Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

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FIby45
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Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by FIby45 »

Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
chinchin
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by chinchin »

What's the alternative?
Last edited by chinchin on Sat Sep 12, 2020 9:20 am, edited 1 time in total.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Steve Reading »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
Maybe some day it will break but thus far I don't think it has. As long as you invested in broad market indices and you diversified into many countries, you were just fine going through all bubbles (Japan in the 80s, Tech in the late 90s, etc).
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by David Jay »

Great discussion of P/E here: viewtopic.php?t=252467

P/E has been “above the long term average” since 1992. Because it is not a stationary series.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by BrooklynInvest »

Not sure the market is trading at 30X yet (the S&P's at 25ish?) but a good question.

No is probably the technically correct answer but easier said than done at times.

I think my asset allocation takes care of this. The equity market being "overvalued" is one of the risks I'm reflecting in my overall asset allocation. I don't know whether equity prices drop or earnings rise from this point but my asset allocation should reflect my ability to tolerate this and other risks? If my willingness to tolerate risk declines then my A-A changes. If market risk increases based on valuation then it doesn't. I'll keep my A-A and dollar cost average away!
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by whereskyle »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
No one is buying bonds. P/E is pressed up because interest rates are low and there's nowhere to get yield. Earnings are down due to the pandemic, further exacerbating the ratio, but should/could/will rise soon. Add to that that. despite all the grandstanding, Congress still may pass another stimulus bill.

The distinction between today and 1990s irrational exuberance is that, unlike in 1999, when bonds were yielding 6% (and Jack infamously "reset his allocation" to a 50/50 stock/bond ratio) today we are looking at below-inflation returns from bonds. This means that people are not just blindly driving up stocks in anticipation of a 20% annual return, eschewing a much more rational approach. Today, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.

I think the p/e is where it's at not because of irrational exuberance but simply because this is the best all the investors in the marketplace think they can do. In other words, the prices are right.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheTimeLord »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
IMHO the market does not trade on PEs (they are only known in retrospect) but trades somewhat on future PEs which are guesses because no one knows the E in the future with certainty. There is a repetitive theme on this forum by some that seems to imply there is a simple math calculation you can perform to determine the proper valuation for the stock market at a given time which in my opinion is a bit like driving a car while looking in the rearview mirror. In general you can say the knowns have been priced in and the unknowns are constantly changing and being handicapped by the market. On top of this the value of stock is relative to what other investments return. About the only thing I know for sure is stocks are always incorrectly priced for the future I just don't know if their prices are too low to too high.
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FIby45
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by FIby45 »

BrooklynInvest wrote: Sat Sep 12, 2020 9:18 am Not sure the market is trading at 30X yet (the S&P's at 25ish?) but a good question.

No is probably the technically correct answer but easier said than done at times.

I think my asset allocation takes care of this. The equity market being "overvalued" is one of the risks I'm reflecting in my overall asset allocation. I don't know whether equity prices drop or earnings rise from this point but my asset allocation should reflect my ability to tolerate this and other risks? If my willingness to tolerate risk declines then my A-A changes. If market risk increases based on valuation then it doesn't. I'll keep my A-A and dollar cost average away!
S&P 500 PE Ratio: 28.72 +0.02 (0.05%) 4:00 PM EDT, Fri Sep 11
Mean: 15.82
Median: 14.83

Not quite 30x but high, and 1.8 x mean.

I have considered changing my AA, but isn't changing your asset allocation based on market factors akin to "timing the market" on some level?
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by zaboomafoozarg »

Well, Bogle did switch his stock allocation from 65% to 35% in late 1999, which worked out well.

I figure I'm not as smart or rich as him though, nor am I in my 70s, so I stick with the 75/25 that I've got.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by acegolfer »

It's fascinating to see BHs still believe in P/E mean reversion.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheTimeLord »

zaboomafoozarg wrote: Sat Sep 12, 2020 9:41 am Well, Bogle did switch his stock allocation from 65% to 35% in late 1999, which worked out well.

