U.S. stocks in freefall

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Simplegift
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Re: U.S. stocks in freefall

Post by Simplegift » Mon Sep 28, 2015 4:42 pm

Rx 4 investing wrote:The long-term [average] should be thought of as a stake in the ground. That stake has a bunge cord attached to it.

As you well know, Rx 4, P/E values are inversely correlated with inflation historically. When inflation is very low like today, it's normal for P/E values to be quite high like today — and vice versa. One can't view the 150-year average P/E value in isolation, as if it's an immutable constant, without considering the context of current inflation levels. See this recent thread (in which you yourself posted your market timing "rule of 20.")

With all respect, you keep posting the same flawed analysis over and over, as if it's the gospel — without any indication that you've heard and incorporated conflicting information. Where I come from, that's called dogmatism (i.e., the tendency to lay down principles as incontrovertibly true, without consideration of conflicting evidence or the opinions of others).
Cordially, Todd

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oneleaf
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Re: U.S. stocks in freefall

Post by oneleaf » Mon Sep 28, 2015 4:48 pm

Rx 4 investing wrote:
Homer J wrote: Please read this.
https://philosophicaleconomics.wordpres ... 3/shiller/
" For most of history, the Shiller Cyclically-Adjusted Price-Earnings ratio (CAPE) oscillated in a pseudo sine wave around a long-term (130 year) average of 15.30. It spent 55% percent of the time above the average, and 45% of the time below–a reasonable result for a metric that allegedly mean reverts. Since 1990, however, the metric has only spent 2% of the time below its historical average–98% of the time above.

The metric’s failure to mean-revert over the last 23 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression. Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value”.

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken. There is no other way to coherently explain why the metric has consistently failed to migrate towards its long-term average, or spend any amount of time below it, as it should do every so often in bear markets. "


I have read this several times, and I don't think your guru is looking at the Shiller P/E the right way. First, your friend seems to be suffering from a case of recency bias...

--On May 1, 2007 , the Shiller P/E was recorded at 27.55.

--On March 1, 2009, the Shiller P/E was recorded at 13.32 .

---The long term mean was around 16 at the time.


Not sure how this means the previous blogger has recency bias? He specifically acknowledged that it only got to the mean for a very brief moment out of 23 years, and that was in the depths of a full blown financial panic. His analysis is pretty spot on. Take a look at the other articles he has on CAPE, as they are quite illuminating, in terms of CAPE's limitations. You are using CAPE way beyond its usefulness in your market timing suggestions, and the fact that you keep namedropping every guru you can to support your views (none of whom suggest market timing... I mean c'mon, Asness's discussion on defensive stocks means to buy longterm treasuries?) makes me feel you are hijacking every conversation you can for some personal agenda. Are you Rob Bennett?

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Re: U.S. stocks in freefall

Post by zaboomafoozarg » Mon Sep 28, 2015 5:26 pm

oneleaf wrote:Are you Rob Bennett?


... now it all makes sense :D

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Rx 4 investing
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Re: U.S. stocks in freefall

Post by Rx 4 investing » Mon Sep 28, 2015 6:01 pm

The "Rule of 20" gives the investor some insight into valuation level relative to inflation only. It doesn't suggest a non-emotional, systematic, valuation-based suggestion for an appropriate asset allocation.

Evidence continues to accumulate that systematic approaches beats the opinions of experts. Experts believe they can tell when the market is expensive, and then will make adjustments. It seems many experts rationalized that the market's recent highs were justifiable, and they convinced themselves that the market was not expensive at Shiller P/E 26- 27.

The systematic, formulaic approach can help take the guess work out of AA...

--Shiller proved that earnings mean-revert. Earnings are the mother's milk of stocks. The Shiller P/E gives us insight into when the earnings are mean-reverting, as we get a strong clue that greedy, or uninformed investors may still be bidding up the prices. We shouldn't be surprised it happens. Time after time, it is shown that investors are notorious for chasing performance.

--As the market gets gradually more expensive, the formula reduces stock allocation reduces. This is in line with the Shiller P/E's message, i.e. reducing expected future returns of stocks, and the increasing risk.

--Higher Shiller P/E readings suggest a increased likelihood of the market falling from current levels due to valuation rather than as volatility. Some may call this the "dogma." I call it value-investing.

Browser wrote: "... your strategy calls for continually adjusting your equity allocation based on CAPE, which entails short term market timing. "


Any customized approach that references the Shiller P/E doesn't have to be "continual." Graham believe that allocations could be adjusted if the investor perceived that prices were escalated and getting frothy. He offered 25%-50%-75%. Mr. Bogle offered 35%-50%-65%. A defensive investor's stock allocations can be measured and graded. Here's but one example using Vanguard "one stop shopping " funds . I am sure there are folks out here a lot more creative than I am.

