You Can Market Time At Valuation Extremes

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Youngblood
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Re: You Can Market Time At Valuation Extremes

Post by Youngblood » Sun Jul 01, 2018 3:33 pm

Dandy wrote:
Mon Jun 18, 2018 9:58 am
The problem with market timing at valuation extremes are the "being right too early" problem that I posted about earlier and also the definition of "extreme valuations."
First I am not making any case the current markets are overvalued or extremely overvalued. Just that the topic needs to be explored in more detail than essentially being dismissed with a few words of guidance.

There is a risk for "being early" and there is a risk in being late. The stage of live, the risk tolerance you think you have, and your investment goal e.g. growth vs asset preservation, etc. come into play as to which risk -- early or late is a bigger concern. For quite some time my goal has been asset preservation thus a rather modest equity allocation of 43%. If I was in my 30's or 40's I would still have growth as a goal and not want to be "early" I'd take a risk since I would have sufficient human capital to still reach my goals.

Jack, near retirement age (and in questionable health) reduced his equity allocation by 15 or 20% e.g. from say 70% to 50%. That is a major change. It turned out to be a great call. I don't expect any more detailed research, analysis etc to be right all the time. But, as valuations rise risk likely rises also - we need better information of when that rise in risk is becoming a problem that normal rebalancing isn't necessarily enough. Agreed it will not be with a very high degree of certainty. And we need that general guidance from a trusted source based on some reasonable analysis not from some media hype/analyst.

I agree this is not an easy task and may be relatively impossible. But, Mr. Bogle blessed it in rare occasions and I think it needs more analysis/discussion. Otherwise it seems we will only recognize extreme overvaluation after the fact when many have lost a significant amount.
Such a great post, causing a slew of what ifs in my mind. Don't we all, at least, wish we knew when to fold? OTOH, what would happen if someone actually could recognize extreme overvaluation, reported it and most investors believed and acted on it?

Anyway, like you said, not easy and relatively impossible but interesting to discuss.

BTW, being a retiree like you, I did the only thing I could to protect myself by reducing my equity allocation at a time I thought the market had significant downside risk.
"I made my money by selling too soon." | Bernard M. Baruch

Random Walker
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Re: You Can Market Time At Valuation Extremes

Post by Random Walker » Sun Jul 01, 2018 3:41 pm

Can’t time a market, but I do believe one can somewhat judiciously and opportunistically time their glidepath to the retirement portfolio. This is why I somewhat disagree with Target Date Funds. They only account for our age in determining glidepath. Why not account for other variables than just age when moving towards the retirement AA. I think it’s also beneficial to account for past returns, current valuations, future expected returns, changing ability willingness need when moving to the retirement AA. This likely results in more of a stepwise transition to the retirement AA than a smooth glide. If the market has been more generous than expected, net worth greater than expected, and future expected returns less, why not take more than a measles 1-2% in a given year if approaching retirement?

Dave

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 4:46 pm

Youngblood wrote:
Sun Jul 01, 2018 3:33 pm
Dandy wrote:
Mon Jun 18, 2018 9:58 am
The problem with market timing at valuation extremes are the "being right too early" problem that I posted about earlier and also the definition of "extreme valuations."
First I am not making any case the current markets are overvalued or extremely overvalued. Just that the topic needs to be explored in more detail than essentially being dismissed with a few words of guidance.

There is a risk for "being early" and there is a risk in being late. The stage of live, the risk tolerance you think you have, and your investment goal e.g. growth vs asset preservation, etc. come into play as to which risk -- early or late is a bigger concern. For quite some time my goal has been asset preservation thus a rather modest equity allocation of 43%. If I was in my 30's or 40's I would still have growth as a goal and not want to be "early" I'd take a risk since I would have sufficient human capital to still reach my goals.

Jack, near retirement age (and in questionable health) reduced his equity allocation by 15 or 20% e.g. from say 70% to 50%. That is a major change. It turned out to be a great call. I don't expect any more detailed research, analysis etc to be right all the time. But, as valuations rise risk likely rises also - we need better information of when that rise in risk is becoming a problem that normal rebalancing isn't necessarily enough. Agreed it will not be with a very high degree of certainty. And we need that general guidance from a trusted source based on some reasonable analysis not from some media hype/analyst.

I agree this is not an easy task and may be relatively impossible. But, Mr. Bogle blessed it in rare occasions and I think it needs more analysis/discussion. Otherwise it seems we will only recognize extreme overvaluation after the fact when many have lost a significant amount.
Such a great post, causing a slew of what ifs in my mind. Don't we all, at least, wish we knew when to fold? OTOH, what would happen if someone actually could recognize extreme overvaluation, reported it and most investors believed and acted on it?

Anyway, like you said, not easy and relatively impossible but interesting to discuss.

BTW, being a retiree like you, I did the only thing I could to protect myself by reducing my equity allocation at a time I thought the market had significant downside risk.
Dandy was quoting me. I wasn't dismissing the topic, indeed since I have started posting on this forum, I have posted on this issue many times and in detail. You have to use sort of a mental shorthand or my posts could get so lengthy that no one would read them. This last post that Dandy quoted from was a summary of my thoughts and not an extensive white paper on the subject.

My conclusion is that strategic asset allocation at valuation extremes might help you control risks and help you sleep at night but it is doubtful that doing so would boost returns.

In early 2000, I did a shift of 15% of my portfolio, shifting those funds from stocks into cash. That probably boosted returns a bit and helped with risk. In 2005, I took most of that cash and went into bonds with it. Over time, that should boost returns a bit. In 2008-2009, I did nothing but put 100% of monies for new investment into stocks for about a year. I probably hurt my returns because I didn't rebalance from bonds back into stocks. Yes, I admit that I was scared. So hard to say how these three moves affected risk and return. I did a fourth move in 2007-2008 further de-emphasizing my individual stocks, doing Small/Value tilting, and getting into International Mid/Small-Cap. My fourth move probably detracted from returns as we have been in a Large Growth market since the financial crisis.

So my experience was a mixed bag. I tried to mitigate risk a bit and (hopefully) boost returns but hard to say that I succeeded at either. Believe me, I have thought about this a whole lot.
A fool and his money are good for business.

