At what point is this a bubble?

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PoultryMan
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At what point is this a bubble?

Post by PoultryMan » Wed Feb 12, 2020 9:45 am

I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?

mega317
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Re: At what point is this a bubble?

Post by mega317 » Wed Feb 12, 2020 9:46 am

This is bigger than rebalancing bands. It's telling you your risk tolerance is less than you thought it was and your stock allocation is too high.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 9:50 am

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?
Sounds like you have a case of fear of heights. Unless you’re retired and your withdrawal rate is pretty high I wouldn’t think about it. Perhaps do some reading on past growth phases in market. By historical standards, the metrics still have a lot of room to run. Plus stock valuations may stretch even further than historically with record low interest rates. Who knows.

Calling the top isn’t a realistic expectation.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 9:51 am

And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 9:52 am

And if you’re looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.

KlangFool
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Re: At what point is this a bubble?

Post by KlangFool » Wed Feb 12, 2020 9:55 am

OP,

1) I do not know.

2) I do not care.

3) My AA is 60/40. I am contributing new money to whatever is low in my allocation.

4) If you need to care or worry whether it is a bubble, you have a wrong AA.

5) Use a fund of funds like the Lifestrategy Moderate Growth Fund (60/40) or A Target Retirement Fund, then, you never need to think about whether you are buying at a high.

KlangFool
Last edited by KlangFool on Wed Feb 12, 2020 9:57 am, edited 2 times in total.

Caduceus
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Re: At what point is this a bubble?

Post by Caduceus » Wed Feb 12, 2020 9:56 am

Pierre Delecto wrote:
Wed Feb 12, 2020 9:52 am
And if you’re looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.
Lol at the nick. Please tell me you are really Mitt Romney. :D

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 9:57 am

Caduceus wrote:
Wed Feb 12, 2020 9:56 am
Pierre Delecto wrote:
Wed Feb 12, 2020 9:52 am
And if you’re looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.
Lol at the nick. Please tell me you are really Mitt Romney. :D
I do have a lot of time on my hands now that no one wants to talk to me anymore in my circle.

thx1138
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Re: At what point is this a bubble?

Post by thx1138 » Wed Feb 12, 2020 9:58 am

You'll know it is a bubble quite some time after it has actually popped. It's hard to even tell if anything popped for sure when it is happening.

Note that everything you said was just as true in Aug 2018 with the SP500 at 2900. And then the sky was falling through the fall as it dropped to 2500. Oh my - it was a bubble! And it popped! Oh, wait we are at nearly 3400 now a year later.

Someone recently posted the best quote on market experience I've ever seen (might have been WhiteCoatInvestor) along the lines of "Beginner investors have trouble staying the course at market lows, intermediate investors have trouble staying the course at market highs, advanced investors just stay the course."

It is reasonable to feel concerned. Our brain has evolved to feel concerned in these situations.

It is unreasonable to act on that concern. Our brain in a different more analytical mode can show us that too.
Last edited by thx1138 on Wed Feb 12, 2020 10:00 am, edited 1 time in total.

rascott
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Re: At what point is this a bubble?

Post by rascott » Wed Feb 12, 2020 9:59 am

I don't know how much stock to put into analyst earnings estimates.... but per the SP500 site.... the consensus estimates are roughly $175 in earnings for 2020. Slap a 20 multiple on that and you get a price target of 3500 on the S&P.... roughly 4% above the current value (ignoring dividends). A 20 multiple may be a little low.... it was 21ish for 2016 and 2017.

That's a rough and dirty analysis.... but doesn't look bubblish to me at these levels.
Last edited by rascott on Wed Feb 12, 2020 10:02 am, edited 1 time in total.

ge1
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Re: At what point is this a bubble?

Post by ge1 » Wed Feb 12, 2020 10:00 am

I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck

rockstar
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Re: At what point is this a bubble?

Post by rockstar » Wed Feb 12, 2020 10:01 am

Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.
Bogle says the exact opposite in his book.

I think, it’s good that the OP is getting this off their chest. Investing is definitely psychological. They will make mistakes. I have made plenty.

When I’m worried about the market, I think of Hitchhikers Guide to the Galaxy. Don’t panic.