Stock allocation = 100 – { 100 x (CAPE – AvgCAPE/2)/(AvgCAPE*2 – AvgCAPE/2) }

The formula's current output is 37% stocks (at Shiller P/E 23.89 and long-term mean of 16.6 as of 9-28-15) ). The investor initiating the strategy today would simply pick a VG Life Strategy fund closed to the formula output --and stick with it ---until the next LS stock threshold was reached ...

--LS Income Fund: 20% stocks

--LS Conservative Growth Fund: 40% stocks / 60% bonds <= this fund is closest to the current output of 37%.

--LS Moderate Growth Fund: 60% stocks / 40% bonds

--LS Growth Fund: 80% stocks / 20% bonds.

Using the Life Strategy approach above, the next likely landing spot for stock allocation , should the market continue declining, will be the " moderate growth" fund with 60% stocks. To some investors, this is intuitive and make sense because they want to raise their stock allocation, or go opposite of the crowd, when valuations get more attractive.

Be safe out there
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: U.S. stocks in freefall

Post by backpacker » Mon Sep 28, 2015 6:10 pm

Simplegift wrote:
Rx 4 investing wrote:The long-term [average] should be thought of as a stake in the ground. That stake has a bunge cord attached to it.

P/E values are inversely correlated with inflation historically. When inflation is very low like today, it's normal for P/E values to be quite high like today — and vice versa. One can't view the 150-year average P/E value in isolation, as if it's an immutable constant, without considering the context of current inflation levels. See this recent thread (in which you yourself posted your market timing "rule of 20.")


So while I initially found this observation persuasive, now I'm not so sure. If PE10 used the last ten years of nominal earnings, then it would make sense. The price of the market compared to past nominal earnings will go up as future inflation exceptions go down. And visa versa. The price of the market compared to past nominal earnings will go down as future inflation expectants go up. But PE10 uses real earnings, not nominal earnings. So why the heck would there be any correlation between the two?

Maybe inflation predicts PE ratios because inflation predicts the real risk-free rate? High inflation leads to a high-risk free rate and low inflation to a low risk-free rate. Since the expected return of stocks is the risk-free rate + the equity risk premium, high inflation leads to low PE ratios and low inflation to high PE ratios, all else being equal. That's the best I've got. But if that's right, there's no real point to comparing PE ratios to inflation. We might as well just compare them to the risk-free rate, since the inflation only explains changes in PE by way of explaining changes in the risk-free rate.

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Simplegift
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Re: U.S. stocks in freefall

Post by Simplegift » Mon Sep 28, 2015 6:45 pm

Rx 4 investing wrote:The systematic, formulaic approach can help take the guess work out of AA...

We understand you believe this with an almost messianic fervor — but why choose the Bogleheads Forum for your ministry? As you well know, the Boglehead approach involves each investor choosing an asset allocation consistent with their need, ability and desire to take risk, then staying the course — the simple buy-hold-rebalance approach.

You seem to feel that there is a minority of pre-retirees and retirees who need to be "saved" by your complex market forecasting and market timing message — but, honestly, the Bogleheads Forum is the last place that you're likely to find a receptive audience for your message.

Do you get this at all? Or does it not bother you that your repeated posts are now verging on trolling here?
Cordially, Todd

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Re: U.S. stocks in freefall

Post by Rx 4 investing » Mon Sep 28, 2015 7:16 pm

Backpacker wrote: "So while I initially found this observation persuasive, now I'm not so sure. If PE10 used the last ten years of nominal earnings, then it would make sense. The price of the market compared to past nominal earnings will go up as future inflation exceptions go down. And visa versa. The price of the market compared to past nominal earnings will go down as future inflation expectants go up. But PE10 uses real earnings, not nominal earnings. So why the heck would there be any correlation between the two?

Maybe inflation predicts PE ratios because inflation predicts the real risk-free rate? High inflation leads to a high-risk free rate and low inflation to a low risk-free rate. Since the expected return of stocks is the risk-free rate + the equity risk premium, high inflation leads to low PE ratios and low inflation to high PE ratios, all else being equal. That's the best I've got. But if that's right, there's no real point to comparing PE ratios to inflation. We might as well just compare them to the risk-free rate, since the inflation only explains changes in PE by way of explaining changes in the risk-free rate."


FWIW...I have been tracking Aswath Damodaran's ERP for a few years now and while I do think he is onto something (uses risk free rate) , just like the "Rule of 20", they both appear to be blunt instruments.

First, Dr. D's ERP reading for September is 6.28%, which seems to reflect a healthy "fear" of equities (vs. the long-term mean of 4.04%). But how do we know that fear isn't justified based on deteriorating macro-economic conditions? Also, what A-A is appropriate for this level at 6.28% ?