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gmaynardkrebs
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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Jul 01, 2018 4:50 pm

nedsaid wrote:
Sun Jul 01, 2018 3:32 pm
gmaynardkrebs wrote:
Sun Jul 01, 2018 1:34 pm
nedsaid wrote:
Sun Jul 01, 2018 12:29 pm
...We are not in a bubble here and stock and bond valuations here are reasonable given the economic environment. My friends and family don't discuss the stock market very much if at all.
The "bubble" here is not being blown by people like you and me. This is a career risk "bubble." Put yourself in the position of a career trader or investment manager. What would you be doing now?
What bubble are you talking about? The US Stock Market has been stalled since January, trading in a range and getting close to the 10% correction. Bond prices are down in concert with interest rates ticking up. I am sure that there is a lot of churn in institutional portfolios like hedge funds but the markets haven't gone anywhere in months. No euphoria out there that I am aware of. As far as career risk of traders or managers, not sure that affects the markets themselves. They might be taking on more risk to outperform but they have always done that.
I think the S&P would be approx 1/3 lower were it not for the career risk effect. I consider 50% overvaluation to be a bubble. Of course career risk affects the market. I am surprised you would think otherwise.

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 4:53 pm

Random Walker wrote:
Sun Jul 01, 2018 3:41 pm
Can’t time a market, but I do believe one can somewhat judiciously and opportunistically time their glidepath to the retirement portfolio. This is why I somewhat disagree with Target Date Funds. They only account for our age in determining glidepath. Why not account for other variables than just age when moving towards the retirement AA. I think it’s also beneficial to account for past returns, current valuations, future expected returns, changing ability willingness need when moving to the retirement AA. This likely results in more of a stepwise transition to the retirement AA than a smooth glide. If the market has been more generous than expected, net worth greater than expected, and future expected returns less, why not take more than a measles 1-2% in a given year if approaching retirement?

Dave
You do need a plan with some thought behind it. I like what you are saying to allow flexibility in your plan as circumstances and events dictate. This is why I don't like to be too mechanical in my planning. For example, my life looks a lot different now than I thought it would look four years ago. Some things changed and this has affected my planning.

We all like to think that our tweaks to asset allocation, glide paths and the like will improve our results. Too often it is simple tinkering because of boredom. Problem is it is hard to tell the difference between tinkering and making prudent changes. We think ourselves more prudent than we really are. There is a certain vanity to all of this.
A fool and his money are good for business.

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Sun Jul 01, 2018 5:01 pm

gmaynardkrebs wrote:
Sun Jul 01, 2018 4:50 pm
nedsaid wrote:
Sun Jul 01, 2018 3:32 pm
gmaynardkrebs wrote:
Sun Jul 01, 2018 1:34 pm
nedsaid wrote:
Sun Jul 01, 2018 12:29 pm
...We are not in a bubble here and stock and bond valuations here are reasonable given the economic environment. My friends and family don't discuss the stock market very much if at all.
The "bubble" here is not being blown by people like you and me. This is a career risk "bubble." Put yourself in the position of a career trader or investment manager. What would you be doing now?
What bubble are you talking about? The US Stock Market has been stalled since January, trading in a range and getting close to the 10% correction. Bond prices are down in concert with interest rates ticking up. I am sure that there is a lot of churn in institutional portfolios like hedge funds but the markets haven't gone anywhere in months. No euphoria out there that I am aware of. As far as career risk of traders or managers, not sure that affects the markets themselves. They might be taking on more risk to outperform but they have always done that.
I think the S&P would be approx 1/3 lower were it not for the career risk effect. I consider 50% overvaluation to be a bubble. Of course career risk affects the market. I am surprised you would think otherwise.
You might be right but there is no way to quantify the career risk effect. My belief is that the career risk effect has always been there and hard to say if or how much this affects the market. Perhaps your premise is that the success of indexing is causing managers to take even bigger risks than before.

If you are looking at the Schiller P/E 10, the markets look pretty darned expensive. If you look at forward P/E's for the US Market, which is now 17, that doesn't look excessive. Trailing P/E's were 25 but another poster said that they are now more like 20. Again, a bit above historical averages but nowhere near bubble territory.

In early 2000, before the tech bubble burst, forward P/E's were about 32 and trailing P/E's were about 45.

Also keep in mind a lot of folks out there are shorting stocks as well. You don't short stocks if you think they are going up. Don't know how much short interest there is compared to history, perhaps you could research and report back. That is another thing to look at.
A fool and his money are good for business.

Dandy
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Re: You Can Market Time At Valuation Extremes

Post by Dandy » Sun Jul 01, 2018 5:12 pm

Dandy was quoting me. I wasn't dismissing the topic ...
Didn't mean to let my post make you look bad and unfairly characterize your post. I was probably reacting to scores of other posts that dismiss any concern about high valuations with a phrase like stay the course, that market timing etc. I feel it cuts off discussion and maybe some new ideas.

It reminds me of people saying the early bird catches the worm but never looking at the risk to the early worm. :D Investor with a need or want for asset preservation might rather risk being early to adjust equity exposure than those with decades of human capital who are shooting for growth to get their "number".

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Jul 01, 2018 8:36 pm

nedsaid wrote:
Sun Jul 01, 2018 5:01 pm
...Also keep in mind a lot of folks out there are shorting stocks as well. You don't short stocks if you think they are going up. Don't know how much short interest there is compared to history, perhaps you could research and report back. That is another thing to look at.
The risks of shorting are so asymmetric, I don't consider short interest to be of any real significance with regard to the assessment of the over-valuation of the market as a whole.

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nedsaid
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Re: You Can Market Time At Valuation Extremes

Post by nedsaid » Mon Jul 02, 2018 9:30 am

Dandy wrote:
Sun Jul 01, 2018 5:12 pm
Dandy was quoting me. I wasn't dismissing the topic ...
Didn't mean to let my post make you look bad and unfairly characterize your post. I was probably reacting to scores of other posts that dismiss any concern about high valuations with a phrase like stay the course, that market timing etc. I feel it cuts off discussion and maybe some new ideas.

It reminds me of people saying the early bird catches the worm but never looking at the risk to the early worm. :D Investor with a need or want for asset preservation might rather risk being early to adjust equity exposure than those with decades of human capital who are shooting for growth to get their "number".
The stock market is risky, it is good for investors, particularly older investors to err on the side of conservatism.
A fool and his money are good for business.