The last two bubbles I remember are Tesla and Bitcoin. Before that I’m thinking of housing, where credit got way too loose. It’s easier to see these things in hindsight. Is this market a bubble? I have no idea.

Pretty much all of my new money is going into t-bills and CDs. Others here are allocating to money markets and US TIPS. Some are buying intermediate. I’m doing this to maintain my AA at 75/25. I was 100% equities. But I have reduced my risk for peace of mind. You’ll have to figure out what works for you.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 10:07 am

ge1 wrote:
Wed Feb 12, 2020 10:00 am
I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck
Stocks are priced for the future and not for what’s already happened. An example: If last year a company had great earnings but the next several years look bad for earnings, for whatever reason, rearward looking PE is totally misleading as to what the price of the company’s stock should be in the present.

csmath
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Re: At what point is this a bubble?

Post by csmath » Wed Feb 12, 2020 10:21 am

I don't know the answer to your question but didn't we have a -20% draw down about 14 months ago? We are always in some sort of bubble somewhere but I'm not sure who really knows where it is at and if the bubble is just starting to get inflated or if it is about to burst.

+1 to it sounds like AA needs adjustment to better fit risk tolerance.

rkhusky
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Re: At what point is this a bubble?

Post by rkhusky » Wed Feb 12, 2020 10:40 am

You will know it’s a bubble when it pops.

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bertilak
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Re: At what point is this a bubble?

Post by bertilak » Wed Feb 12, 2020 10:41 am

It ain't a bubble 'till it pops.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

DB2
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Re: At what point is this a bubble?

Post by DB2 » Wed Feb 12, 2020 10:43 am

My opinion: stay globally diversified and balanced. Make sure your asset allocation is comfortable enough for you. We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops. Massive QE could re-create another one for all we know.

MnD
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Re: At what point is this a bubble?

Post by MnD » Wed Feb 12, 2020 10:51 am

The 20-year CAGR of the US market is 6.76% and that's before inflation.
Pretty ho-hum in my opinion.
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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Portfolio7
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Re: At what point is this a bubble?

Post by Portfolio7 » Wed Feb 12, 2020 10:57 am

It's not. There just is no bubble. Fundamentals remain pretty sound around the economic horn, so to speak.

If you want to argue the animal spirits portion of stock prices, we seem about average.

The market could still crash, or it could go up 20% this year (I'm betting 15% in the Boglehead Challenge).
"An investment in knowledge pays the best interest" - Benjamin Franklin

whereskyle
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Re: At what point is this a bubble?

Post by whereskyle » Wed Feb 12, 2020 11:01 am

Who knows? Despite the market highs, the trend of recent growth has been relatively subdued and stable. This period seems different than historical pre-bubble periods of very high growth in the very short term. Would I bet that distinction alone means this is not a bubble? Absolutely not. As others have stated, the question is not whether this is a bubble. The question is whether you are comfortable with your asset allocation. I totally agree that it's healthy for you to be honest about your emotions. If re-allocating will prevent you from selling at a loss if there is a crash, then you should consider re-allocating.

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Svensk Anga
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Re: At what point is this a bubble?

Post by Svensk Anga » Wed Feb 12, 2020 11:43 am

DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.

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gmaynardkrebs
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Re: At what point is this a bubble?

Post by gmaynardkrebs » Wed Feb 12, 2020 11:56 am

Bubble or no bubble, the one thing for sure about stocks is that they are always risky. That's the important thing to keep in mind. If they were "safe" assets, you probably wouldn't want them, because there would be no money to be made.

DB2
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Re: At what point is this a bubble?

Post by DB2 » Wed Feb 12, 2020 11:56 am

Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:00 pm

DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html
Didn’t read the article. Companies are IPOing later now. Private equity is getting more of the gains (as well as losses — see WeWork).

quantAndHold
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Re: At what point is this a bubble?

Post by quantAndHold » Wed Feb 12, 2020 12:02 pm

You’ll know it’s a bubble when Uber drivers are giving you stock tips. Every bubble I’ve lived through (dotcom, real estate, bitcoin, etc) has had the same feature. Someone at the bottom of the economic ladder was telling me how to make money on the bubbling financial product.

Until then, not a bubble.