I figure I'm not as smart or rich as him though, nor am I in my 70s, so I stick with the 75/25 that I've got.
As I remember (which could be totally incorrect), he gave 2 reasons, mostly his health because of a failing heart and secondly because I think he may have described bonds as the buy of the century.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rascott »

P/Es are only relevant when adjusted for underlying interest rates. For all we know 30x may well be the "norm" for decades..... if interest rates are going to stay sub-1%.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by nisiprius »

It's a puzzle. My personal answer is that

1) if you don't think you can bear to do this, then you probably have too much of your money in stocks.

2) If you are pretty sure that you can bear to do this, then the question is "what is the alternative and how sure you are that it is actually better?"

If "completely ignoring all external signals and auto-investing monthly" sometimes produces terrible results, it is tempting to suppose that anything else must be better, but is it so?

One thing to note is that when I've backtested, I've found that in order to get any advantage from market timing the timing needs to be really accurate. "Sooner or later a crash is coming and it may be terrific" is not good enough.

When I was a little kid, we once had to run out to the car in rain, and my dad said "We'll just run between the raindrops." And I believed he really could do it. If you run in a straight line, you are sure to get hit by raindrops and get wet. But can you really do any better by running in a zigzag and trying to avoid them?

In the 2000's I worked at a company with a Fidelity-managed 401(k) plan, and I used Fidelity Asset Manager--now called Fidelity Asset Manager 50%--because I didn't like any of the individual bond fund offerings. This is a tactical asset allocation fund, and its strategy is
Maintaining a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10% of assets in short-term and money market instruments though FMR may overweight or underweight in each asset class.
The fund managers could have read Robert Shiller's Irrational Exuberance and probably had. How successful were they in dodging 2008-2009, compared to a dumb fixed allocation to their "neutral point" of 50% stock index, 40% bond Index, and 10% cash?
Source

Image

Note #1: I used Vanguard funds for second portfolio, not out of brand loyalty, but because Fidelity's comparable funds have changed ticker symbols and PortfolioVisualizer isn't smart enough to deal with that).

Note #2: I was personally invested in FASMX, but by 2007 the company had honored my request that they add a bond index fund to the 401(k) choices, so I was personally out of Fidelity Asset manager by then and wasn't personally affected by its performance.
Last edited by nisiprius on Sat Sep 12, 2020 10:07 am, edited 4 times in total.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rascott »

zaboomafoozarg wrote: Sat Sep 12, 2020 9:41 am Well, Bogle did switch his stock allocation from 65% to 35% in late 1999, which worked out well.

I figure I'm not as smart or rich as him though, nor am I in my 70s, so I stick with the 75/25 that I've got.
Intermediate term bonds were paying 7% or so at that time..... and equity P/Es were higher than today. Not really a good comparison.

I'd dump a lot of money in bonds today too, if I could get that kind of yield. Alas, equities appear to be the only game in town today.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Robot Monster »

FIby45 wrote: Sat Sep 12, 2020 9:30 am I have considered changing my AA, but isn't changing your asset allocation based on market factors akin to "timing the market" on some level?
In another thread something similar was being discussed. Would you buy US stocks if they became crazy expensive, with a CAPE ratio of 90? I argued that a person might want to shy away from such a thing.

Mr. Thrill had an elegantly expressed response:
Based on current earnings, a CAPE of 90 would imply that the S&P 500 would be around 10,000. That seems...implausible.

But your question is very valid. Similar concerns led me to personally abandon buy-and-hold because there are situations in which I simply would not want to own stocks. Contrary to the BH principles, I do believe that prices matter so far as my own investments are concerned, even if only at the extremes.

I have no doubt that if CAPE reached 90 that some here would still advocate staying the course no matter what. But I strongly suspect that many here would be expressing grave concerns, even if they didn't provide actionable advice.
"I believe prices matter." Yes.