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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Mon Jul 02, 2018 2:32 pm

Dandy wrote:
Sun Jul 01, 2018 5:12 pm
Investor with a need or want for asset preservation might rather risk being early to adjust equity exposure than those with decades of human capital who are shooting for growth to get their "number".
Investor with a need or want for asset preservation should ALREADY have changed their Asset Allocation, not waiting until valuations "get high".

The risk of a crash is never zero. If you have a need for asset preservation, then you move to preserve your assets, regardless of valuations.
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Re: You Can Market Time At Valuation Extremes

Post by Northern Flicker » Mon Jul 02, 2018 2:50 pm

Park wrote:
Fri Jun 15, 2018 3:20 pm
Thanks for your comments.

There are those pointing out that there are many bear markets, where market timing based on valuation extremes wouldn't have helped you.

I agree. The sensitivity of market timing based on valuation extremes isn't high.

But the specificity is high. At low valuations, the probability of high future returns is high. Conversely, at high valuations, the probability of low future returns is high.
I think it is not uncommon for the first 6-12 months and last 6-12 months of a bull market to have some of the most robust returns of the bull market run. Given the difficulty of timing the start and end of a bear market accurately, you may well give up some of the best returns of a bull market run trying to avoid a bear market even if the bear market materializes relatively near to when you predict. If it does not materialize near to when you predict, you just get hosed by the timing attempt. This creates an asymmetry where the expected return on trying to time a bear market relative to staying invested is likely negative.
Risk is not a guarantor of return.

Dandy
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Re: You Can Market Time At Valuation Extremes

Post by Dandy » Mon Jul 02, 2018 4:28 pm

Investor with a need or want for asset preservation should ALREADY have changed their Asset Allocation, not waiting until valuations "get high".
There is certainly some truth in that e.g. a good allocation and a rebalancing plan usually does the trick. Risk tolerance and the translation of that into an allocation plan and a rebalancing plan is often a lot of educated (we hope) guesses on top of other educated guesses. Risk also changes with age and the decline of human capital - which is often not fully realized.

So, sometimes extreme valuations can cause panic, worry to be sure but on occasion necessary reassessment of your ability to take risk and also your need to take it. If you recall Mr. Bogle who is a savvy investor made a significant reduction of his equity allocation just prior to the year 2000 sell off. He has said when the market is extremely overvalued you should consider taking such significant equity reduction. Why would it be ok for him to do and say that and yet be such a shock if others suggest it?

I think the real key is what measure or measures would be good indicators of extreme valuation and what would be considered extreme.

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Park
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Re: You Can Market Time At Valuation Extremes

Post by Park » Wed Jul 04, 2018 7:36 am

https://www.morningstar.com/videos/3539 ... roach.html

Below is from a discussion between Frank Kinniry of Vanguard and Christine Benz of Morningstar, and is taken from the above link:

Benz: ...But the tactical umbrella has a lot of different strategies beneath it, and I'm wondering are there any strategies that make more sense to you than others within the tactical realm.

Kinniry: We've looked at it, long and hard. And actually, we have a real reason to look at this and spend a lot of time looking at it, and really the only thing we've found that has some merit is at the stock/bond mix, meaning we don't see a lot between U.S. and international or growth and value or size, but we do see some ability of tactical allocation in the extremes and really the extremes are limited periods in time where this occurs. So, 1998-1999, when you saw a valuations at unprecedented levels, one could have said the equity market was set up for potentially lower returns, and in 2009, believe it or not, at the bottom, the equity market looked about as attractive as it had in 20 to 25-plus years.

And so there is a lot of noise in the middle, but there are some small windows in time where the stock/bond mix, you may want to shade, and we would say only small shades if you were 60/40 stock/bonds, maybe it would go up 5% or 10% in your equities or down 5% or 10%, but really never making wholesale moves.

Benz: And arguably a rebalancing strategy would kind of get you there.

Kinniry: Absolutely, a rebalancing strategy is probably the best way to take advantage of some of these opportunities without making wholesale changes; that's exactly right."

In 1998-1999, PE10 was in the range of 33-44. In 2009, PE10 was in the range of 13-20. My opinion is that Frank Kinniry from Vanguard is stating that one can market time at valuation extremes, albeit quite modestly.

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Park
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Re: You Can Market Time At Valuation Extremes

Post by Park » Sun Jul 08, 2018 11:11 am

I try not to bump a thread that I've started, but I'd like to make the following points, which I think would be of use to many on this board:

Larry Swedroe:

"I agree that market timing at EXTREMES is a good idea, but only if you are prepared to
a) be wrong for long time (I sold all growth in 98 and looked bad for 2 years, then looked great)
b) don't confuse strategy and outcome
c) stay disciplined (the hard part is when do you get back).

so for most, especially if have well diversified by asset classes/factors, simply rebalancing is likely to prove better.

and I've only made a few trades over the past 20 years including getting out of growth in 98 and out of REITS a few years ago. Valuations do matter, and they matter a lot."


At the end of 1989, someone who invested solely on world market cap would have had about 40% of their stock exposure in Japanese stocks.

http://www.etf.com/sections/index-inves ... nopaging=1

"through 2017, Japanese large-cap stocks would gain just 0.5% per year, producing a cumulative return of less than 15% over the 28-year period."

At the end of 1989, Japanese stocks had a CAPE of around 90.

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Re: You Can Market Time At Valuation Extremes

Post by InvestInPasta » Mon Jul 09, 2018 3:22 am

David Jay wrote:
Wed Jun 20, 2018 8:35 am
Park wrote:
Fri Jun 15, 2018 3:20 pm
But the specificity is high. At low valuations, the probability of high future returns is high. Conversely, at high valuations, the probability of low future returns is high.
TRUE.

Now how does one monetize that information?
It's impossible, I couldn't monetize these kind of informations with Euro Bonds that always have an exact 10 years nominal return, I mean they always have an exact math nominal valuation for the next nth years.
The herd's behaviour is unpredictable!

In 2014 safe 10-15Years Euro Bonds like EIB/Bunds/OAT were yielding a yearly nominal 1.5% net (after taxes).
I said to myself: "I won't buy them at these tiny returns!"
The herd carried on buying Euro Bonds until they yielded ZERO net (+20% in bond price).
I said to myself: "People are crazy, I bet now these bonds will collapse, I'm smart, I keep staying out!"
The herd carried on buying Euro Bonfs until they yielded a NEGATIVE return. Another +10% in bond price. :shock:

How can someone monetize valuations?
When studying English I am lazier than my portfolio. Feel free to correct my english and investing mistakes.

