Are these forecasts based on valuations reliable at all?

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steve321
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Are these forecasts based on valuations reliable at all?

Post by steve321 »

I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Is the low forecast due to valuations?
If so, what do you think of these forecasts based on CAPE and PB ratios?
https://www.starcapital.de/fileadmin/us ... lie7_L.JPG
And if these forecasts are reasonable, why not shift to international stocks? (instead of staying invested in US stocks expecting very low returns, given the risks?)
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Re: Are these forecasts based on valuations reliable at all?

Post by FIREchief »

They've rarely been reliable in the past. I don't know why this time would be any different.
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Re: Are these forecasts based on valuations reliable at all?

Post by Seasonal »

A Vanguard study concluded "We confirm that valuation metrics such as price/earnings ratios, or P/Es, have had an
inverse or mean-reverting relationship with future stock market returns, although it
has only been meaningful at long horizons and, even then, P/E ratios have “explained”
only about 40% of the time variation in net-of-inflation returns. Our results are similar
whether or not trailing earnings are smoothed or cyclically adjusted (as is done in
Robert Shiller’s popular P/E10 ratio)."
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Re: Are these forecasts based on valuations reliable at all?

Post by nisiprius »

Not as market-timing guidance. Not as anything actionable. Not as a way of telling which of two asset classes is going to outperform going forward. No. Tune out the noise.

From time to time people have been able to dig out, or find someone who had dug out for them, GMO's seven-year asset class return forecasts for seven years ago, and compared them to what really happened. They've been bad jokes. These forecasts probably are, too.

I notice that these forecasts don't even try to bracket a range of uncertainty. Does 6.0% percent mean 6.0%±1% or 6.0% ± 6% or 6.0% ± 10%? The GMO forecasts do include a range of uncertainty, and it's very wide, and still the reality has often fallen outside the range. Even the actual rank order of returns, which asset classes would outperform which, has borne little resemblance to the forecasts.
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Re: Are these forecasts based on valuations reliable at all?

Post by garlandwhizzer »

PB hasn't worked well for a long time. It has largely been discounted as the sole measurement of value because it hasn't worked well. There is controversy now about what is the best way to capture value premium and no certainty on this point. PB seemed to work well in the distant past on backtesting until it was first described. In the recent decade and a half it has underperformed body. Many believe that PB's initial success was mostly an artifact of a manufacturing based bricks and mortar economy where tangible book value was a decent measure of what a firm was worth. Now in the information age book value doesn't mean much. The most important asset a company can have is intellectual property, not physical property. It is very difficult to put a accurate value on intellectual property.

As for CAPE, it has historically has had some limited predictive value over a 10 yr. time horizon, very little over shorter terms. Forecasts based on any parameters, PE, PB, PCF, are in my opinion not be trusted. Accounting manipulations can alter these numbers. They are not written in stone. In the Vanguard study no investing parameter had more than a 40% predictive value, most had much less, meaning that the majority of future market action is not predictable by any known parameters. Important to keep this in mind when people use words like "expected return." Expected by whom? is a better question.

My opinion is to be skeptical of forecasts. No one knows where Mr. Market is going in the future. Having said that there is one thing that I believe to have some predictable value and it is not based on equity parameters. It is instead based on investor sentiment, specifically when investor sentiment is at or close to its all time historical extremes in one direction or the other. When everyone is wildly bullish and the market is skyrocketing that is usually the riskiest time. Likewise when there is widespread panic and investors flee from stocks en masse, that is typically a great time to buy equity. There are IMO hints now especially in LC tech darlings that we may be approaching extreme levels of positive sentiment among inexperienced day trading Robin Hood types. Time will tell but it's worth watching carefully.

One attraction of a TSM (beta) portfolio is that it makes no predictions about future winners and losers. No overweighting the former and underweighting the latter. Most who try to separate future winners from losers fail. TSM's only prediction is that the collective wisdom of the market (or lack of it) is likely better at allocating investment resources than the individual investor, the active fund manager, of the factor fund manager. That is usually a good bet. There is a reason why consistent long term outperformance in real funds is rare in the modern era of professionally dominated markets

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Re: Are these forecasts based on valuations reliable at all?