Is not wanting to buy something, because you don't like the price, timing the market? Perhaps. Did those who avoided buying into the tulip bubble, or beanie baby bubble, time the market? If so, perhaps timing the market isn't always such a sin, after all.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Rat_Race »

I think it would be fair to say that central bank policy over the past 15 years has contributed to the performance of the markets through QE, low interest rates and more recently purchasing of treasuries and corporate bonds. Company valuations have also been supported by an elevated level of stock buybacks over the past 5 years, as opposed to earnings growth. Whether this can continue indefinitely remains to be seen, but do not mistake the performance of the market as a purely organic expansion of the health of corporate balance sheets or the overall economy. Though we have witnessed an increase in productivity in many areas, the US economy, in large part, has been powered by increasing debt over many years. Personal debt, corporate debt and government debt are all at very high levels compared to historical norms. I don't believe we will simply grow ourselves out of this predicament.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by gubernaculum »

I would argue that 14 x P/E is gone. 30 x P/E is now the norm and will increase. Just an alternative view on this situation.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by whodidntante »

Yes, sometimes it breaks. Our advocate and mentor, Jack Bogle, timed the market prior to the dot-bomb. Stay the course, but don't forget to watch for icebergs.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Beehave »

I recall when I was about your age and the Dow Jones passed 10,000 for the first time. The exuberant speculation was that10,000 "might be the new floor." I have no recollection at all as to how much I purchased every paycheck back then when the market fluctuated, say, between 8,000 and 12,000 or whatever. I believed in general that twenty years or thirty or forty years later I'd be happy that I had steadily dripped money into the market each paycheck, and that belief ended up being the case. My strong belief is that twenty-plus years from now you will be very glad you had put money in at what today may appear to be an over-exuberant level and feel that you had done exactly the right thing.

Best wishes.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by CyclingDuo »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
Slow and Steady wins the race. :beer

Be like Sarah and throw up your hands while just investing on a regular basis through the thick and the thin of it all (which you cannot control). Control what you can - sticking with your regular contributions through all of your accumulation years.

https://imgur.com/gallery/BlK4jzM

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FIby45
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by FIby45 »

chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
One alternative is resigning to no growth or very little growth.

Bonds paying nothing is an alternative. Cash (even with inflation.). Midwest real estate that is cashflowing is an option.

There would be alot of better options if the market drops 50% (which I understand can't be predicted.)

It's great to read everyone's input!
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheDDC »

FIby45 wrote: Sat Sep 12, 2020 11:35 am
chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
One alternative is resigning to no growth or very little growth.

Bonds paying nothing is an alternative. Cash (even with inflation.). Midwest real estate that is cashflowing is an option.

There would be alot of better options if the market drops 50% (which I understand can't be predicted.)

It's great to read everyone's input!
That's nice. I don't think I want to get into RE today. Tomorrow, who knows? We're talking about equities here.

I'll stick with stocks, since there is no other real alternative. Bonds are obviously not an alternative if looking for actual yield. And I say this as someone who is earning 3.5% on cash as well.

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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by David Jay »

FIby45 wrote: Sat Sep 12, 2020 9:30 amS&P 500 PE Ratio:
Mean: 15.82
Median: 14.83
Did you follow the link I provided and read through the thread?

This “mean” and “median” includes data from another time and different conditions. That economy is gone, P/E of 14-15-16 is never coming back. This is not a stationary series so quoting mean and median is a distraction, not an coherent argument.

The modern (last 30 years) normal is probably closer to 25.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by physixfan »

Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...

Maybe 10 years later, when all the treasury bonds offer negative nominal yields, stocks with any finite number PE are dirt cheap...
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheTimeLord »

physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...
I certainly won't be using that assumption when I invest.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by physixfan »

TheTimeLord wrote: Sat Sep 12, 2020 12:07 pm
physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...
I certainly won't be using that assumption when I invest.
Nowadays the 30 yr mortgage rate is like less than 2.5%. If you think the bond yield is likely to rise any time soon, then it is really a no brainer to max out the amount of money you can borrow via mortgage.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheTimeLord »

physixfan wrote: Sat Sep 12, 2020 12:23 pm
TheTimeLord wrote: Sat Sep 12, 2020 12:07 pm
physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...
I certainly won't be using that assumption when I invest.
Nowadays the 30 yr mortgage rate is like less than 2.5%. If you think the bond yield is likely to rise any time soon, then it is really a no brainer to max out the amount of money you can borrow via mortgage.
Soon, no but also not decades. At some point longer rates have to rise to become competitive with stocks in order to attract investment imho.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by carolinaman »

Unless you believe you have a special insight to the market, which is rare, then auto investing works great.

