CAPE and other valuation metrics as a crutch to do what they want to do anyway: build their portfolio even bigger and pontificate about the joys of a 2% withdrawal rate. This certainly isn't universal, but I think it's near the mark for most.
I can't speak for others, but I was throwing money into TIPS at real rates of almost 4%.(I didn't catch the peak, which I think was even better.) However, even at the bottom, stocks were only slightly below the median CAPE. They weren't a screaming bargain, and the crash exposed that they were a lot riskier than a lot of people had thought.

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Re: Larry Swedroe: Valuations Too High?

Post by marcopolo » Tue Aug 14, 2018 8:43 am

gmaynardkrebs wrote:
Tue Aug 14, 2018 7:26 am
willthrill81 wrote:
Tue Aug 14, 2018 12:44 am
How many threads/posts were there back in 2008-2009, when CAPE was under its historic mean and median, where CAPE proponents were advocating that people dump everything they could into stocks and advocating 6% withdrawal rates for retirees?
The absence of such recommendations should give one pause. Perhaps some of these proponents are only interested in using CAPE and other valuation metrics as a crutch to do what they want to do anyway: build their portfolio even bigger and pontificate about the joys of a 2% withdrawal rate. This certainly isn't universal, but I think it's near the mark for most.
I can't speak for others, but I was throwing money into TIPS at real rates of almost 4%.(I didn't catch the peak, which I think was even better.) However, even at the bottom, stocks were only slightly below the median CAPE. They weren't a screaming bargain, and the crash exposed that they were a lot riskier than a lot of people had thought.
Well, in hind sight, they were quite a screaming bargain.
I think that is part of the problem with CAPE, which has been "elevated" from shortly after Shiller first published about it.
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 gmaynardkrebs » Tue Aug 14, 2018 9:09 am

marcopolo wrote:
Tue Aug 14, 2018 8:43 am
gmaynardkrebs wrote:
Tue Aug 14, 2018 7:26 am
willthrill81 wrote:
Tue Aug 14, 2018 12:44 am
How many threads/posts were there back in 2008-2009, when CAPE was under its historic mean and median, where CAPE proponents were advocating that people dump everything they could into stocks and advocating 6% withdrawal rates for retirees?
The absence of such recommendations should give one pause. Perhaps some of these proponents are only interested in using CAPE and other valuation metrics as a crutch to do what they want to do anyway: build their portfolio even bigger and pontificate about the joys of a 2% withdrawal rate. This certainly isn't universal, but I think it's near the mark for most.
I can't speak for others, but I was throwing money into TIPS at real rates of almost 4%.(I didn't catch the peak, which I think was even better.) However, even at the bottom, stocks were only slightly below the median CAPE. They weren't a screaming bargain, and the crash exposed that they were a lot riskier than a lot of people had thought.
Well, in hind sight, they were quite a screaming bargain.
I think that is part of the problem with CAPE, which has been "elevated" from shortly after Shiller first published about it.
I'm not sure they were a screaming bargain then, and I'm not sure they would be now, even if they crashed back to the historic mean. That's what CAPE10 means, and I think remains a powerful indicator. That said, CAPE is hardly infallible. If the market dropped to a CAPE under 20, I probably would say they are a bargain. In fact, I doubt there will be a crash because the buy on the dips mentality is so deeply embedded that it effectively puts a floor under stock prices at this point, and will for a long time.

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Re: Larry Swedroe: Valuations Too High?