MindBogler
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Re: At what point is this a bubble?

Post by MindBogler » Wed Feb 12, 2020 12:04 pm

It is a bubble after it crashes and everyone can explain why we should have known.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:06 pm

MindBogler wrote:
Wed Feb 12, 2020 12:04 pm
It is a bubble after it crashes and everyone can explain why we should have known.
So true! Then I’ll just work a few more years or spend less.

DB2
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Re: At what point is this a bubble?

Post by DB2 » Wed Feb 12, 2020 12:08 pm

Pierre Delecto wrote:
Wed Feb 12, 2020 12:00 pm
DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html
Didn’t read the article. Companies are IPOing later now. Private equity is getting more of the gains (as well as losses — see WeWork).
They are not making much money. As a group these are the lowest profits of IPOs since the 1990s. Only 24% made money(!). In 1999, only 28% made money. But, this is the kind of thing you see in a late cycle bubble.

Elysium
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Re: At what point is this a bubble?

Post by Elysium » Wed Feb 12, 2020 12:10 pm

PoultryMan wrote:
Wed Feb 12, 2020 9:45 am
I know to stick with a plan and rebalance as needed. Having said that, when Warren buffett cant find anything to invest in, PE ratios seem high, when is it a bubble and time to take some money off the table?

Maybe my unease is an irrational emotion?

Im trying to make this post actionable, so I guess Im asking, is it reasonable to be concerned? Does this tell me my rebalancing bands are too wide? Too narrow? Anyone else wondering the same?
Two things.

1. Don't look at PE ratios or any valuation metric that applies to a broad category of stocks in an effort to predict future direction. They are a horrendous metric for predicting near term stock returns (3-5 years), and the long term (10-12 years) predictability rate is equally horrendous.

2. Don't look at what Warren Buffett is doing, unless you are also in the business of identifying individual companies to invest heavily in, get in on the board of directors, and hold it for ever. If you are then you may not find anything to invest in for long periods of time, because by nature such opportunities only present themselves once every decade or even less.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:12 pm

DB2 wrote:
Wed Feb 12, 2020 12:08 pm
Pierre Delecto wrote:
Wed Feb 12, 2020 12:00 pm
DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html
Didn’t read the article. Companies are IPOing later now. Private equity is getting more of the gains (as well as losses — see WeWork).
They are not making much money. As a group these are the lowest profits of IPOs since the 1990s. Only 24% made money(!). In 1999, only 28% made money. But, this is the kind of thing you see in a late cycle bubble.
Reminds me that in his books Peter Lynch hated IPOs. He loved spin-offs though. Not sure if spin-off outperformance is still a thing.

anoop
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Re: At what point is this a bubble?

Post by anoop » Wed Feb 12, 2020 12:21 pm

This is a bubble, but unlike all prior bubbles, the fed continues to blow this one bigger. So the key is knowing when the fed is going to stop supporting the bubble. From that time it can be a year or few before market corrects. But right now, no chance for even a mild correction for the foreseeable future.

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nisiprius
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Re: At what point is this a bubble?

Post by nisiprius » Wed Feb 12, 2020 12:23 pm

I think it is a bubble. That's not the question. The question is: what should one do when one thinks there is a bubble?

I'm doing nothing.

The problem is that if you really look at the numbers, you'll find that can't get any real advantage just from spotting a bubble even if you are right. You need to get the timing right. The windows of opportunity for getting any worthwhile advantage are narrow.

"Sooner or later a crash is coming and it may be terrific" doesn't cut it.

I learned this in 1997. Alan Greenspan made his "irrational exuberance" speech in December 1996. I didn't go to cash, but I did pull back on our stock allocation. The crash happened around April, 2000, more than three years later, during which time the Dow rose from 7,000 almost to 12,000. Now, this wasn't a disaster at all, but the point is that it didn't do me much good, either. Because of having lowered our stock allocation, we partly missed out on the crash, but we partly missed out on three years of fantastic growth, too. Overall it didn't do much good or much harm. I don't kick myself for doing it.

If you piled in believing the good times would never end, then, certainly, better to ease off now, before a crash instead of afterwards. But don't get impatient watching your friends get rich and pile in again!