A higher ERP reading like this has not historically been associated with market tops. With today's price action of the S & P 500, it is down about -11.4% from it's 52-week high. It will be interesting to see how this "correction" plays out relative to the ERP reading, and if we need to establish tolerance bands around Dr. D's readings. On the opposite end, Dr. D suggests the low reading for E-R-P ("greed") of 2.05%, was recorded at the height of the tech bubble in 1999. The ERP reading go no where close to that. (numbers from my own downloads and spreadsheets--for illustration only).

http://pages.stern.nyu.edu/~adamodar/

Denis Ouellet is a financial blogger at Bearnobull.com, and he regularly tracks the "Rule of 20." There are only 3 broad areas associated with the long-term graph of the readings, i.e. "lower risk", "rising risk" and "extreme risk". Going into this -11 % correction, the rule did record a reading into the "rising risk" range a while back, but again the investor was left with no way of quantifying from that warning what the appropriate A-A should be in a "defensive" mode. From what I can gather looking through the website, he must have gotten frustrated with the lack of preciseness he was looking for too, and now combines it with "the 120 yield spread."

Because there is so much emotion and speculation in markets, it is very difficult expect rifle accuracy when those are factors are in play. As for now, our tool bag only has shot guns, not rifles. We also have not seen financial asset behavior entering into a de-flationary environment almost 90 years. We may be suffering from recency bias.

Maybe Buffett is right when he said " It is better to be approximately right, than precisely wrong. "

http://www.bearnobull.com/2014/12/08/a- ... ld-spread/
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: U.S. stocks in freefall

Post by HomerJ » Mon Sep 28, 2015 8:02 pm

Rx 4 investing wrote:Evidence continues to accumulate that systematic approaches beats the opinions of experts. Experts believe they can tell when the market is expensive, and then will make adjustments.


You realize YOU are the one who is acting like an expert here, believing you can tell when the market is expensive by looking at valuations.

Don't you understand what we are saying here? We are saying we don't make adjustments at all.

The systematic, formulaic approach can help take the guess work out of AA...


We base AA on the need and willingness to take risk, not on what the market is doing.

I plan my AA around the fact that a crash could happen tomorrow... I did this 4 years ago, 3 years ago, 2 years ago, etc.

When you're 30, and you know that a crash can happen at anytime, you might still have an aggressive AA, because you have plenty of time to recover from a crash... When you're 60 and you know that a crash can happen at anytime, you'll probably have a more conservative AA, because retirement is around the corner, and you can't afford to lose a bunch in the short-term.

Does this make sense? In neither case, does one have to guess the probability of a crash happening. You don't have to care about valuations. You pick an AA on your need and willingness to take risk.


--Higher Shiller P/E readings suggest a increased likelihood of the market falling from current levels due to valuation rather than as volatility. Some may call this the "dogma." I call it value-investing.


Except Shiller P/E readings have been "high" since 1992... using your formula, you have been low on stocks since 1992. Is this true? Have you been holding a conservative AA since 1992? At no point during the past 23 years, did you not question how well this system of yours actually works in practice?

Or are you new to this system, and after reading about it, thinks it makes a lot of sense? Because if you had actually been using your formula for the past 23 years, I think you would have given up on it by now....

DOW was in the low 3000s in 1992, by the way... when your formula would have told you to majorly lower your stock allocation.

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Re: U.S. stocks in freefall

Post by EarlyStart » Mon Sep 28, 2015 8:21 pm

Rx 4 investing wrote:The "Rule of 20" gives the investor some insight into valuation level relative to inflation only. It doesn't suggest a non-emotional, systematic, valuation-based suggestion for an appropriate asset allocation.

Evidence continues to accumulate that systematic approaches beats the opinions of experts. Experts believe they can tell when the market is expensive, and then will make adjustments. It seems many experts rationalized that the market's recent highs were justifiable, and they convinced themselves that the market was not expensive at Shiller P/E 26- 27.

The systematic, formulaic approach can help take the guess work out of AA...

--Shiller proved that earnings mean-revert. Earnings are the mother's milk of stocks. The Shiller P/E gives us insight into when the earnings are mean-reverting, as we get a strong clue that greedy, or uninformed investors may still be bidding up the prices. We shouldn't be surprised it happens. Time after time, it is shown that investors are notorious for chasing performance.

--As the market gets gradually more expensive, the formula reduces stock allocation reduces. This is in line with the Shiller P/E's message, i.e. reducing expected future returns of stocks, and the increasing risk.

--Higher Shiller P/E readings suggest a increased likelihood of the market falling from current levels due to valuation rather than as volatility. Some may call this the "dogma." I call it value-investing.

Browser wrote: "... your strategy calls for continually adjusting your equity allocation based on CAPE, which entails short term market timing. "


Any customized approach that references the Shiller P/E doesn't have to be "continual." Graham believe that allocations could be adjusted if the investor perceived that prices were escalated and getting frothy. He offered 25%-50%-75%. Mr. Bogle offered 35%-50%-65%. A defensive investor's stock allocations can be measured and graded. Here's but one example using Vanguard "one stop shopping " funds . I am sure there are folks out here a lot more creative than I am.

Stock allocation = 100 – { 100 x (CAPE – AvgCAPE/2)/(AvgCAPE*2 – AvgCAPE/2) }

The formula's current output is 37% stocks (at Shiller P/E 23.89 and long-term mean of 16.6 as of 9-28-15) ). The investor initiating the strategy today would simply pick a VG Life Strategy fund closed to the formula output --and stick with it ---until the next LS stock threshold was reached ...