I was a technology executive during the dot com era and it was obvious to me there was a craziness to technology investing that had to end badly. I did not know when or how bad it would be, but throwing gobs of money at companies that had never produced a product or made money made no sense. I pared back my investments, especially technology related ones and came out ok on that one.

I was not so fortunate in 2008. Like many, I was concerned about the risks of sub prime mortgages, but I had no idea how this house of cards was put together. Apparently, quite a few bank executives and economists were in the same boat. I think if someone understood collaterized debt obligations, credit default swaps and the like, they would have got out of the market, or as some did, short the market. Very few experts understood this until it happened.

Recessions often come without warning and the cause is not anticipated. Hence, it is best to stay invested.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

I like Buffet's math for calculating bond PE equivalent on page 14 of his annual letter to shareholders.

https://berkshirehathaway.com/letters/2017ltr.pdf

If you follow this logic, equities look really reasonable at their current PE.

https://www.wsj.com/market-data/stocks/peyields

And the NASDAQ looks far more reasonable at the current PE levels than the S&P 500 given its potential to grow at a much faster rate.

I don't think we are experiencing irrational exuberance because bonds yields are ridiculously low. However, if bond rates go up, then equities should get crushed.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by FIby45 »

David Jay wrote: Sat Sep 12, 2020 11:52 am
FIby45 wrote: Sat Sep 12, 2020 9:30 amS&P 500 PE Ratio:
Mean: 15.82
Median: 14.83
Did you follow the link I provided and read through the thread?
Yep. Very interesting.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...

Maybe 10 years later, when all the treasury bonds offer negative nominal yields, stocks with any finite number PE are dirt cheap...
What you say above reminds me of Japan. But we have one thing going for us that Japan doesn't: population growth.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by bluquark »

Personally I believe in implied equity risk premium mean reversion. That is a measure combining forward-projected earnings and interest rates. Because interest rates are so low, I don't find the current high PE alarming.

So I am not a traditional buy-and-hold Boglehead but my philosophy is valuation-informed investing, which tries to correct for the past failures of that investing style. Aside from not relying on simple PE, I use wide bands and wait months before reacting to valuation. Almost always the market is more or less semi-rational within my wide bands. In practice this has meant that my behavior has matched traditional Boglehead and this has remained a theoretical philosophical difference.

But I have a plan in my IPS to adjust my AA if someday implied ERP using Damodaran's model does reach bizarre levels (for me that's <3.5% or >6.5%). That hasn't happened since the dot-com bubble, when I was too young to be investing. Having this data-driven plan written in advance gives me confidence that I will be able to coolly sell (or buy!) in a commonsensical way if and when valuations get insane again (as Bogle himself famously did), while also not getting scared out of stocks by valuation permabears who constantly spin tales out of isolated anecdotes like Tesla or out of bad metrics like simple average PE.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Robot Monster »

rockstar wrote: Sat Sep 12, 2020 3:17 pm
physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...

Maybe 10 years later, when all the treasury bonds offer negative nominal yields, stocks with any finite number PE are dirt cheap...
What you say above reminds me of Japan. But we have one thing going for us that Japan doesn't: population growth.
Japan not only has a dwindling population which "will fall by a further 8 million by 2030 unless changes are made," but a good part of their existing population is old and and gray. "Japan has the highest old-age dependency ratio of all OECD countries – there is one person over 65 for every two people between the ages of 20 and 64. And this ratio is rising." Source
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by warner25 »

chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
whereskyle wrote: Sat Sep 12, 2020 9:26 amToday, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.
I generally agree with this sentiment, but there is an alternative to US stocks with high PE ratios right now: ex-US stocks. The Vanguard Total International Stock Index Fund has a PE ratio of 16. I'm not doing anything special about it (sticking with about 25% of my stock allocation in the TSP "I Fund"), but I think this is odd. I don't know why the crowd has shunned ex-US stocks so much over the past decade. I increasingly suspect that the higher valuations of US stocks reflect simple performance chasing, especially as I see and hear more people talk about doubling down on Apple, Microsoft, Amazon, Google, etc.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by whereskyle »

warner25 wrote: Sat Sep 12, 2020 5:47 pm
chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
whereskyle wrote: Sat Sep 12, 2020 9:26 amToday, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.
I generally agree with this sentiment, but there is an alternative to US stocks with high PE ratios right now: ex-US stocks. The Vanguard Total International Stock Index Fund has a PE ratio of 16. I'm not doing anything special about it (sticking with about 25% of my stock allocation in the TSP "I Fund"), but I think this is odd. I don't know why the crowd has shunned ex-US stocks so much over the past decade. I increasingly suspect that the higher valuations of US stocks reflect simple performance chasing, especially as I see and hear more people talk about doubling down on Apple, Microsoft, Amazon, Google, etc.
50% of my portfolio is VT (Vanguard Total World ETF, ER .08). I agree entirely.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by JBTX »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
I'd always say no, as long as your asset allocation is one you are comfortable with. With your stock allocation, only half of your portfolio-US- has high PES. International and emerging don't. You've hedged your bets.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

warner25 wrote: Sat Sep 12, 2020 5:47 pm
chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
whereskyle wrote: Sat Sep 12, 2020 9:26 amToday, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.
I generally agree with this sentiment, but there is an alternative to US stocks with high PE ratios right now: ex-US stocks. The Vanguard Total International Stock Index Fund has a PE ratio of 16. I'm not doing anything special about it (sticking with about 25% of my stock allocation in the TSP "I Fund"), but I think this is odd. I don't know why the crowd has shunned ex-US stocks so much over the past decade. I increasingly suspect that the higher valuations of US stocks reflect simple performance chasing, especially as I see and hear more people talk about doubling down on Apple, Microsoft, Amazon, Google, etc.
The lower PE has more to do with what industries make up international indexes than those companies being cheaper.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

Robot Monster wrote: Sat Sep 12, 2020 5:34 pm
rockstar wrote: Sat Sep 12, 2020 3:17 pm
physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...

Maybe 10 years later, when all the treasury bonds offer negative nominal yields, stocks with any finite number PE are dirt cheap...
What you say above reminds me of Japan. But we have one thing going for us that Japan doesn't: population growth.
Japan not only has a dwindling population which "will fall by a further 8 million by 2030 unless changes are made," but a good part of their existing population is old and and gray. "Japan has the highest old-age dependency ratio of all OECD countries – there is one person over 65 for every two people between the ages of 20 and 64. And this ratio is rising." Source
The US is aging as well. This is partially offset by immigration.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by TheTimeLord »

rockstar wrote: Sat Sep 12, 2020 7:43 pm
warner25 wrote: Sat Sep 12, 2020 5:47 pm
chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
whereskyle wrote: Sat Sep 12, 2020 9:26 amToday, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.
I generally agree with this sentiment, but there is an alternative to US stocks with high PE ratios right now: ex-US stocks. The Vanguard Total International Stock Index Fund has a PE ratio of 16. I'm not doing anything special about it (sticking with about 25% of my stock allocation in the TSP "I Fund"), but I think this is odd. I don't know why the crowd has shunned ex-US stocks so much over the past decade. I increasingly suspect that the higher valuations of US stocks reflect simple performance chasing, especially as I see and hear more people talk about doubling down on Apple, Microsoft, Amazon, Google, etc.
The lower PE has more to do with what industries make up international indexes than those companies being cheaper.
Preach brother.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by pseudoiterative »

rockstar wrote: Sat Sep 12, 2020 1:53 pm I like Buffet's math for calculating bond PE equivalent on page 14 of his annual letter to shareholders.