Post by marcopolo » Tue Aug 14, 2018 9:33 am

gmaynardkrebs wrote:
Tue Aug 14, 2018 9:09 am
marcopolo wrote:
Tue Aug 14, 2018 8:43 am
gmaynardkrebs wrote:
Tue Aug 14, 2018 7:26 am
willthrill81 wrote:
Tue Aug 14, 2018 12:44 am
How many threads/posts were there back in 2008-2009, when CAPE was under its historic mean and median, where CAPE proponents were advocating that people dump everything they could into stocks and advocating 6% withdrawal rates for retirees?
The absence of such recommendations should give one pause. Perhaps some of these proponents are only interested in using CAPE and other valuation metrics as a crutch to do what they want to do anyway: build their portfolio even bigger and pontificate about the joys of a 2% withdrawal rate. This certainly isn't universal, but I think it's near the mark for most.
I can't speak for others, but I was throwing money into TIPS at real rates of almost 4%.(I didn't catch the peak, which I think was even better.) However, even at the bottom, stocks were only slightly below the median CAPE. They weren't a screaming bargain, and the crash exposed that they were a lot riskier than a lot of people had thought.
Well, in hind sight, they were quite a screaming bargain.
I think that is part of the problem with CAPE, which has been "elevated" from shortly after Shiller first published about it.
I'm not sure they were a screaming bargain then, and I'm not sure they would be now, even if they crashed back to the historic mean. That's what CAPE10 means, and I think remains a powerful indicator. That said, CAPE is hardly infallible. If the market dropped to a CAPE under 20, I probably would say they are a bargain. In fact, I doubt there will be a crash because the buy on the dips mentality is so deeply embedded that it effectively puts a floor under stock prices at this point, and will for a long time.
Well, I guess if you define "bargain" to be what CAPE tells you, then it is a kind of a tautology. I prefer to have the market make those judgements.
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 gmaynardkrebs » Tue Aug 14, 2018 9:37 am

marcopolo wrote:
Tue Aug 14, 2018 9:33 am
Well, I guess if you define "bargain" to be what CAPE tells you, then it is a kind of a tautology. I prefer to have the market make those judgements.
How does one do that?

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Re: Larry Swedroe: Valuations Too High?

Post by willthrill81 » Tue Aug 14, 2018 9:45 am

gmaynardkrebs wrote:
Tue Aug 14, 2018 9:37 am
marcopolo wrote:
Tue Aug 14, 2018 9:33 am
Well, I guess if you define "bargain" to be what CAPE tells you, then it is a kind of a tautology. I prefer to have the market make those judgements.
How does one do that?
You buy at whatever the current market price is without any regard to valuations.
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Re: Larry Swedroe: Valuations Too High?

Post by 3funder » Tue Aug 14, 2018 10:47 am

willthrill81 wrote:
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.
But...should it? I don't think so. Just because corporations don't have to amortize goodwill on a schedule doesn't mean they are doing a good job generating top line growth. EPS figures can be manipulated in all sorts of ways (share buybacks, moving intellectual property from one locale to another, etc.).
Last edited by 3funder on Tue Aug 14, 2018 10:51 am, edited 2 times in total.

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nedsaid
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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Tue Aug 14, 2018 10:48 am

I am having an interesting exchange with Larry Swedroe via personal message. Pretty much his firm is putting less importance upon the metric of book value. What I have been saying is that the accountants have understated the value of companies, book value pretty consistently is much less than the market value of companies. I have also wondered if in a similar fashion the accountants have been understating earnings and if the economists have been underestimating productivity growth. If such things like computer hardware, software, artificial intelligence, and robots have been boosting productivity more than realized; then it is no wonder why profit margins for companies are near all time highs. We just need fewer and fewer people for the same unit of output. As Larry says, the rewards are going to capital and not labor and it is not hard to see why.
A fool and his money are good for business.

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corn18
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Re: Larry Swedroe: Valuations Too High?

Post by corn18 » Tue Aug 14, 2018 10:56 am

corn18 wrote:
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!
I’ll post this again because it seems more relevant after 4 pages. Much to do about nothing.

gmaynardkrebs
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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Tue Aug 14, 2018 10:58 am

willthrill81 wrote:
Tue Aug 14, 2018 9:45 am
gmaynardkrebs wrote:
Tue Aug 14, 2018 9:37 am
marcopolo wrote:
Tue Aug 14, 2018 9:33 am
Well, I guess if you define "bargain" to be what CAPE tells you, then it is a kind of a tautology. I prefer to have the market make those judgements.
How does one do that?
You buy at whatever the current market price is without any regard to valuations.
The problem I have with that view is that it's as tautological as CAPE is alleged to be, except that, unlike CAPE, it gives just one signal -- to keep exactly the same allocations you have now (other than normal rebalancing or age adjusting) There are worse strategies, but if CAPE was 14. I know I''d want to buy a lot more. I' might even say that at CAPE 20.