--LS Income Fund: 20% stocks

--LS Conservative Growth Fund: 40% stocks / 60% bonds <= this fund is closest to the current output of 37%.

--LS Moderate Growth Fund: 60% stocks / 40% bonds

--LS Growth Fund: 80% stocks / 20% bonds.

Using the Life Strategy approach above, the next likely landing spot for stock allocation , should the market continue declining, will be the " moderate growth" fund with 60% stocks. To some investors, this is intuitive and make sense because they want to raise their stock allocation, or go opposite of the crowd, when valuations get more attractive.

Be safe out there




You know "earnings", the denominator in all p/e ratios (Schiller's included) are not constant throughout time, correct? Accounting standards (GAAP) constantly change.

p/e ratios are generally higher today than they were in the 80s, for example, is the increasingly standards by which companies are required to write off depreciation and amortization of various line items that they used to be able to capitalize without auditors batting an eye. p/e of 15 in 1980 is in NO WAY comparable to p/e 15 in 2015.

This is really the tip of the iceberg as to why p/e ratios aren't great indicators in isolation, even when transformed into CAPE, etc. Other considerations include the interest rate at which you discount future earnings, the expected growth rate of earnings, inflation, whether earnings increases are functions of buybacks and whether those buybacks are financed with cheap debt, ad infinitum.

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Re: U.S. stocks in freefall

Post by Leeraar » Mon Sep 28, 2015 8:47 pm

I don't really want to join the dogfight, but I might observe that the basic strategy is to set your Asset Allocation and stick to it.

You might change your investing strategy based on life events, but not on market events.

L.
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Re: U.S. stocks in freefall

Post by backpacker » Mon Sep 28, 2015 9:26 pm

Rx 4 investing wrote:
Backpacker wrote: "So while I initially found this observation persuasive, now I'm not so sure. If PE10 used the last ten years of nominal earnings, then it would make sense. The price of the market compared to past nominal earnings will go up as future inflation exceptions go down. And visa versa. The price of the market compared to past nominal earnings will go down as future inflation expectants go up. But PE10 uses real earnings, not nominal earnings. So why the heck would there be any correlation between the two?

Maybe inflation predicts PE ratios because inflation predicts the real risk-free rate? High inflation leads to a high-risk free rate and low inflation to a low risk-free rate. Since the expected return of stocks is the risk-free rate + the equity risk premium, high inflation leads to low PE ratios and low inflation to high PE ratios, all else being equal. That's the best I've got. But if that's right, there's no real point to comparing PE ratios to inflation. We might as well just compare them to the risk-free rate, since the inflation only explains changes in PE by way of explaining changes in the risk-free rate."


FWIW...I have been tracking Aswath Damodaran's ERP for a few years now and while I do think he is onto something (uses risk free rate), just like the "Rule of 20", they both appear to be blunt instruments.

First, Dr. D's ERP reading for September is 6.28%, which seems to reflect a healthy "fear" of equities (vs. the long-term mean of 4.04%). But how do we know that fear isn't justified based on deteriorating macro-economic conditions?


I really like Damodaran and his present view of the markets more or less matches my own. The ERP is high, so investors are being paid well for taking equity risk. This may be because stocks are riskier than normal. It may be because investors are more fearful than normal. But investors, whether they own stocks or not, should expect low returns. This because the risk-free rate is low, making expected returns relatively low even though the ERP is relatively high.

Good luck! :beer
Last edited by backpacker on Mon Sep 28, 2015 9:31 pm, edited 2 times in total.

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Re: U.S. stocks in freefall

Post by Rx 4 investing » Mon Sep 28, 2015 9:27 pm

Homer J asked: " Have you been holding a conservative AA since 1992? At no point during the past 23 years, did you not question how well this system of yours actually works in practice? Or are you new to this system ? "

FWIW...I have always been a mutual fund investor in both my 401-K and taxable accounts, with a 60% stocks / 40% bonds target allocation. We did the methodical dollar cost averaging, and twice annual re-balancing back to target if necessary. For both of my daugther's college accounts, we used have EE savings bonds, Vanguard's STAR fund, Vanguard's Wellesley Fund, and when they became available, transitioned to Vanguard age-based funds in our state's 529 plan.

I have been using the formula-approach 'live" in my retirement accounts since 2011. I also look at Graham's "margin of safety" calculation to determine my bi-weekly 401-K fund allocations. Based on the M-O-S calculation, it has been bonds and cash for quite a while now.

I have always been a fan of the Shiller P/E methodology with its roots from the work of Graham and Dodd. I have Security Analysis in my library, and The Intelligent investor. Cyclically adjusted earnings makes sense to me. Graham said to use average earnings from the last 7 years when buying common stocks as a valuation tool. So I was searching for a way to determine asset allocation based on the Shiller P/E, a frustration of many investors. Kingham's formula brought them both together. Dr. Shiller's award of the Nobel Prize a few years back was the icing on the cake that will now have me take this AA approach into my retirement years.