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Park
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Re: You Can Market Time At Valuation Extremes

Post by Park » Thu Oct 04, 2018 12:42 am

One justifiable criticism of valuation based market timing is that there is less reversion to the mean for stock markets.

But at extremes of valuation, you don't need reversion to mean. Expensive stock markets or cheap stock markets can do worse or better respectively, even if there is no reversion to the mean.



At extremes of valuation, the probability of reversion to mean increases, especially when a market is expensive. Historically, investors have demanded an equity risk premium. Stocks are riskier than bonds/cash; I don't think that will change, so I don't think the equity risk premium will disappear.

An individual stock can be very cheap, because earnings growth expectations are appropriately low. Similarly, an individual stock can be very expensive, because those expectations are appropriately high. But the historical real growth in earnings is 1.5% yearly in the US stock market. It can deviate from that, but not as much as at the individual stock level. And there will be a stronger tendency for reversion to mean in earnings growth for the stock market as whole, versus individual stocks.

A stock market or an individual stock could be expensive or cheap, not because of earnings growth, but due to risk. If it is riskier, it will be cheaper. If it has less risk, it will be expensive

http://www.efficientfrontier.com/ef/197/rebal197.htm

William Bernstein: "over very long time horizons there is usually relatively little difference in the returns in most national equity markets"

If you believe that markets price in risk and the level of risk is similar in most markets, then there should be little difference in returns. Once again, mean reversion in risk is likely greater at the stock market level than at the level of individual stocks. A stock can go bankrupt. A stock market can go bankrupt (Russian or Chinese markets after communism), but it is less common.

For the good majority of stock markets, there will be mean reversion in earnings growth and in risk. At extremes of valuation, this is relevant.




Another criticism of valuation based market timing is that CAPE doesn't work in the short term. But at extremes of valuation, I'm not as sure about that.

http://www.indexologyblog.com/2018/10/0 ... k-returns/

The link above has graphs showing the relationship of US CAPE to returns over the next 3, 5 7 and 10 years. If you look at the slope of the line, it increases as the time span shortens. So stock market return is more sensitive to CAPE as the time span shortens. However, dispersion increases even more as the time span shorten. The R squared increases as the time span lengthens.

But look at the dispersion at the extremes. As only American data is used, there's little data at the highest CAPEs. At the lowest CAPEs though, there is quite a bit more data. The dispersion there is noticeably less than in the middle at 3, 5 and 7 years. And what dispersion there is tends to be in positive returns. For a CAPE less than 15, the minimum return over the next 3 years is about 8%.

https://www.starcapital.de/fileadmin/us ... imling.pdf

The above link is to a study of CAPE and market returns from 17 countries.

The following is maximum drawdown in relationship to CAPE, using CAPE data from all countries.
CAPE 0-10, average maximum drawdown over the next 3 years is -5.7%, average maximum drawdown over the next 15 years is -5.2%
10-15, -8.8%, -11.1%
15-20, -12.4%, -13.6%
20-25, -18.1%, -23.1%
25-30, -22.3%, -27.5%
30+, -28.8%, -39.5%

When it comes to average maximum drawdown over the next 3 years, the relationship to CAPE isn't that bad.

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Re: You Can Market Time At Valuation Extremes

Post by Chris42163 » Fri Feb 15, 2019 8:44 pm

This is an outstanding discussion! Though it's old, it's the most relevant conversation I've found on the internet regarding my current concerns and actions.

I started investing at ~25 y/o in 2007 in earnest. I believed, and still do, in the mantra of buy and hold investments. I believed in Buffet and Bogle regarding investment for the long run... avoid timing... ignore the news.

In 2018, that changed. I realized that the CAPE and TMC/GDP valuation metrics had only been exceeded twice in the past century plus. The first time was prior to the Great Depression. The second was prior to the Tech Crash. In September, I noted that CAPE valuations exceeded the Great Depression era, leaving only the tech bubble outlier as historically worse. Then, at the beginning of October, I watched the market come rapidly off of it's September peak and drop from ~2930 by more than 200 points. That was finally the moment that I realized that I would regret riding out a huge loss and kick myself more for it than if I took action and missed a gain. The market bounded upward to 2809 by mid-October, and I seized the opportunity, liquidated my stocks and went 100% into my money Market (VMMXX). I avoided the October to December sell off.

On Xmas eve, after evaluating the faults of the CAPE-10 myself, I calculated a CAPE-8 and realized that the lingering slump of the recession era economy had a 3 point effect on the CAPE ratio. At that point, the CAPE10 was 29.01 (down from ~33) and my calculated CAPE8 was only 25.7. I had further read about adjustments in earnings, inflation and Fed rates and their effects on Schiller's CAPE. This is also likely on the order of a 2-3 point difference. I felt that if the current CAPE (xmas 2018) is more in line with a historical CAPE of 22, then perhaps it's not really as extreme as I'd originally perceived. I reinvested everything, having avoided 13% losses and having gained a little over 12% since then.

I did not lose confidence in CAPE, especially considering that Buffet's indicator largely backs up the CAPE near all-time highs. And, I do not require a "buy now" CAPE valuation, but I felt the need to escape what I considered extreme valuations, even while I realized that markets can be irrational for a long time and can always become more irrational, no matter where you are.

The timing though was very fortunate and lucky. I had no expectation of a short term drop before my sell off, nor did I expect the short term gain after my repurchase. I fully intended to remain out for years, if necessary. Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1. The TMC/GDP (Buffet indicator), at 138.2% is 7.5% (in growth) off of its all-time peak.

I am not posting to add any wisdom. I don't have any. My rational mind says that timing is wrong, in general. It also says that extreme valuations are not in line with risks, and the market will be "extreme"ly temperamental to the next world event or bad news. I don't want to be stupid or greedy. These are the kinds of thoughts that lead me to call into question our current conventional "wisdom." I'm not dogmatic enough that I can't call rules meant for general guidance into question in extreme circumstances.

edit (21FEB): I pulled up the calculations and determined that the actual CAPE/8 calculation I conducted was not on xmas eve. It was on 19DEC. The S&P500 was at 2506 @ an adjusted CAPE/8 of 24.5, and a CAPE/10 of 27.5. The next day, 20 Dec, my money reinvested at the S&P's close of 2467 at a CAPE/8 of 24.1.
Last edited by Chris42163 on Thu Feb 21, 2019 9:46 pm, edited 1 time in total.