You have to be ready to take the bad with the good. Thinking you can get the equity risk premium without really taking the risk is a form of self-deception and greed. Accept that you will miss out on some gains and be hit by some losses, that's just the risk you take. If you can't accept that, then you aren't experiencing risk tolerance, you are experiencing risk denial.

I think your unease is a "rational emotion." It's kind of like the time I calculated the chances of an airplane accident in terms of time. It turned out that the risk per mile is far lower for plane travel than for driving, but during takeoffs and landings, the risk per minute is higher for flying. So a rational person ought feel anxious during takeoffs and landings, but ought to fly anyway.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

rascott
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Re: At what point is this a bubble?

Post by rascott » Wed Feb 12, 2020 12:32 pm

DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html

That's nonsense in that the actual number of IPOs is still pretty low. Last year was half the number of IPOs that there were in 1999.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:36 pm

anoop wrote:
Wed Feb 12, 2020 12:21 pm
This is a bubble, but unlike all prior bubbles, the fed continues to blow this one bigger. So the key is knowing when the fed is going to stop supporting the bubble. From that time it can be a year or few before market corrects. But right now, no chance for even a mild correction for the foreseeable future.
This post probably has appeared on a regular basis since 2013. People just need to stop thinking so much about the Fed. It leads to bad investing decisions.

rockstar
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Re: At what point is this a bubble?

Post by rockstar » Wed Feb 12, 2020 12:37 pm

rascott wrote:
Wed Feb 12, 2020 12:32 pm
DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html

That's nonsense in that the actual number of IPOs is still pretty low. Last year was half the number of IPOs that there were in 1999.
Private equity and venture capital are much bigger today. Companies can get funding and stay private for longer.

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JoeRetire
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Re: At what point is this a bubble?

Post by JoeRetire » Wed Feb 12, 2020 12:38 pm

You'll only know it was a bubble after it bursts.
Very Stable Genius

rascott
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Re: At what point is this a bubble?

Post by rascott » Wed Feb 12, 2020 12:38 pm

PE ratio is basically identical to what it was in 2015


2015 - 20.35
2016 - 21.07
2017 - 21.47
2018 - 16.54
2019 - 20.56 (estimated as 4th qtr earnings not fully in)
2020 estimates - 18.81


This was based upon data from S&P....and was as of Jan 30th.

So where's the bubble?

I think when people talk about bubble... they really just mean the economy is overdue for a recession.
Last edited by rascott on Wed Feb 12, 2020 12:42 pm, edited 2 times in total.

TN_Boy
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Re: At what point is this a bubble?

Post by TN_Boy » Wed Feb 12, 2020 12:39 pm

Pierre Delecto wrote:
Wed Feb 12, 2020 10:07 am
ge1 wrote:
Wed Feb 12, 2020 10:00 am
I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck
Stocks are priced for the future and not for what’s already happened. An example: If last year a company had great earnings but the next several years look bad for earnings, for whatever reason, rearward looking PE is totally misleading as to what the price of the company’s stock should be in the present.
Your statement is true, but the problem is that forward PE estimates are based upon company and analyst wild guesses estimates of the company earnings will be down the road.

That is, they are predicting the future.

My recollection is that earning estimates tend to have a lot of "momentum." I.e. future estimates tend to look a lot like the last 12 months or so. Analysts are not that good at predicting significant changes in earnings and revenue.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:41 pm

TN_Boy wrote:
Wed Feb 12, 2020 12:39 pm
Pierre Delecto wrote:
Wed Feb 12, 2020 10:07 am
ge1 wrote:
Wed Feb 12, 2020 10:00 am
I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck
Stocks are priced for the future and not for what’s already happened. An example: If last year a company had great earnings but the next several years look bad for earnings, for whatever reason, rearward looking PE is totally misleading as to what the price of the company’s stock should be in the present.
Your statement is true, but the problem is that forward PE estimates are based upon company and analyst wild guesses estimates of the company earnings will be down the road.

That is, they are predicting the future.

My recollection is that earning estimates tend to have a lot of "momentum." I.e. future estimates tend to look a lot like the last 12 months or so. Analysts are not that good at predicting significant changes in earnings and revenue.
Agree that analysts forecasts have real limitations and that’s a factor to consider.

rockstar
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Re: At what point is this a bubble?