I am in the home stretch before retirement (about 8 years to go). Living through the Fed's experiments in fine-tuning the business cycle in the last 20 years, and worrying about the excessive build up of debt, the days of heavy equity allocations at the wrong times are in the rear view mirror. These experiences, including '08 and '09, really pushed me down this path. I really don't want to risk making emotional decisions as I age, nor rely on "expert" opinions.

The calculation for the formula only needs to be done monthly, and maybe even once a quarter. The output is like watching paint dry. I am convinced the formula's output falls within a reasonable range of stock allocation based on appropriate valuation from the Shiller P/Es. The implementation can be simplified like the proposed 25%-50%-75% by Pfau, and/or using the various equity allocations from either Life Strategy or Target Retirement funds.

I'm sure glad our retirement accounts are much more conservative than 60/40 at the present time. But that's us, we are very risk-averse by nature. I totally understand the Boglehead way, and I get what you are doing. As I've said before, I've taught it too my oldest daughter who has just started her career and investing in her 401-k. There is just too much danger now of a big dip in the market to take that kind of approach now. I have no guarantees my employer will keep me until retirement time. Sums are far larger, and my max earnings years are dwindling.

There are some academics who think the Fed should have just stopped way short of zero on the Fed funds rate. Now it appears they are struggling to raise rates just 0.25 bps ! Is this "recovery" as-good- as- it- gets after extraordinary measures ? What in the world will they do in the next recession? N-I-R-P ? Kindleberger chronicled numerous periods where unbridled credit expansion lead to speculation in financial assets. A lot of the funds from the '09 reflation found its way into global stock markets and other assets. Did the markets get too high based on economic reality? Are "the markets " losing their faith in the global central bankers ? Based on inflationary expectations, long treasury bonds are offering good value. TLT was up +1.7 % today, offsetting some of the loss from those risky equities.

As the saying goes, how can we enjoy a sunny day, if we never have a rainy one? You will have your day in the sun soon ( I am certainly rooting for you!) . We are not 0% stocks for pete's sake! Be safe out there.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: U.S. stocks in freefall

Post by visualguy » Tue Sep 29, 2015 12:09 am

Leeraar wrote:I don't really want to join the dogfight, but I might observe that the basic strategy is to set your Asset Allocation and stick to it.

You might change your investing strategy based on life events, but not on market events.


Market events may convince you that the index fund buy & hold strategy isn't really likely to work well within your time horizon, and then you need to figure out a way to exit the market. Market events give you new information that you didn't have before - more data points which may change your view on how likely the strategy is to work.

Another issue is that if the strategy makes sense only in the "long run", then you need to exit the stock market pretty early in life. The decision on when and how to exit the market can be influenced by market events. I find it strange to hear middle aged people saying that they keep in the stock market only money that they won't need in the next 20 years. Dude, you're in your 50s, so you'll need much of the money way sooner than that. How come it's still in the market?

This realization hit me in 2013 when I switched most of my investments to rental properties. Market events influenced the timing of my stock market exit. Figured out I might as well exit when my stock market holdings were doing well since it was time to exit within a fairly short time frame anyway. Didn't get it completely right, but now we're pretty much back to where things were when I sold (US market) or worse (international). Sometimes you need to seize the day and do things when conditions are favorable.

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Re: U.S. stocks in freefall

Post by Browser » Tue Sep 29, 2015 7:18 am

Back to the topic of the thread -- did anyone notice the 300 point freefall yesterday? Trifecta Death Cross in the DOW, S&P, and Nas -- Now this is getting interesting. Dip Buyers and DCA-ers are in hog heaven. :greedy
We don't know where we are, or where we're going -- but we're making good time.

understandingJH
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Re: U.S. stocks in freefall

Post by understandingJH » Tue Sep 29, 2015 7:35 am

Look familiar?

Image


How about this?


Image

scone
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Re: U.S. stocks in freefall

Post by scone » Tue Sep 29, 2015 9:16 am

^^^ Yep, seems a lot of people have noticed. My bi-weekly contribution goes in tonight, and I will peek to see if I need to buy more . Feeling pretty chill, actually. 8-)
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore

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Clearly_Irrational
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Re: U.S. stocks in freefall

Post by Clearly_Irrational » Tue Sep 29, 2015 10:42 am

HomerJ wrote:We base AA on the need and willingness to take risk, not on what the market is doing.


I find the PE10 a reasonable indicator for when we're experiencing non-normal levels of risk but my own testing suggested that non-extreme values have little signaling power.

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Re: U.S. stocks in freefall

Post by flyingaway » Tue Sep 29, 2015 11:08 am

There was a drop yesterday? I was out hiking with friends and missed that. Tomorrow will be the last day of the month and my automatic contribution will go in.