Post by Bluce »

steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Is the low forecast due to valuations?
If so, what do you think of these forecasts based on CAPE and PB ratios?
https://www.starcapital.de/fileadmin/us ... lie7_L.JPG
And if these forecasts are reasonable, why not shift to international stocks? (instead of staying invested in US stocks expecting very low returns, given the risks?)
See The Fortune Sellers. It's a great read.
No one can foretell the future. Or can they? There are many who purport to-and they are making a fortune. From meteorologists to investment advisers, prognosticating professionals are part of a multibillion-dollar industry. No longer merely fortunetellers, they are fortune sellers, offering us a commodity we're more than eager to buy: the future.

In this piercing and provocative expose, business consultant and forecasting expert William Sherden casts an unblinking eye on the booming business of predicting the future, separating fact from fallacy to show us not only how best to use the forecasts we're given, but how to "select the nuggets of valuable future advice from amongst the $200 billion worth of mostly erroneous future predictions put forth each year.
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Re: Are these forecasts based on valuations reliable at all?

Post by burritoLover »

Investors were worried about a U.S. bubble starting in 2010 all the way through now. It’s interesting to read articles around 2017 where there appeared to be a lot of concern that this was imminent and they were modifying their portfolios as a result. Everyone was so sure how right they were at the time.

If you hear ANYONE making predictions about the coming years of the market, it’s a good rule of thumb to ignore everything that is coming out of their mouth. The only thing you can control is how diversified you are.
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Re: Are these forecasts based on valuations reliable at all?

Post by flaccidsteele »

Forecasts have nothing to do with the future. It’s a simulation run by the brain in the present. If the person feels good, the simulation is optimistic. If the person feels bad, the simulation is pessimistic
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: Are these forecasts based on valuations reliable at all?

Post by steve321 »

nisiprius wrote: Sat Aug 22, 2020 12:44 pm Not as market-timing guidance. Not as anything actionable. Not as a way of telling which of two asset classes is going to outperform going forward. No. Tune out the noise.

From time to time people have been able to dig out, or find someone who had dug out for them, GMO's seven-year asset class return forecasts for seven years ago, and compared them to what really happened. They've been bad jokes. These forecasts probably are, too.

I notice that these forecasts don't even try to bracket a range of uncertainty. Does 6.0% percent mean 6.0%±1% or 6.0% ± 6% or 6.0% ± 10%? The GMO forecasts do include a range of uncertainty, and it's very wide, and still the reality has often fallen outside the range. Even the actual rank order of returns, which asset classes would outperform which, has borne little resemblance to the forecasts.
All right thanks. I never read GMO's reports; I thought valuethinker had given a positive assessment of them somewhere but I am not sure I if remember correctly.

So this is something I have been wondering since reading another forum here, on expected returns: most BH expect very low to zero returns for equities going forward. So if valuations can't be a predictor, on what do Bogleheads base their low future expectations? Can anyone explain this to me?
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Re: Are these forecasts based on valuations reliable at all?

Post by Lauretta »

My understanding is that future returns can be expressed by this formula (Bogle):

Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio

The first 2 terms can be estimated but regarding the 'Change in P/E Ratio' we don't know whether there'll be multiples expansion, contraction or if the P/E will stay roughly the same. These estimante (like GMO's) make assumptions about the third term which sometimes are totally wrong, and so are their predictions.

But I think that if the P/E ratio is higher than the odds are against you, both because the Dividend Yield is lower (as it depends on P) and because the Change in P/E Ratio is more likely to be negative than positive: I mean it has a longer way to fall than to climb.
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Re: Are these forecasts based on valuations reliable at all?

Post by asif408 »

Take a look at this chart of CAPE ratios of US, Developed ex US, and emerging markets since 1985 and let me know what you think OP https://twitter.com/Callum_Thomas/statu ... 46816?s=20

You can decide for yourself if this information is useful. To my eye this information has been useful for making long term adjustments to your stock allocations. It has not been useful for making adjustments to stock and bond allocations or making any adjustments without having at least a 5-10 year time frame, sometimes more. But it sure beats just investing blindly without regard to the price you pay.
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Re: Are these forecasts based on valuations reliable at all?

Post by steve321 »

asif408 wrote: Sun Aug 23, 2020 6:33 am Take a look at this chart of CAPE ratios of US, Developed ex US, and emerging markets since 1985 and let me know what you think OP https://twitter.com/Callum_Thomas/statu ... 46816?s=20

You can decide for yourself if this information is useful. To my eye this information has been useful for making long term adjustments to your stock allocations. It has not been useful for making adjustments to stock and bond allocations or making any adjustments without having at least a 5-10 year time frame, sometimes more. But it sure beats just investing blindly without regard to the price you pay.
Thank you, it does seem to be useful in the long term; this contradicts nisiprius post above.