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HomerJ
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Re: Larry Swedroe: Valuations Too High?

Post by HomerJ » Tue Aug 14, 2018 11:12 am

The crazy thing about this thread...

Did any of you actually read Larry's article?

He basically says Valuations are NOT too high right now.
The preceding reasons help explain why the long-term median of the CAPE 10 has drifted upward. While the CAPE 10’s mean has been 16.9 over the entire period since 1880, from 1960 through April 2018, a period of more than 58 years, the mean has been 20.1. Since 1970, the mean has been 20.0. Since 1980, the mean has been 21.9. Since 1990, a period of almost 30 years, it has been a much higher 25.6.

When people state there is a risk that valuations revert to their mean, which mean should we expect them to revert to? The one that includes very different (and much riskier) economic and regulatory regimes? That’s comparing apples to oranges. Perhaps we should expect reversion to the mean over the more recent period beginning in 1990?
While the current U.S. CAPE 10 is 33, the current CAPE 8—which has about the same explanatory power as the CAPE 10 but excludes the very bad and temporarily depressed earnings figures from 2008 and 2009—is 5 points lower at 28. (Comparable figures for non-U.S. developed and emerging markets are about 19 and 15, respectively.)

That’s not all that much higher than the CAPE 10’s mean of 25.6 from 1990 through April 2018. A CAPE ratio of 28 results in an earnings yield of 3.6%, while a CAPE ratio of 25.6 results in an earnings yield of 3.9%. That’s not much of a difference. It is also just 1 percentage point lower than the average CAPE 10 earnings yield of 4.6% for the period starting from 1980. There’s no way to know if that is the right earnings yield.

Additionally, if we use the CAPE 8 of 28, and make the adjustments for the accounting changes and the reduction in dividends, we get what we might call an adjusted CAPE 8 of about 23.5. That provides a forecast for real returns of about 4.3%, or about 1 percentage point higher than the real return forecast using the current CAPE 10.
The bottom line is that today’s high valuations, while signaling investors should expect future equity returns to be significantly lower than past returns (bond yields are much lower than historical levels, creating a challenge for overall portfolio returns), don’t necessarily mean the market is overvalued. They also don’t mean that you should be acting on warnings from “market gurus” about the virtual certainty of an impending bear market.
I disagree about "we should expect future equity returns to be significantly lower" since he's been saying that for years and it hasn't happened (not saying he's wrong, just saying he might be wrong. He can't predict the future.), but I agree with him that the current value of CAPE10 of 32-33 is meaningless by itself. You have to put in context with all the other variables he mentioned in the article.

Very strange to me that Larry would point out all the legitimate problems with CAPE (ones I have pointed out for years), and then continue to insist we can accurately calculate an "expected return" from it. He basically gave us 3 different possible expected returns in this article (all of which are plus/minus 8% - note he failed to disclose the error range).

What exactly are you supposed to do with that as an investor?
Last edited by HomerJ on Tue Aug 14, 2018 11:23 am, edited 3 times in total.
The J stands for Jay

gmaynardkrebs
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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Tue Aug 14, 2018 11:19 am

nedsaid wrote:
Tue Aug 14, 2018 10:48 am
I am having an interesting exchange with Larry Swedroe via personal message. Pretty much his firm is putting less importance upon the metric of book value. What I have been saying is that the accountants have understated the value of companies, book value pretty consistently is much less than the market value of companies. I have also wondered if in a similar fashion the accountants have been understating earnings and if the economists have been underestimating productivity growth. If such things like computer hardware, software, artificial intelligence, and robots have been boosting productivity more than realized; then it is no wonder why profit margins for companies are near all time highs. We just need fewer and fewer people for the same unit of output. As Larry says, the rewards are going to capital and not labor and it is not hard to see why.
It's quite a fraught path going from book value to your rather startling conclusion. Trade and commerce take place in a legal, regulatory, and tax structure that determines the efficient production frontier. Clearly, that structure has changed dramatically over the last 30 years, in ways that many feel have vastly expanded the rewards going to capital as opposed to labor.
Last edited by gmaynardkrebs on Tue Aug 14, 2018 11:26 am, edited 2 times in total.