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Re: U.S. stocks in freefall

Post by Sheepdog » Tue Sep 29, 2015 11:24 am

flyingaway wrote: Tomorrow will be the last day of the month and my automatic contribution will go in.


Oh well, day after tomorrow my automatic withdrawal takes place.
People should not say everything they think. They should think about everything they say.

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Re: U.S. stocks in freefall

Post by lack_ey » Tue Sep 29, 2015 11:33 am

Clearly_Irrational wrote:
HomerJ wrote:We base AA on the need and willingness to take risk, not on what the market is doing.


I find the PE10 a reasonable indicator for when we're experiencing non-normal levels of risk but my own testing suggested that non-extreme values have little signaling power.

Did you run the analysis in "real time" going along or using the full history at every point?

For example, it's not much use to say that historically extreme values are predictive. After all, you can't get higher than the highest point in history or lower than the lowest point. Of course there will be a rebound. There will definitely be rebounds on values not far from the very top and bottom too.

In mid 1995, PE10 was at what was then an extreme. Only the 1966ish peak and of course the late 1920s were higher. Turned out not to be so extreme an actually a great buying opportunity, and lower than any other point in the last 20 years other than 08-09, a little bit of 10, and the bottom of the 11 dip). Doesn't look so extreme now, but that's only with the 1995-2015 history in place for context.

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Re: U.S. stocks in freefall

Post by Clearly_Irrational » Tue Sep 29, 2015 12:36 pm

lack_ey wrote:Did you run the analysis in "real time" going along or using the full history at every point?


I did both. You didn't specify what month of 1995, so for illustration I'll use June. At that time I would have been worried about values above 24. Following along in real time as the threshold adjusts, it doesn't show a red light until November 1995 at which point the threshold was 24.08. A signal indicator does not a robust system make however, which is why I use seven and the combined indicator didn't start screaming until years later in late 2000.

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Re: U.S. stocks in freefall

Post by HomerJ » Tue Sep 29, 2015 1:45 pm

Clearly_Irrational wrote:
lack_ey wrote:Did you run the analysis in "real time" going along or using the full history at every point?


I did both. You didn't specify what month of 1995, so for illustration I'll use June. At that time I would have been worried about values above 24. Following along in real time as the threshold adjusts, it doesn't show a red light until November 1995 at which point the threshold was 24.08. A signal indicator does not a robust system make however, which is why I use seven and the combined indicator didn't start screaming until years later in late 2000.


So you agree that the PE10 signal failed in the 90s.

And I think if you were using PE10 in the 1990s, you would have been worried before 24. I wish I could find PE10 newsletters from the 90s. I'm willing to bet very big money that when the PE10 crossed 20 in 1992, red alarms were going off everywhere.

At that time, the only other times PE10 crossed 20 was before the Panic of 1907, the crash of 1929, the crash of 1937, and the mid 1960s which were followed by a 16-year stock market bear. Crossing 20 predicted bad-times ahead 100% of the time with the data at that time.

I highly doubt anyone in the 90s with that data was saying at PE 20 or 21 or 22, "Wait a little longer, it's not really bad until it crosses 24"

Anyone faithfully following a PE10 valuation system got out of the market in 1992 or 1993, and hasn't been back in since... (MAYBE they jumped back in 2009, but I'm sure they would be expecting it to fall even further... I mean it barely got back to the mean. But if even if they jumped in 2009, they got back out in 2010).

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Re: U.S. stocks in freefall

Post by lee1026 » Tue Sep 29, 2015 2:04 pm

Keep in mind that PE10 was not published until 1988, and didn't become popular until much later. Google trends suggest that it didn't become popular until around 2009-2010, but that is an unreliable way to say when something become popular. If you want to argue that PE10 failed after the 1990s, then it would have never actually worked - it would just be another indicator that worked great in sample and poorly out of it.

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Re: U.S. stocks in freefall

Post by Leeraar » Tue Sep 29, 2015 2:12 pm

Eventually the data will surrender, and you'll find a meaningful correlation:

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Re: U.S. stocks in freefall

Post by mudfud » Tue Sep 29, 2015 2:25 pm

Leeraar wrote:Eventually the data will surrender, and you'll find a meaningful correlation:



L. :P


Hilarious! This reminds me of the "Butter Production in Bangladesh" and S&P500 correlation, or better still, butter projection AND cheese AND sheep!

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Re: U.S. stocks in freefall

Post by Clearly_Irrational » Tue Sep 29, 2015 2:26 pm

HomerJ wrote:So you agree that the PE10 signal failed in the 90s.


No, I just think that PE10, by itself, is not a sufficient reason to reduce your stock allocation. It's a signal that things are starting to get over-valued but it's not a good timing indicator in isolation. It was correct that stock valuations were stretched, but they can stay stretched for an extended period of time before the actual crash.

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Re: U.S. stocks in freefall

Post by VictoriaF » Tue Sep 29, 2015 4:48 pm

mudfud wrote:
Leeraar wrote:Eventually the data will surrender, and you'll find a meaningful correlation:



L. :P


Hilarious! This reminds me of the "Butter Production in Bangladesh" and S&P500 correlation, or better still, butter projection AND cheese AND sheep!