I imagine the very high DM valuations where essentially due to Japan(?).

Like you say this method is likely to work in the long term; I am wondering whether one can look at indicators to try to find a sort of inflection point when the trend switches from one area to another. I mean it's like an elastic band getting more and more stretched, and we don't know how long you can get valuations rising.

I wonder, have you ever thought of looking at indicators to try to sort of time the rotation from US to other markets? I guess it can't be easy since Meb Faber has been going on for ages on investing in cheaper countries, and he's also into momentum but he doesn't seem to use it to time the rotation. Probably not feasible? What do you think?
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Re: Are these forecasts based on valuations reliable at all?

Post by columbia »

Am I forecasting that stocks will deliver a higher return than bonds for the rest of my life? Yes.

Will they? We shall see.


Any equities forecast that gets more specific than that is silly.
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Re: Are these forecasts based on valuations reliable at all?

Post by steve321 »

columbia wrote: Sun Aug 23, 2020 8:23 am Am I forecasting that stocks will deliver a higher return than bonds for the rest of my life? Yes.

Will they? We shall see.


Any equities forecast that gets more specific than that is silly.
the last sentence doesn't make sense to me. For example, why should anyone invest in riskier countries (or say in small, riskier companies) unless they expect a higher return? So one is always having expectations/making forecasts.
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Re: Are these forecasts based on valuations reliable at all?

Post by invest2bfree »

Great Topic.

I just dont see these high returns pan out for Europe or Japan.

Both these economies have very poor demographics, Average Age 45+.

JApan has no immigration and Europe has no clear immigration policy.

Iam bullish on Canada, India and China.

Now Iam indifferent to Latin America and Australia but they had the best returns in 2000-2007 period. They are very resource heavy.
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Re: Are these forecasts based on valuations reliable at all?

Post by YRT70 »

steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Where did you read that?

This is what Vanguard expects for the next decade (nominal):
U.S. equities 4.0%-6.0% (16.4% median volatility)
Global equities ex-U.S. (unhedged) 7.0%-9.0% (18.3%)
U.S. aggregate bonds 0.5%-1.5% (4.0%)
Global bonds ex-U.S. (hedged) 0.5%-1.5% (2.1%)

https://americas.vanguard.com/instituti ... ctives.htm
Last edited by YRT70 on Sun Aug 23, 2020 9:30 am, edited 1 time in total.
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Re: Are these forecasts based on valuations reliable at all?

Post by columbia »

steve321 wrote: Sun Aug 23, 2020 8:53 am
columbia wrote: Sun Aug 23, 2020 8:23 am Am I forecasting that stocks will deliver a higher return than bonds for the rest of my life? Yes.

Will they? We shall see.


Any equities forecast that gets more specific than that is silly.
the last sentence doesn't make sense to me. For example, why should anyone invest in riskier countries (or say in small, riskier companies) unless they expect a higher return? So one is always having expectations/making forecasts.
I don't invest in "riskier countries" and am agnostic on how my equity investments will compare with those who choose to; in fact, I don't care what the difference will be. It's not relevant to my financial life and certainly not something that one could accurately forecast.
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Re: Are these forecasts based on valuations reliable at all?

Post by steve321 »

columbia wrote: Sun Aug 23, 2020 9:25 am
steve321 wrote: Sun Aug 23, 2020 8:53 am
columbia wrote: Sun Aug 23, 2020 8:23 am Am I forecasting that stocks will deliver a higher return than bonds for the rest of my life? Yes.

Will they? We shall see.


Any equities forecast that gets more specific than that is silly.
the last sentence doesn't make sense to me. For example, why should anyone invest in riskier countries (or say in small, riskier companies) unless they expect a higher return? So one is always having expectations/making forecasts.
I don't invest in "riskier countries" and am agnostic on how my equity investments will compare with those who choose to; in fact, I don't care what the difference will be. It's not relevant to my financial life and certainly not something that one could accurately forecast.
I'm not talking about you. I am talking about active investors who, as a whole, set the prices (at which you invest as a passive investor). Even if you don't think about these things, or if like you say you are 'agnostic', it does not make risk vs return considerations less real.