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steve321
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Re: Larry Swedroe: Valuations Too High?

Post by steve321 » Tue Aug 14, 2018 11:23 am

nedsaid wrote:
Tue Aug 14, 2018 10:48 am
I am having an interesting exchange with Larry Swedroe via personal message. Pretty much his firm is putting less importance upon the metric of book value. What I have been saying is that the accountants have understated the value of companies, book value pretty consistently is much less than the market value of companies. I have also wondered if in a similar fashion the accountants have been understating earnings and if the economists have been underestimating productivity growth. If such things like computer hardware, software, artificial intelligence, and robots have been boosting productivity more than realized; then it is no wonder why profit margins for companies are near all time highs. We just need fewer and fewer people for the same unit of output. As Larry says, the rewards are going to capital and not labor and it is not hard to see why.
I find it a bit strange that he is having private exchanges with various Bogleheads, who are then making his thoughts public. I understand he is being sulky for some criticisms he received years ago, but perhaps if he wants to continue to contribute to discussions wouldn't the most efficient way be to get over the past and to write again on this Forum, instead of having his thoughts reported by others?

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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Tue Aug 14, 2018 11:29 am

steve321 wrote:
Tue Aug 14, 2018 11:23 am
I find it a bit strange that he is having private exchanges with various Bogleheads, who are then making his thoughts public. I understand he is being sulky for some criticisms he received years ago, but perhaps if he wants to continue to contribute to discussions wouldn't the most efficient way be to get over the past and to write again on this Forum, instead of having his thoughts reported by others?
I think he's made his reasons pretty clear, and I appreciate his willingness to engage indviduals via PM despite that.

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Re: Larry Swedroe: Valuations Too High?

Post by gmaynardkrebs » Tue Aug 14, 2018 11:31 am

deleted -- duplicate
Last edited by gmaynardkrebs on Tue Aug 14, 2018 1:00 pm, edited 1 time in total.

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steve roy
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Re: Larry Swedroe: Valuations Too High?

Post by steve roy » Tue Aug 14, 2018 12:58 pm

vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
As the well-known philosopher Errol Flynn once wrote:

“Any man who dies with more than $5000 to his name is a FAILURE.”

(Please note: Mr. Flynn died with more than $5k, so he didn’t follow his own maxim.)

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corn18
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Re: Larry Swedroe: Valuations Too High?

Post by corn18 » Tue Aug 14, 2018 1:03 pm

steve roy wrote:
Tue Aug 14, 2018 12:58 pm
vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
As the well-known philosopher Errol Flynn once wrote:

“Any man who dies with more than $5000 to his name is a FAILURE.”

(Please note: Mr. Flynn died with more than $5k, so he didn’t follow his own maxim.)
It's actually $10,000. With inflation, that would put it around $74,000 today.

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steve roy
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Re: Larry Swedroe: Valuations Too High?

Post by steve roy » Tue Aug 14, 2018 1:39 pm

corn18 wrote:
Tue Aug 14, 2018 1:03 pm
steve roy wrote:
Tue Aug 14, 2018 12:58 pm
vineviz wrote:
Fri Aug 10, 2018 9:39 am
To me, the downside of dying rich will be the realization that I didn't live my life as fully as I could have.
As the well-known philosopher Errol Flynn once wrote:

“Any man who dies with more than $5000 to his name is a FAILURE.”

(Please note: Mr. Flynn died with more than $5k, so he didn’t follow his own maxim.)
It's actually $10,000. With inflation, that would put it around $74,000 today.
OMG. All these years, I've had the wrong price-point.