Image

Mud


Many years ago, when I still had a TV, Louis Rukeyser has introduced me to the correlation between lengths of women's skirts and market valuations. Since then I have evolved in many ways, but I'm still paying excessive attention to markets when fashions change and to women when the markets get crazy. Some associations are just too vivid.

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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Tue Sep 29, 2015 4:56 pm

This is totally boring. Call your shots BEFORE you shoot or I doubt your veracity.
Last edited by Uncle Pennybags on Wed Sep 30, 2015 12:52 pm, edited 1 time in total.

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Re: U.S. stocks in freefall

Post by HawaiiBrewer » Tue Sep 29, 2015 6:22 pm

I'm not to regular in coming to the Forum but had extra time today away from my hobbies so thought I'd take a look.....wow, the markets dropped 300 points? Maybe I should listen to the news more often, but then why bother since I'm staying the course.

:shock: I certainly got a head ache reading and trying to understand the calculations, formulas, etc of the Rx 4 Investing dissertation. I read every book and investment tip provided in the Wiki sources and thought I'd keep it simple with a twice a year review of my AA keeping with the Boglehead philosophy and KISS approach. My "calculation" amounts to looking at my AA and rebalancing if needed. In the past 2 yrs, I haven't had to make any changes, so it's been a very easy calculation. One can make life(and investing) very complicated if that is your thing, but when I ask what time it is, I don't want to hear how to make a watch.

Time for a beer... :sharebeer

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Re: U.S. stocks in freefall

Post by Browser » Tue Sep 29, 2015 6:56 pm

The more I've learned the simpler my investment philosophy is getting: (1) Decide how much I can stand to own in stocks and (2) the rest into safe stuff like TIPs, Cash, CDs. Don't even have nominal bonds anymore. No small, no value, no factors anywhere. My lazy portfolio is about as slothful as it can be.
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Re: U.S. stocks in freefall

Post by linenfort » Wed Sep 30, 2015 9:18 am

Browser wrote:The more I've learned the simpler my investment philosophy is getting: (1) Decide how much I can stand to own in stocks and (2) the rest into safe stuff like TIPs, Cash, CDs. Don't even have nominal bonds anymore. No small, no value, no factors anywhere. My lazy portfolio is about as slothful as it can be.

+1
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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Wed Sep 30, 2015 12:56 pm

HawaiiBrewer wrote:...wow, the markets dropped 300 points? Maybe I should listen to the news more often,...
This was on the popular "news" a fortnight ago. When investing makes the popular news it is time to go be a contrarian to the masses.

Nobody told me to buy yesterday; I have one unit left for the month. Where should I stick it? :confused

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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Fri Oct 02, 2015 11:59 pm

I notice the mortgagee the ranch to play the market types are very quiet lately.

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Re: U.S. stocks in freefall

Post by livesoft » Sat Oct 03, 2015 12:27 am

livesoft wrote:Public Service Announcement: VXF was in RBD territory earlier today.

A few days later VXF is up 2.8%.
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Re: U.S. stocks in freefall

Post by Leif » Sat Oct 03, 2015 12:08 pm

Uncle Pennybags wrote:I notice the mortgagee the ranch to play the market types are very quiet lately.

To mix my metaphors, the bulls are in hibernation now.
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Re: U.S. stocks in freefall

Post by fortyofforty » Sat Oct 03, 2015 7:31 pm

It's so hard to catch the absolute bottoms. I often found that when I thought I was putting money into stocks when they were down a lot, they dropped more the following day. It's much easier and less stressful to set an automatic investment and let the calendar set your investment dates. You'll likely never catch the true bottom of market corrections, but you'll dollar cost average your way to good performance and less stress on your nerves. I suppose that's one big advantage to employer-sponsored investment plans. They deduct money from your paycheck on a regular basis and invest it as you choose, without emotion.
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Re: U.S. stocks in freefall

Post by livesoft » Sat Oct 03, 2015 7:42 pm

fortyofforty wrote:It's so hard to catch the absolute bottoms. I often found that when I thought I was putting money into stocks when they were down a lot, they dropped more the following day.

I have to disagree. One way to catch the bottom is to buy every single day. :twisted:

Or if one rebalances on a day they think is the bottom and the next day goes lower, then buy more the next day since if yesterday's prices were good, then lower prices are even better. :)
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Re: U.S. stocks in freefall

Post by HopeToGolf » Sun Oct 04, 2015 3:17 am

livesoft wrote:
fortyofforty wrote:It's so hard to catch the absolute bottoms. I often found that when I thought I was putting money into stocks when they were down a lot, they dropped more the following day.