https://berkshirehathaway.com/letters/2017ltr.pdf
thank you for sharing, great read!
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

TheTimeLord wrote: Sat Sep 12, 2020 8:19 pm
rockstar wrote: Sat Sep 12, 2020 7:43 pm
warner25 wrote: Sat Sep 12, 2020 5:47 pm
chinchin wrote: Sat Sep 12, 2020 9:12 am What's the alternative?
whereskyle wrote: Sat Sep 12, 2020 9:26 amToday, people just don't know where else to put their money because there is no easily identifiable alternative to turn to.
I generally agree with this sentiment, but there is an alternative to US stocks with high PE ratios right now: ex-US stocks. The Vanguard Total International Stock Index Fund has a PE ratio of 16. I'm not doing anything special about it (sticking with about 25% of my stock allocation in the TSP "I Fund"), but I think this is odd. I don't know why the crowd has shunned ex-US stocks so much over the past decade. I increasingly suspect that the higher valuations of US stocks reflect simple performance chasing, especially as I see and hear more people talk about doubling down on Apple, Microsoft, Amazon, Google, etc.
The lower PE has more to do with what industries make up international indexes than those companies being cheaper.
Preach brother.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by warner25 »

TheTimeLord wrote: Sat Sep 12, 2020 8:19 pm
rockstar wrote: Sat Sep 12, 2020 7:43 pmThe lower PE has more to do with what industries make up international indexes than those companies being cheaper.
Preach brother.
But, by definition, they are cheaper, right? They are the industries that investors haven't bid up so high.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by selters »

warner25 wrote: Sun Sep 13, 2020 3:24 am
TheTimeLord wrote: Sat Sep 12, 2020 8:19 pm
rockstar wrote: Sat Sep 12, 2020 7:43 pmThe lower PE has more to do with what industries make up international indexes than those companies being cheaper.
Preach brother.
But, by definition, they are cheaper, right? They are the industries that investors haven't bid up so high.
By that definition value stocks are cheaper than growth stocks. Not just now, but they always have been and always will be. And value traps (those that in hindsight will be known as value traps) are the cheapest stocks of all.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by burritoLover »

rockstar wrote: Sat Sep 12, 2020 7:43 pm The lower PE has more to do with what industries make up international indexes than those companies being cheaper.
https://www.google.com/amp/s/seekingalp ... utral-view
Where exactly do foreign equities stand versus US stocks right now? Our data suggests developed market (ex-US) stocks trade at a 50-60% discount to the US. When sector-neutralizing the markets, the valuation discount dips – but not by much. The difference becomes about 40-50%. Putting some multiples to that, the USA’s PE10 ratio using an equal-weight sector approach yields a multiple of 29x versus about 18x for international developed markets.

And the valuation discounts grow when comparing US to Asia (ex-Japan) and US versus Emerging Markets.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by LFS1234 »

FIby45 wrote: Sat Sep 12, 2020 11:35 am There would be alot of better options if the market drops 50% (which I understand can't be predicted.)
There is logic behind the idea of keeping some "dry powder" now with the intent of not investing it until after better investment opportunities become available. The arguments against this are obvious and will no doubt be set forth by others, but Buffett and many traditional old-school investors have a hurdle rate for investing, and will keep their money in cash equivalents until such time that they can find investments meeting those hurdle rates.

Food for thought: an excerpt from a June 2003 speech by Jack Bogle (from page 3 of transcript):

"(A)s 2000 began, the 1.8% return on stocks that I projected for the coming decade
would have been, with the exception of the 1930s, the lowest for any preceding decade. The analysis
wasn’t complicated. Dividend yield was a skinny 1.1%, and a far cry from the 5% long-term norm. I
guessed that annual earnings growth might average 6%, optimistic by long-term standards but consistent
with the post World-War II era. Investment return then, 7.1%. I couldn’t imagine that the P/E of 31 times
would rise, and guessed it might drop to 18—who on earth knew how far it would drop?—providing a
negative speculative return of –5.3%.