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nedsaid
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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Tue Aug 14, 2018 4:42 pm

steve321 wrote:
Tue Aug 14, 2018 11:23 am
nedsaid wrote:
Tue Aug 14, 2018 10:48 am
I am having an interesting exchange with Larry Swedroe via personal message. Pretty much his firm is putting less importance upon the metric of book value. What I have been saying is that the accountants have understated the value of companies, book value pretty consistently is much less than the market value of companies. I have also wondered if in a similar fashion the accountants have been understating earnings and if the economists have been underestimating productivity growth. If such things like computer hardware, software, artificial intelligence, and robots have been boosting productivity more than realized; then it is no wonder why profit margins for companies are near all time highs. We just need fewer and fewer people for the same unit of output. As Larry says, the rewards are going to capital and not labor and it is not hard to see why.
I find it a bit strange that he is having private exchanges with various Bogleheads, who are then making his thoughts public. I understand he is being sulky for some criticisms he received years ago, but perhaps if he wants to continue to contribute to discussions wouldn't the most efficient way be to get over the past and to write again on this Forum, instead of having his thoughts reported by others?
Actually, Larry has been posting again though certainly less than he did before. What he stated in the forum is 100% consistent with what he has said in private messages. I have no secret insights to Larry's thinking, it is quite public not only here but in his articles and books. Any forum member is free to contact him by personal message or e-mail.

I have several times posted from those PM's but again no secrets there. It has mostly been him responding to things I have posted, sometimes to clarify a misunderstanding on my part.

The gist of the comments is that Larry believes the market is fairly expensive here. Though P/E ratios are lower, profit margins are near all-time highs, and labor is getting a historically low share of the rewards. His opinion seems to be that the high profit margins are unsustainable and that there will be a swing from capital back to labor. Pretty much that wages will be going up and that will put pressure on margins. He also points to very low levels of unemployment. What I don't know is if Larry is worried about a pick up in inflation.

My point is that if economic growth goes to a new, new normal of 3% GDP growth rather than the new normal of 1% to 2% that earnings growth would be more sustainable than thought. I also don't think labor markets are as tight as perceived. First, formerly discouraged workers are coming back to the workforce and I also believe that many people are underemployed.

Again, if you have a question of Larry, you can feel free to contact him. You can go right to the source.
A fool and his money are good for business.

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nedsaid
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Re: Larry Swedroe: Valuations Too High?

Post by nedsaid » Tue Aug 14, 2018 4:50 pm

gmaynardkrebs wrote:
Tue Aug 14, 2018 11:19 am
nedsaid wrote:
Tue Aug 14, 2018 10:48 am
I am having an interesting exchange with Larry Swedroe via personal message. Pretty much his firm is putting less importance upon the metric of book value. What I have been saying is that the accountants have understated the value of companies, book value pretty consistently is much less than the market value of companies. I have also wondered if in a similar fashion the accountants have been understating earnings and if the economists have been underestimating productivity growth. If such things like computer hardware, software, artificial intelligence, and robots have been boosting productivity more than realized; then it is no wonder why profit margins for companies are near all time highs. We just need fewer and fewer people for the same unit of output. As Larry says, the rewards are going to capital and not labor and it is not hard to see why.
It's quite a fraught path going from book value to your rather startling conclusion. Trade and commerce take place in a legal, regulatory, and tax structure that determines the efficient production frontier. Clearly, that structure has changed dramatically over the last 30 years, in ways that many feel have vastly expanded the rewards going to capital as opposed to labor.
The gist of all of this is that I am wondering aloud if the US Stock Market is as expensive as many here seem to believe. The metrics are good but they don't seem to capture 100% of the real story of what is going on in the markets. Larry seems to believe the market is fairly expensive, I am not so sure.

My comments about productivity gains from computers, AI, and robots are in response to Larry wondering if record high profit margins are sustainable. It might be that productivity gains are more than perceived and that there won't be as much labor demand as hoped. Perhaps if labor is scarce, companies will hire more robots instead of raising wages. Maybe these high profit margins are more sustainable than believed.

I am simply asking questions to stimulate thinking.
A fool and his money are good for business.

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