I have to disagree. One way to catch the bottom is to buy every single day. :twisted:

Or if one rebalances on a day they think is the bottom and the next day goes lower, then buy more the next day since if yesterday's prices were good, then lower prices are even better. :)


Livesoft-

One day you should post your IPS. That has to be one complex document. If you are 100% invested with little cash to be "opportunistic" you must be moving money around between funds and accounts pretty often. How did you do this and work?

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Re: U.S. stocks in freefall

Post by triceratop » Sun Oct 04, 2015 3:32 am

HopeToGolf wrote:
livesoft wrote:
fortyofforty wrote:It's so hard to catch the absolute bottoms. I often found that when I thought I was putting money into stocks when they were down a lot, they dropped more the following day.

I have to disagree. One way to catch the bottom is to buy every single day. :twisted:

Or if one rebalances on a day they think is the bottom and the next day goes lower, then buy more the next day since if yesterday's prices were good, then lower prices are even better. :)


Livesoft-

One day you should post your IPS. That has to be one complex document. If you are 100% invested with little cash to be "opportunistic" you must be moving money around between funds and accounts pretty often. How did you do this and work?


+1; I would be very interested. Nearly every week I gain some piece of wisdom from some new part of his strategy. Just this week was the daily rebalancing into and out of short term corporate bonds over the past few months. Livesoft remarked one place that he has more than 10 separate accounts, and the strategy behind this decision would be fascinating I am sure. I don't plan on using all or even a few these pieces of information in the short to intermediate term, but the insights are excellent for building general knowledge and acumen as I begin my investing career, standing on the shoulders of giants.
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Re: U.S. stocks in freefall

Post by livesoft » Sun Oct 04, 2015 8:09 am

1. I don't rebalance daily and I am pretty sure that I did not write that.

2. I rebalance when there is an RBD and shortly thereafter... as well as a few other times just like everybody else such as when dividends show up.

3. The only thing different about my IPS from others you have seen is that I have: I must buy equities on a RBD unless it is a Friday, but I may buy on a RBD if it is a Friday. I must buy on an RBD Mon-Thurs. Thus, my IPS is not complicated.

4. If RBDs occur daily, then yes, I will rebalance daily. That has not happened yet.

5. I posted in the forum, the last 2 RBDs that I acted on.

6. I have listed the accounts I have several times on the forum: (his & her) IRA, RothIRA, inherited IRA, 401(k), 403(b) <- that's 10 accounts right there without mentioning any taxable accounts, 529 plans, HSA.
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Re: U.S. stocks in freefall

Post by triceratop » Sun Oct 04, 2015 1:22 pm

livesoft wrote:1. I don't rebalance daily and I am pretty sure that I did not write that.


I was referring to your comment: viewtopic.php?f=1&t=174980&p=2643928#p2643928

I apologize if I misunderstood what you were saying.
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Re: U.S. stocks in freefall

Post by livesoft » Sun Oct 04, 2015 1:26 pm

triceratop wrote:
livesoft wrote:1. I don't rebalance daily and I am pretty sure that I did not write that.


I was referring to your comment: viewtopic.php?f=1&t=174980&p=2643928#p2643928

I apologize if I misunderstood what you were saying.

^Those bonds funds do not go up and down daily by 0.5% - such a relatively large change for a bond fund is rare. Hence, no daily rebalancing has happened. However, if bonds funds were that volatile every day, then I would be doing something until I perceived such moves as normal and not rare.
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Re: U.S. stocks in freefall

Post by Bustoff » Mon Oct 05, 2015 8:52 am

This is crazy.
The S&P is now up 5% in 4 days.

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Re: U.S. stocks in freefall

Post by VictoriaF » Mon Oct 05, 2015 8:55 am

Bustoff wrote:This is crazy.
The S&P is now up 5% in 4 days.


But it's not 2k yet. I demand my 2k!!!

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Re: U.S. stocks in freefall

Post by Bustoff » Mon Oct 05, 2015 9:46 am

VictoriaF wrote:
Bustoff wrote:This is crazy.
The S&P is now up 5% in 4 days.


But it's not 2k yet. I demand my 2k!!!

Victoria

It's going back down. Livesoft must be selling rebalancing.

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Re: U.S. stocks in freefall

Post by Browser » Mon Oct 05, 2015 10:15 am

It goes up -- it goes down -- and it remains the same. The market to nowhere. :arrow:
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Re: U.S. stocks in freefall

Post by Toons » Mon Oct 05, 2015 1:12 pm

Browser wrote:It goes up -- it goes down -- and it remains the same. The market to nowhere. :arrow:


Indexing is like watching paint dry :happy :happy
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Re: U.S. stocks in freefall

Post by Uncle Pennybags » Mon Oct 05, 2015 3:37 pm

Why wasn't I informed of this? :confused

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Re: U.S. stocks in freefall

Post by ray.james » Mon Oct 05, 2015 3:52 pm

RGD :happy
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Re: U.S. stocks in freefall

Post by Hodor » Mon Oct 05, 2015 8:21 pm

Bustoff wrote:This is crazy.
The S&P is now up 5% in 4 days.


At this rate, we'll all be retired by Christmas :D

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