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Fri Feb 15, 2019 10:55 pm

Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
Then why aren't you 100% out again?

(Note that I think bouncing 100% in and out is a terrible idea).
The J stands for Jay

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gmaynardkrebs
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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Fri Feb 15, 2019 11:30 pm

Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.

marcopolo
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Re: You Can Market Time At Valuation Extremes

Post by marcopolo » Sat Feb 16, 2019 8:25 am

Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm

...
In September, I noted that CAPE valuations exceeded the Great Depression era, leaving only the tech bubble outlier as historically worse.
...
I seized the opportunity, liquidated my stocks and went 100% into my money Market (VMMXX).


On Xmas eve, after evaluating the faults of the CAPE-10 myself, I calculated a CAPE-8 and realized that the lingering slump of the recession era economy had a 3 point effect on the CAPE ratio. At that point, the CAPE10 was 29.01 (down from ~33) and my calculated CAPE8 was only 25.7. I had further read about adjustments in earnings, inflation and Fed rates and their effects on Schiller's CAPE. This is also likely on the order of a 2-3 point difference. I felt that if the current CAPE (xmas 2018) is more in line with a historical CAPE of 22, then perhaps it's not really as extreme as I'd originally perceived. I reinvested everything, having avoided 13% losses and having gained a little over 12% since then.


...
I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
So, let me see if i get this right.

Near a market peak, you discovered CAPE was high (wasn't it that way for some time, why didn't you take action earlier?), so you decided to liquidate your entire portfolio without spending the 15 minutes it might have taken to do a Google search on possible problems with that metric.

Then, conveniently, at the market trough you have an epiphany on Christmas eve and learn about all the problems with CAPE and get back in. How fortuitous.

Now, a month and a half later, you seem to have forgotten all about the problems with CAPE that you discovered on Christmas eve? How odd.
Once in a while you get shown the light, in the strangest of places if you look at it right.

Beliavsky
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Re: You Can Market Time At Valuation Extremes

Post by Beliavsky » Sat Feb 16, 2019 1:16 pm

If the stock market were trading at 50 times trailing earnings which were not depressed by a recession (as in 2009), I would not understand the market's valuation and would sell my holdings in tax-deferred accounts. I thought one Boglehead principle was not to invest in things you don't understand. A 50 stock market P/E in normal times would fit that description to me.

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Re: You Can Market Time At Valuation Extremes

Post by KyleAAA » Sat Feb 16, 2019 2:10 pm

The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sat Feb 16, 2019 2:27 pm

KyleAAA wrote:
Sat Feb 16, 2019 2:10 pm
The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.
I believe that is incorrect. CAPE establishes a uniform measure going back over time. In any event, there's a recent thread about a revised CAPE that adjusts for accounting and makes a few other tweaks. After all the chatter about how CAPE distorted the comparisons, the numbers changed very little in the revised CAPE.

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Re: You Can Market Time At Valuation Extremes

Post by marcopolo » Sat Feb 16, 2019 2:31 pm

gmaynardkrebs wrote:
Sat Feb 16, 2019 2:27 pm
KyleAAA wrote:
Sat Feb 16, 2019 2:10 pm
The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.
I believe that is incorrect. CAPE establishes a uniform measure going back over time. In any event, there's a recent thread about a revised CAPE that adjusts for accounting and makes a few other tweaks. After all the chatter about how CAPE distorted the comparisons, the numbers changed very little in the revised CAPE.
The definition of CAPE may not have changed, but the definition of E certainly did, which makes comparing CAPE across history problematic.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: You Can Market Time At Valuation Extremes

Post by KyleAAA » Sat Feb 16, 2019 2:32 pm

gmaynardkrebs wrote:
Sat Feb 16, 2019 2:27 pm
KyleAAA wrote:
Sat Feb 16, 2019 2:10 pm
The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.
I believe that is incorrect. CAPE establishes a uniform measure going back over time. In any event, there's a recent thread about a revised CAPE that adjusts for accounting and makes a few other tweaks. After all the chatter about how CAPE distorted the comparisons, the numbers changed very little in the revised CAPE.
It doesn’t provide a unified measure, it merely reflects contemporary accounting standards. Much more importantly, the mix of companies makes a big difference. 20x earnings for a software company is VERY different than 20x earnings for a manufacturing company. There are a lot more software companies now than 40 years ago.

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sat Feb 16, 2019 2:48 pm

KyleAAA wrote:
Sat Feb 16, 2019 2:32 pm
gmaynardkrebs wrote:
Sat Feb 16, 2019 2:27 pm
KyleAAA wrote:
Sat Feb 16, 2019 2:10 pm
The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.
I believe that is incorrect. CAPE establishes a uniform measure going back over time. In any event, there's a recent thread about a revised CAPE that adjusts for accounting and makes a few other tweaks. After all the chatter about how CAPE distorted the comparisons, the numbers changed very little in the revised CAPE.
It doesn’t provide a unified measure, it merely reflects contemporary accounting standards. Much more importantly, the mix of companies makes a big difference. 20x earnings for a software company is VERY different than 20x earnings for a manufacturing company. There are a lot more software companies now than 40 years ago.
That's interesting. I'm not sure if this is what you mean, but IIRC, I think even Grantham, one of CAPE's biggest fans, thinks that the equilibrium rate has been permanently elevated from the historic level, due to monopoly power, low interest rates, and other reasons.

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Re: You Can Market Time At Valuation Extremes

Post by Beliavsky » Sat Feb 16, 2019 8:21 pm

gmaynardkrebs wrote:
Fri Feb 15, 2019 11:30 pm
Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.
Any variable that predicts stock market returns (has some correlation with future returns) can be used for market timing or tactical asset allocation.