Nobody would invest in Russia if they expected the same returns as in the US, since Russia is much riskier for business. I say that because I know, my wife is Russian. Of course investors expectations might be wrong, but no sane investor would invest in more risky markets expecting the same returns. You might know also that this works for bonds too. Junk bonds have higher yields that US government bonds for the same reason.
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Re: Are these forecasts based on valuations reliable at all?

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YRT70 wrote: Sun Aug 23, 2020 9:20 am
steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Where did you read that?

This is what Vanguard expects for the next decade (nominal):
U.S. equities 4.0%-6.0% (16.4% median volatility)
Global equities ex-U.S. (unhedged) 7.0%-9.0% (18.3%)
U.S. aggregate bonds 0.5%-1.5% (4.0%)
Global bonds ex-U.S. (hedged) 0.5%-1.5% (2.1%)

https://americas.vanguard.com/instituti ... ctives.htm
Here
viewtopic.php?f=1&t=323333
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Stock Market Forecasts

Post by Taylor Larimore »

Steve321:

I have learned (the hard way) to pay absolutely no attention to stock market forecasts. It is the primary reason I started the Boglehead Contest so that Bogleheads could see for themselves how their own forecasts are usually wrong.

2020 Boglehead Contest

Best wishes
Taylor
Jack Bogle's Words of Wisdom about stock market forecasts: "Nobody knows nothing."
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Re: Stock Market Forecasts

Post by steve321 »

Taylor Larimore wrote: Sun Aug 23, 2020 9:43 am Steve321:

I have learned (the hard way) to pay absolutely no attention to stock market forecasts. It is the primary reason I started the Boglehead Contest so that Bogleheads could see for themselves how their own forecasts are usually wrong.

2020 Boglehead Contest

Best wishes
Taylor
Jack Bogle's Words of Wisdom about stock market forecasts: "Nobody knows nothing."
Thanks Taylor. Great to have your input, I really appreciate that! I'd say that forecasts over the short term (say 1 year) are indeed a waste of time, however I've read forecasts by knowledgeable people like Bill Bernstein over a long time frame, like here:
https://www.etf.com/sections/features-a ... our-plan-0
What do you think?
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Re: Are these forecasts based on valuations reliable at all?

Post by YRT70 »

steve321 wrote: Sun Aug 23, 2020 9:41 am
YRT70 wrote: Sun Aug 23, 2020 9:20 am
steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Where did you read that?

This is what Vanguard expects for the next decade (nominal):
U.S. equities 4.0%-6.0% (16.4% median volatility)
Global equities ex-U.S. (unhedged) 7.0%-9.0% (18.3%)
U.S. aggregate bonds 0.5%-1.5% (4.0%)
Global bonds ex-U.S. (hedged) 0.5%-1.5% (2.1%)

https://americas.vanguard.com/instituti ... ctives.htm
Here
viewtopic.php?f=1&t=323333
Quite a few people with very low expectations (0-2% real) in the beginning of the thread. Later on there are more people with expectations above 2% real. The majority of the people in that thread is expecting above 2% real.
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Re: Are these forecasts based on valuations reliable at all?

Post by abuss368 »

steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Is the low forecast due to valuations?
If so, what do you think of these forecasts based on CAPE and PB ratios?
https://www.starcapital.de/fileadmin/us ... lie7_L.JPG
And if these forecasts are reasonable, why not shift to international stocks? (instead of staying invested in US stocks expecting very low returns, given the risks?)
Hi steve321 -

Honestly I would not put much weight, if any, in this or any other forecast. Unfortunately forecasts can motivate investors to make portfolio moves that they later may regret. I would focus on developing a portfolio based on goals, timeframe, and tolerance for risks, and tune out the market noise.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Are these forecasts based on valuations reliable at all?

Post by asif408 »

steve321 wrote: Sun Aug 23, 2020 8:11 am
asif408 wrote: Sun Aug 23, 2020 6:33 am Take a look at this chart of CAPE ratios of US, Developed ex US, and emerging markets since 1985 and let me know what you think OP https://twitter.com/Callum_Thomas/statu ... 46816?s=20

You can decide for yourself if this information is useful. To my eye this information has been useful for making long term adjustments to your stock allocations. It has not been useful for making adjustments to stock and bond allocations or making any adjustments without having at least a 5-10 year time frame, sometimes more. But it sure beats just investing blindly without regard to the price you pay.
Thank you, it does seem to be useful in the long term; this contradicts nisiprius post above.

I imagine the very high DM valuations where essentially due to Japan(?).