Post by rockstar » Wed Feb 12, 2020 12:42 pm

anoop wrote:
Wed Feb 12, 2020 12:21 pm
This is a bubble, but unlike all prior bubbles, the fed continues to blow this one bigger. So the key is knowing when the fed is going to stop supporting the bubble. From that time it can be a year or few before market corrects. But right now, no chance for even a mild correction for the foreseeable future.
Lower rates raised all boats. That’s been pretty much the Fed’s job for as long as I have been working. They inflate asset values by lowering rates and buying long duration bonds. They keep liquidity flowing when banks won’t. They haven’t had to fight inflation for decades since real wage growth went to zero.

If inflation magically appears, then we’ll have an issue. But I don’t think employees have the bargaining power to get it done.

JonnyB
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Re: At what point is this a bubble?

Post by JonnyB » Wed Feb 12, 2020 12:46 pm

Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.
I always like this argument that the future looks much better if you just look at the future predictions.
Last edited by JonnyB on Wed Feb 12, 2020 12:51 pm, edited 1 time in total.

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 12:49 pm

JonnyB wrote:
Wed Feb 12, 2020 12:46 pm
Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.
I always like this argument that the future looks much better if you look at the future predictions.
Fine than look at the next year’s earnings forecasted by management. Many/most companies set them low as too many earnings misses from guidances results in management changes at the top.

DB2
Posts: 668
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Re: At what point is this a bubble?

Post by DB2 » Wed Feb 12, 2020 12:50 pm

rascott wrote:
Wed Feb 12, 2020 12:32 pm
DB2 wrote:
Wed Feb 12, 2020 11:56 am
Svensk Anga wrote:
Wed Feb 12, 2020 11:43 am
DB2 wrote:
Wed Feb 12, 2020 10:43 am
We probably are in a bubble (it seems Greenspan era Fed policies create these) just based on these IPOs alone (so reminiscent of dotcom), but who knows how long it goes and when it pops.
I think the WeWork IPO would have sailed right through in 1999 without any scrutiny. Seems that the market is more cautious about valuing new companies now.
These IPOs are the least profitable since late 90s.

https://www.cnbc.com/2019/09/18/this-ye ... ubble.html

That's nonsense in that the actual number of IPOs is still pretty low. Last year was half the number of IPOs that there were in 1999.
Regardless, most aren't making money.

JonnyB
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Re: At what point is this a bubble?

Post by JonnyB » Wed Feb 12, 2020 1:01 pm

nisiprius wrote:
Wed Feb 12, 2020 12:23 pm
I learned this in 1997. Alan Greenspan made his "irrational exuberance" speech in December 1996. I didn't go to cash, but I did pull back on our stock allocation. The crash happened around April, 2000, more than three years later, during which time the Dow rose from 7,000 almost to 12,000. Now, this wasn't a disaster at all, but the point is that it didn't do me much good, either. Because of having lowered our stock allocation, we partly missed out on the crash, but we partly missed out on three years of fantastic growth, too. Overall it didn't do much good or much harm. I don't kick myself for doing it.
If you sold your stocks in 1997 and invested in the Vanguard Total Bond Fund instead, you would have been ahead in 2013. That's 16 years later. And if you had decided to reinvest in stocks any time between 2008 and 2013, a 5-year span, when PEs were much lower, you would come out way ahead.

Stock prices matter. Investors can be irrational. Bubbles exist, can be recognized and can be avoided.

stocknoob4111
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Re: At what point is this a bubble?

Post by stocknoob4111 » Wed Feb 12, 2020 1:16 pm

It's concerning due to lack of market breadth... I have read that 5 tech stocks are providing most of the returns for the S&P 500. I am guessing it hasn't been like this historically. Why aren't the 495 companies in the index not performing?

rascott
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Re: At what point is this a bubble?

Post by rascott » Wed Feb 12, 2020 1:23 pm

stocknoob4111 wrote:
Wed Feb 12, 2020 1:16 pm
It's concerning due to lack of market breadth... I have read that 5 tech stocks are providing most of the returns for the S&P 500. I am guessing it hasn't been like this historically. Why aren't the 495 companies in the index not performing?