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Re: You Can Market Time At Valuation Extremes

Post by willthrill81 » Sat Feb 16, 2019 8:26 pm

Beliavsky wrote:
Sat Feb 16, 2019 8:21 pm
gmaynardkrebs wrote:
Fri Feb 15, 2019 11:30 pm
Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.
Any variable that predicts stock market returns (has some correlation with future returns) can be used for market timing or tactical asset allocation.
The trick is finding out now which variables will be related to future market returns and how.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: You Can Market Time At Valuation Extremes

Post by siriusblack » Sat Feb 16, 2019 8:50 pm

gmaynardkrebs wrote:
Sat Feb 16, 2019 2:27 pm
KyleAAA wrote:
Sat Feb 16, 2019 2:10 pm
The meaning of CAPE changes over time with accounting standards and company mix. 50 CAPE in 1987 is not the same as 50 CAPE today.
I believe that is incorrect. CAPE establishes a uniform measure going back over time. In any event, there's a recent thread about a revised CAPE that adjusts for accounting and makes a few other tweaks. After all the chatter about how CAPE distorted the comparisons, the numbers changed very little in the revised CAPE.
Anybody have the link or name of this thread?

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sat Feb 16, 2019 8:53 pm

Beliavsky wrote:
Sat Feb 16, 2019 8:21 pm
gmaynardkrebs wrote:
Fri Feb 15, 2019 11:30 pm
Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.
Any variable that predicts stock market returns (has some correlation with future returns) can be used for market timing or tactical asset allocation.
They discovered that butter prices in Bangladesh appear to have some correlation with stock returns.

You going to invest on that?
The J stands for Jay

Beliavsky
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Re: You Can Market Time At Valuation Extremes

Post by Beliavsky » Sat Feb 16, 2019 9:10 pm

HomerJ wrote:
Sat Feb 16, 2019 8:53 pm
Beliavsky wrote:
Sat Feb 16, 2019 8:21 pm
gmaynardkrebs wrote:
Fri Feb 15, 2019 11:30 pm
Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.
Any variable that predicts stock market returns (has some correlation with future returns) can be used for market timing or tactical asset allocation.
They discovered that butter prices in Bangladesh appear to have some correlation with stock returns.

You going to invest on that?
After you have done the statistical testing you need to ask yourself if the relationship is plausible. Do you think it is plausible that the earnings yield of the stock market is correlated to future returns? I do.

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sat Feb 16, 2019 10:35 pm

Beliavsky wrote:
Sat Feb 16, 2019 1:16 pm
If the stock market were trading at 50 times trailing earnings which were not depressed by a recession (as in 2009), I would not understand the market's valuation and would sell my holdings in tax-deferred accounts. I thought one Boglehead principle was not to invest in things you don't understand. A 50 stock market P/E in normal times would fit that description to me.
In 1996, CAPE appeared "extreme" and "excessive"

Look at this chart. What is a reasonable assumption to take from this CAPE?

Image

The last two times it was this high we had the Great Depression, and a 16-year bear market.

Wouldn't it make sense to sell your holdings at this point?

Yet the market more than doubled before crashing 40%, which means it never dropped as low as it was in 1996, at valuations that were extremely high for the time.

1996, with the second highest valuations in U.S. history turned out to be a CHEAP time to buy stocks. A GREAT time to buy stocks.

I'm not saying CAPE has zero value. But it sure doesn't have the value you think it has. Market-timing is hard. CAPE has been consistently high for 27 years. CAPE as a market signal has failed. Even if the market crashed 80% tomorrow, CAPE has already failed as a market-timing signal. It's been too long.
The J stands for Jay

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Re: You Can Market Time At Valuation Extremes

Post by willthrill81 » Sat Feb 16, 2019 11:21 pm

Beliavsky wrote:
Sat Feb 16, 2019 1:16 pm
I thought one Boglehead principle was not to invest in things you don't understand.
If you can truly understand why the stock market does what it does, I wish you would explain it to me. It consistently beats the heck out of me.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: You Can Market Time At Valuation Extremes

Post by marcopolo » Sat Feb 16, 2019 11:58 pm

Beliavsky wrote:
Sat Feb 16, 2019 9:10 pm
HomerJ wrote:
Sat Feb 16, 2019 8:53 pm
Beliavsky wrote:
Sat Feb 16, 2019 8:21 pm
gmaynardkrebs wrote:
Fri Feb 15, 2019 11:30 pm
Chris42163 wrote:
Fri Feb 15, 2019 8:44 pm
Nevertheless, I am now back in the situation I was in back in October. The markets have rebounded. The CAPE is at 30.1.
If you want to get out again, that 's up to you, but don't use CAPE to justify it. CAPE is not a market timing tool.
Any variable that predicts stock market returns (has some correlation with future returns) can be used for market timing or tactical asset allocation.
They discovered that butter prices in Bangladesh appear to have some correlation with stock returns.

You going to invest on that?
After you have done the statistical testing you need to ask yourself if the relationship is plausible. Do you think it is plausible that the earnings yield of the stock market is correlated to future returns? I do.
In a dynamic economy, what would be the rationale for earnings yield form 8,9, or 10 years ago to be correlated to forward returns today?
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: You Can Market Time At Valuation Extremes

Post by mariezzz » Sun Feb 17, 2019 12:45 am

Somewhere on bogleheads is an old thread which mentioned that missing just a few of the top earnings days a year would massively affect your personal earnings ... if you try to market time, you likely miss those days, was part of the discussion.

This link, provided above, presents a pretty good argument for not getting too excited by rebalancing. Although as Rick Ferri has pointed out in other threads, a benefit of rebalancing is that it may keep your asset allocation in line with your risk tolerance.

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Re: You Can Market Time At Valuation Extremes

Post by revhappy » Sun Feb 17, 2019 2:37 am

This is the 20 years chart of S&P500 v/s earnings.

Image

Before Aug 2014, there was a gap between earnings and the S&P 500 and then as earnings fell, markets kept going up and the gap closed. Now earnings are expected to fall, due to fading tax cut effect, global slowdown related to trade war uncertainty or in general high rates now compared to few years ago. So earnings falling is a given. Hence S&P 500 should fall if it has to stay at the same valuation. If not it becomes even more overvalued.

In my opinion, when you know markets are overvalued, it is okay to miss the next 30% returns, especially now that we know this is the longest cycle and recession can happen anytime now and rates are only going up. Bogle himself said next decade will have poor returns. So over the next decade we could have +30% followed by -80%.

I am okay with missing the +30 as well as the -80.