Like you say this method is likely to work in the long term; I am wondering whether one can look at indicators to try to find a sort of inflection point when the trend switches from one area to another. I mean it's like an elastic band getting more and more stretched, and we don't know how long you can get valuations rising.

I wonder, have you ever thought of looking at indicators to try to sort of time the rotation from US to other markets? I guess it can't be easy since Meb Faber has been going on for ages on investing in cheaper countries, and he's also into momentum but he doesn't seem to use it to time the rotation. Probably not feasible? What do you think?
Yes, Japan was the primary reason DM market valuations were so high in the 1980s. At one point in the 1980s Japan had the largest market cap of any county in the world and was more than half of the international index.

I wouldn't bother trying to time inflection points, then you are getting into short term timing, which is difficult and has a lot of competition, and there's no evidence anyone can do that consistently and profitably. Best to just average into the lower valuation regions gradually and slowly over time, and wait patiently for things to turn around. If you are constantly averaging in you should have a hefty exposure when things turn around. In the late 90s, for instance, EM was much cheaper than US or developed markets, but unless your timing was perfect, it took about 6-7 years to start outperforming.

The same story has happened with EM and developed exUS since the early to mid 2010s, they've been getting cheaper and still are. Who knows how long this will continue but the odds it will continue forever are low. No long term gain without years of short term pain.
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Re: Are these forecasts based on valuations reliable at all?

Post by FIREchief »

asif408 wrote: Sun Aug 23, 2020 6:33 am But it sure beats just investing blindly without regard to the price you pay.
Actually, investing blindly without regard to price has been a very successful long term strategy for many of us here on the forum. 8-)
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Re: Are these forecasts based on valuations reliable at all?

Post by 000 »

steve321 wrote: Sun Aug 23, 2020 1:39 am So this is something I have been wondering since reading another forum here, on expected returns: most BH expect very low to zero returns for equities going forward. So if valuations can't be a predictor, on what do Bogleheads base their low future expectations? Can anyone explain this to me?
Stock investing has become more crowded and seemingly less risky (printer goes brrrrrrrrr) than before.
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Re: Are these forecasts based on valuations reliable at all?

Post by whodidntante »

steve321 wrote: Sat Aug 22, 2020 11:08 am I was surprised to see in a different forum that most BH expect very low or 0% real returns yet they invest rather heavily in stocks, taking up a lot of risk.
Is the low forecast due to valuations?
If so, what do you think of these forecasts based on CAPE and PB ratios?
https://www.starcapital.de/fileadmin/us ... lie7_L.JPG
And if these forecasts are reasonable, why not shift to international stocks? (instead of staying invested in US stocks expecting very low returns, given the risks?)
I have a hefty allocation to international stocks. But I also would if international looked expensive because I didn't make that decision based on a valuation model. I'm a natural born American who currently works for a foreign corporation in the USA. My plan is to work outside the USA within three years. I also plan to spend most of my money in foreign currencies in retirement, so I'm not too keen on having my plans ruined due to a fall in the dollar or the US markets.

I don't know why someone would own a portfolio that they actually believe will have negative real returns, or volatility without returns, especially since there are alternatives that are not so bleak. Expected real returns for my portfolio are positive, maybe even decent. GAO also expects negative real returns for US stocks. But to be honest, I think those predicting negative real returns for US stocks will be proven wrong. We will see. I believe that is a possible outcome, but I've taken the bet that they are wrong.
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Re: Are these forecasts based on valuations reliable at all?

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whodidntante wrote: Sun Aug 23, 2020 2:30 pm GAO also expects negative real returns for US stocks.
do you mean GMO?
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Re: Are these forecasts based on valuations reliable at all?

Post by whodidntante »

steve321 wrote: Sun Aug 23, 2020 2:37 pm
whodidntante wrote: Sun Aug 23, 2020 2:30 pm GAO also expects negative real returns for US stocks.
do you mean GMO?
LOL, yes.

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Re: Are these forecasts based on valuations reliable at all?

Post by steve321 »

whodidntante wrote: Sun Aug 23, 2020 2:58 pm
steve321 wrote: Sun Aug 23, 2020 2:37 pm
whodidntante wrote: Sun Aug 23, 2020 2:30 pm GAO also expects negative real returns for US stocks.
do you mean GMO?
LOL, yes.

Person. Woman. Man. Camera. TV. :happy
:D :D :D :D :D :D
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
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