"The resultant total annual return of 1.8% for the first decade of the new century, I was certain,
wouldn’t result from ten years of 2% annual returns. Markets just don’t work that way. Rather, I told
audiences that more likely would be a decline of 40% to 50% somewhere along the way, surrounded by a
bunch of “normal” years, up and down, averaging around 8%.
We’ve now had that decline—actually just
short of 50%—with the S&P 500 tumbling from 1527 in the spring of 2000 to 775 at last October’s low."

http://johncbogle.com/speeches/JCB_IASC0603.pdf

Note that:
- Bogle in 1999/2000 made an estimate of reasonably likely market returns for the coming decade, and determined them to be very low.
- Bogle noted when markets are well ahead of reality, the stock price adjustment tends to be sudden and not gradual

It would follow from this that when markets are way overextended, a major correction can be expected after which better opportunities can be expected. As others have mentioned, Bogle himself reacted to high stock prices in 1999-2000 by changing his asset allocation.

(Thanks to JoMoney for posting links to the above-referenced Bogle speech as well as other links in a 2016 thread discussing Peter (not William!) Bernstein's apparent 2003 late conversion to active trading in this thread: viewtopic.php?f=10&t=190730&newpost=5492181 )
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Robot Monster »

burritoLover wrote: Sun Sep 13, 2020 6:13 am
rockstar wrote: Sat Sep 12, 2020 7:43 pm The lower PE has more to do with what industries make up international indexes than those companies being cheaper.
https://www.google.com/amp/s/seekingalp ... utral-view
Where exactly do foreign equities stand versus US stocks right now? Our data suggests developed market (ex-US) stocks trade at a 50-60% discount to the US. When sector-neutralizing the markets, the valuation discount dips – but not by much. The difference becomes about 40-50%. Putting some multiples to that, the USA’s PE10 ratio using an equal-weight sector approach yields a multiple of 29x versus about 18x for international developed markets.

And the valuation discounts grow when comparing US to Asia (ex-Japan) and US versus Emerging Markets.
Indeed. Also, Elysium had the same conclusion in another thread:

It is also possible to look at Sector performance individually between US and Ex-US to see whether sector weights are the problem, and we can find that it isn't. Returns overseas were lower regardless of the sector. MSCI maintains indexes for ex-US sectors (as do others). I pulled up some of the reports that you can see here below. Returns are lower for each of these sectors compared to their US counterparts. For instance, Utilities US vs ex-US: 10 year returns 10.33% vs 2.09%, so on..

MSCI ex-US Sector performance:

Financials


Technology


Energy


Healthcare


Consumer Staples


Utilities


Industrials


Conclusion: Sector weights differences are not the reason for US outperformance of late, as US stocks outperformed in sector by sector comparison between US and ex-US as well as broad index comparisons.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by burritoLover »

Keep in mind that not the entire US stock market has a high valuation right now - the gap between growth stock P/E and value stock P/E has never been higher short of maybe the dot com bubble (and I think we even exceeded that this year in March). So, if you are worried about high US prices, and you hate international, then you could add a tilt towards US small cap value in your portfolio.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by illumination »

If we're going to say the stock market has to normalize to a lower PE ratio because that's what it used to be for so long, don't we also have to say that interest rates "normalize" to much higher rates?

What would that do to returns if you invested in intermediate or long term bond funds because you thought stocks were too expensive and interest rates dramatically increased? It could be devastating to a portfolio.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Forester »

whereskyle wrote: Sat Sep 12, 2020 9:26 am No one is buying bonds. P/E is pressed up because interest rates are low and there's nowhere to get yield.
How do you explain Japan & Europe. In the recent past both regions have simultaneously had high(er) P/Es + higher real interest rates, versus the present.
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by warner25 »

illumination wrote: Sun Sep 13, 2020 10:54 am...What would that do to returns if you invested in intermediate or long term bond funds because you thought stocks were too expensive and interest rates dramatically increased? It could be devastating to a portfolio.
Well, yes, that is exactly the scenario that causes so much consternation for so many participants on this forum. Everything, at least in the US, is very richly priced by any historical measure.
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