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Feb 17, 2019 8:32 am

mariezzz wrote:
Sun Feb 17, 2019 12:45 am
Somewhere on bogleheads is an old thread which mentioned that missing just a few of the top earnings days a year would massively affect your personal earnings ... if you try to market time, you likely miss those days, was part of the discussion.
Except that over whatever period of time you are out, wouldn't you miss all the down days as well?

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Feb 17, 2019 8:46 am

HomerJ wrote:
Sat Feb 16, 2019 10:35 pm
Beliavsky wrote:
Sat Feb 16, 2019 1:16 pm
If the stock market were trading at 50 times trailing earnings which were not depressed by a recession (as in 2009), I would not understand the market's valuation and would sell my holdings in tax-deferred accounts. I thought one Boglehead principle was not to invest in things you don't understand. A 50 stock market P/E in normal times would fit that description to me.
In 1996, CAPE appeared "extreme" and "excessive"

Look at this chart. What is a reasonable assumption to take from this CAPE?

Image

The last two times it was this high we had the Great Depression, and a 16-year bear market.

Wouldn't it make sense to sell your holdings at this point?

Yet the market more than doubled before crashing 40%, which means it never dropped as low as it was in 1996, at valuations that were extremely high for the time.

1996, with the second highest valuations in U.S. history turned out to be a CHEAP time to buy stocks. A GREAT time to buy stocks.

I'm not saying CAPE has zero value. But it sure doesn't have the value you think it has. Market-timing is hard. CAPE has been consistently high for 27 years. CAPE as a market signal has failed. Even if the market crashed 80% tomorrow, CAPE has already failed as a market-timing signal. It's been too long.
Jay, I see what you are saying, but there were two dramatic crashes after after 1996, during which CAPE would have signaled a great time to buy, right at the bottom. Moreover, a metric that told investors to sell on Oct 1 1929, and buy at the bottom of 1932-3 could hardly be considered a failure. Lastly, not that I was going to sell in 2008-2011 regardless, the fact that CAPE had gone down a lot did me help firm up my resolve to stay the course during a very stressful time. I think your quibble is with the 16 PE CAPE as the baseline, but if you ignore that absolute litmus test, as I do, and look at whether CAPE10 PE is approaching previous peaks (as it is now) or lows (as it did soon after the 08 crash), ignoring it completely, as many posters here urge (not you, necessarily), strikes me as ill-advised.

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Re: You Can Market Time At Valuation Extremes

Post by marcopolo » Sun Feb 17, 2019 10:19 am

gmaynardkrebs wrote:
Sun Feb 17, 2019 8:46 am
HomerJ wrote:
Sat Feb 16, 2019 10:35 pm
Beliavsky wrote:
Sat Feb 16, 2019 1:16 pm
If the stock market were trading at 50 times trailing earnings which were not depressed by a recession (as in 2009), I would not understand the market's valuation and would sell my holdings in tax-deferred accounts. I thought one Boglehead principle was not to invest in things you don't understand. A 50 stock market P/E in normal times would fit that description to me.
In 1996, CAPE appeared "extreme" and "excessive"

Look at this chart. What is a reasonable assumption to take from this CAPE?

Image

The last two times it was this high we had the Great Depression, and a 16-year bear market.

Wouldn't it make sense to sell your holdings at this point?

Yet the market more than doubled before crashing 40%, which means it never dropped as low as it was in 1996, at valuations that were extremely high for the time.

1996, with the second highest valuations in U.S. history turned out to be a CHEAP time to buy stocks. A GREAT time to buy stocks.

I'm not saying CAPE has zero value. But it sure doesn't have the value you think it has. Market-timing is hard. CAPE has been consistently high for 27 years. CAPE as a market signal has failed. Even if the market crashed 80% tomorrow, CAPE has already failed as a market-timing signal. It's been too long.
Jay, I see what you are saying, but there were two dramatic crashes after after 1996, during which CAPE would have signaled a great time to buy, right at the bottom. Moreover, a metric that told investors to sell on Oct 1 1929, and buy at the bottom of 1932-3 could hardly be considered a failure. Lastly, not that I was going to sell in 2008-2011 regardless, the fact that CAPE had gone down a lot did me help firm up my resolve to stay the course during a very stressful time. I think your quibble is with the 16 PE CAPE as the baseline, but if you ignore that absolute litmus test, as I do, and look at whether CAPE10 PE is approaching previous peaks (as it is now) or lows (as it did soon after the 08 crash), ignoring it completely, as many posters here urge (not you, necessarily), strikes me as ill-advised.
I think you are missing HomerJ's point that the peaks and trough that you think are so telling are only that way in hindsight. Much harder to decipher, and act upon correctly, in real time. You mention the drop in 2008-2011. Even at it's lowest, it only got down to around 15, not particularly low by historical standards. By late 2010, early 2011, it was up in the 23 range, higher than the level prior to the 1937 crash, the 70s bear, or black Monday. How would that signal to keep buying? It only looks like a great buying opportunity in retrospect. Same with the 1996 example HomerJ gave.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Feb 17, 2019 10:58 am

marcopolo wrote:
Sun Feb 17, 2019 10:19 am
I think you are missing HomerJ's point that the peaks and trough that you think are so telling are only that way in hindsight. Much harder to decipher, and act upon correctly, in real time. You mention the drop in 2008-2011. Even at it's lowest, it only got down to around 15, not particularly low by historical standards. By late 2010, early 2011, it was up in the 23 range, higher than the level prior to the 1937 crash, the 70s bear, or black Monday. How would that signal to keep buying? It only looks like a great buying opportunity in retrospect. Same with the 1996 example HomerJ gave.
Marcopolo, thanks for the reply. To be honest, I'm not sure whether I disagree with Homer J's point, or more likely, just don't understand it. However, I can say that if CAPE dropped to 23 tomorrow, I would definitely take 20% from my "safe assets" and move it to equities, even though I realize that 23 is not that low by historical standards. Nor have I sold the equities I currently hold as it's gone up to the 30s. Where I think I might be making a "mistake" under Homer's view is that I've cut back pretty dramatically on the amount of equities in my new contributions to my 401k, not just because I think equities are overvalued at 30+, but because the potential upside seems a lot smaller than the potential downside. I admit that if I really thought that, logically, I should sell some or all of my current holdings. However, I won't do that.