That's way overblown..... yes the megacaps tech have been doing really well.

But the equal-weight SP500 ETF (RSP) was still up 29% last year.

1130Super
Posts: 220
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Location: Minnesota

Re: At what point is this a bubble?

Post by 1130Super » Wed Feb 12, 2020 1:28 pm

ge1 wrote:
Wed Feb 12, 2020 10:00 am
I agree that certain part of the markets most definitely seem to be in a bubble (Tesla with a market cap of almost 150bn for example), primarily US Tech. Other part of the markets seem fine (international, energy for example).

The difficult part is what to do with it. In my portfolio I overweigh US value and small cap value, but I do this knowing that I may underperform the broader index for longer periods of time. There are no guarantees.

good luck
Why do you assume Tesla is in a bubble? Btw don’t say they are bigger than GM and Ford combined, Tesla is not just a car Manufacture, again Tesla is not just a car manufacturer they are a tech company with an ecosystem. They supply the fuel for their ecosystem, they make the fuel for their ecosystem. They sell the cars directly to the consumer.
Tesla = Exxon + 7-Eleven + Ford dealerships + Ford. Not just Ford

Pierre Delecto
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Re: At what point is this a bubble?

Post by Pierre Delecto » Wed Feb 12, 2020 1:28 pm

JonnyB wrote:
Wed Feb 12, 2020 1:01 pm
nisiprius wrote:
Wed Feb 12, 2020 12:23 pm
I learned this in 1997. Alan Greenspan made his "irrational exuberance" speech in December 1996. I didn't go to cash, but I did pull back on our stock allocation. The crash happened around April, 2000, more than three years later, during which time the Dow rose from 7,000 almost to 12,000. Now, this wasn't a disaster at all, but the point is that it didn't do me much good, either. Because of having lowered our stock allocation, we partly missed out on the crash, but we partly missed out on three years of fantastic growth, too. Overall it didn't do much good or much harm. I don't kick myself for doing it.
If you sold your stocks in 1997 and invested in the Vanguard Total Bond Fund instead, you would have been ahead in 2013. That's 16 years later. And if you had decided to reinvest in stocks any time between 2008 and 2013, a 5-year span, when PEs were much lower, you would come out way ahead.

Stock prices matter. Investors can be irrational. Bubbles exist, can be recognized and can be avoided.
Actually go back and check your PE values in the 2008-2013. During much of that time the PE values were actually really high as profits had gone down dramatically, but the underlying businesses still had a lot of value.

MathWizard
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Joined: Tue Jul 26, 2011 1:35 pm

Re: At what point is this a bubble?

Post by MathWizard » Wed Feb 12, 2020 1:30 pm

Pierre Delecto wrote:
Wed Feb 12, 2020 9:51 am
And if your looking at PE values, it’s the forward PE that matters. The rear-looking PE value is largely meaningless.

You know what the current price is
You know what the last year's earnings were

You can only guess what the earning for the next year will be.

So the traditional rear-looking PE is based in reality,
and the forward-looking PE is a guess.


If you think about it, forward PE should be right around 1/return
where return is the return that investors expect to get.
Since the price is always positive, and investors would never want
negative earnings, forward PE will never be negative, though the rear-looking PE in a year could be.

In fact, I would venture that forward PE will always be positive, but less than 25 , corresponding to
an expected rate of return in excess of 4%.

MnD
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Re: At what point is this a bubble?

Post by MnD » Wed Feb 12, 2020 1:32 pm

rascott wrote:
Wed Feb 12, 2020 12:38 pm
PE ratio is basically identical to what it was in 2015


2015 - 20.35
2016 - 21.07
2017 - 21.47
2018 - 16.54
2019 - 20.56 (estimated as 4th qtr earnings not fully in)
2020 estimates - 18.81


This was based upon data from S&P....and was as of Jan 30th.

So where's the bubble?

I think when people talk about bubble... they really just mean the economy is overdue for a recession.
The forward PE of total world (all-cap all-country) is 16.5. Ex-US is 14.0.
https://www.yardeni.com/pub/mscipe.pdf
70/30 AA, Global market cap equity. Rebalance if FI <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.

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