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Re: You Can Market Time At Valuation Extremes

Post by Random Walker » Sun Feb 17, 2019 11:10 am

gmaynardkrebs wrote:
Sun Feb 17, 2019 10:58 am
, not just because I think equities are overvalued at 30+, but because the potential upside seems a lot smaller than the potential downside.
When thinking about valuations, it’s important to appreciate that not only does the mean expected return shift, the whole potential distribution of returns shifts. When valuations are high the potential good outcomes are less good and the potential bad outcomes are more bad: whole distribution shifts left.

Dave

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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sun Feb 17, 2019 11:13 am

revhappy wrote:
Sun Feb 17, 2019 2:37 am
Now earnings are expected to fall, due to fading tax cut effect, global slowdown related to trade war uncertainty or in general high rates now compared to few years ago. So earnings falling is a given. Hence S&P 500 should fall if it has to stay at the same valuation. If not it becomes even more overvalued.
Earnings falling is never a given. I'm not saying you're wrong, or that it won't happen.

But nothing in economics is a given.
In my opinion, when you know markets are overvalued, it is okay to miss the next 30% returns, especially now that we know this is the longest cycle and recession can happen anytime now and rates are only going up. Bogle himself said next decade will have poor returns. So over the next decade we could have +30% followed by -80%.
People said the markets were overvalued 5 years ago. People said rates are only going up 5 years ago. Plenty of stuff was going on in the world that made it "certain" that things were going to go poorly. Greek debt crisis, U.S. government shutdown and downgrade on the debt, Brexit, etc.
I am okay with missing the +30 as well as the -80.
No one can predict the future. What if it's a +120% followed by a -40%?

(An 80% drop is quite a bold prediction, by the way.)
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Re: You Can Market Time At Valuation Extremes

Post by revhappy » Sun Feb 17, 2019 11:33 am

HomerJ wrote:
Sun Feb 17, 2019 11:13 am
revhappy wrote:
Sun Feb 17, 2019 2:37 am
Now earnings are expected to fall, due to fading tax cut effect, global slowdown related to trade war uncertainty or in general high rates now compared to few years ago. So earnings falling is a given. Hence S&P 500 should fall if it has to stay at the same valuation. If not it becomes even more overvalued.
Earnings falling is never a given. I'm not saying you're wrong, or that it won't happen.

But nothing in economics is a given.
In my opinion, when you know markets are overvalued, it is okay to miss the next 30% returns, especially now that we know this is the longest cycle and recession can happen anytime now and rates are only going up. Bogle himself said next decade will have poor returns. So over the next decade we could have +30% followed by -80%.
People said the markets were overvalued 5 years ago. People said rates are only going up 5 years ago. Plenty of stuff was going on in the world that made it "certain" that things were going to go poorly. Greek debt crisis, U.S. government shutdown and downgrade on the debt, Brexit, etc.
I am okay with missing the +30 as well as the -80.
No one can predict the future. What if it's a +120% followed by a -40%?

(An 80% drop is quite a bold prediction, by the way.)
Which is more devastating? Losing money or not making money. Lets say my networth is 600k, which it is btw, if I invest in fixed income, yeah, I wont beat inflation, but if I am able to save at a higher rate, like 50% instead of 20% and I am able to add another 400k to my savings and in another 10 years my networth becomes 1m and I stay frugal, I will get by. If I invest in equities and for some reason markets dont behave like in the past i.e. over a 10 year period instead of 600 + 400 k, I end up with 800k and if markets are really good I end up with like 1.5M. I think I will take the 1M and wouldnt want to risk losing 200k to make another 500k.

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Re: You Can Market Time At Valuation Extremes

Post by marcopolo » Sun Feb 17, 2019 11:38 am

gmaynardkrebs wrote:
Sun Feb 17, 2019 10:58 am
marcopolo wrote:
Sun Feb 17, 2019 10:19 am
I think you are missing HomerJ's point that the peaks and trough that you think are so telling are only that way in hindsight. Much harder to decipher, and act upon correctly, in real time. You mention the drop in 2008-2011. Even at it's lowest, it only got down to around 15, not particularly low by historical standards. By late 2010, early 2011, it was up in the 23 range, higher than the level prior to the 1937 crash, the 70s bear, or black Monday. How would that signal to keep buying? It only looks like a great buying opportunity in retrospect. Same with the 1996 example HomerJ gave.
Marcopolo, thanks for the reply. To be honest, I'm not sure whether I disagree with Homer J's point, or more likely, just don't understand it. However, I can say that if CAPE dropped to 23 tomorrow, I would definitely take 20% from my "safe assets" and move it to equities, even though I realize that 23 is not that low by historical standards. Nor have I sold the equities I currently hold as it's gone up to the 30s. Where I think I might be making a "mistake" under Homer's view is that I've cut back pretty dramatically on the amount of equities in my new contributions to my 401k, not just because I think equities are overvalued at 30+, but because the potential upside seems a lot smaller than the potential downside. I admit that if I really thought that, logically, I should sell some or all of my current holdings. However, I won't do that.

That is probably a perfectly reasonable and moderated response to valuations rising and falling.

The reason I am not making changes triggered by CAPE is because i don't feel like i know what the thresholds should be.
30 years ago, 23 would have been really high, and probably a "sell" signal. You are now saying it would be screaming "buy".
On the upper end, maybe 30+ should be a screaming "sell", but at the December lows, CAPE only got down to about 28ish, and maybe that was "buy" signal, who knows. So, with any quantitative way to determine it reliably (that i am aware of), I would be left to rely on my emotions, gut feel, or some other sentiment. I don't have enough faith in my own ability to make such decisions. So, for better or worse, I ignore CAPE, even at "extremes", and maintain my chosen AA, re-balancing as necessary.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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gmaynardkrebs
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Re: You Can Market Time At Valuation Extremes

Post by gmaynardkrebs » Sun Feb 17, 2019 11:40 am

HomerJ wrote:
Sun Feb 17, 2019 11:13 am

No one can predict the future. What if it's a +120% followed by a -40%?

(An 80% drop is quite a bold prediction, by the way.)
It's just hard for me to see how we get the big upsides you think are at least conceivable. Can you come up with a plausible scenario? A big spurt in earnings growth? Negative interest rates? Even more favorable tax treatment? A huge surge in GDP? An even higher ratio of corporate profits to GDP? The most likely upside surprise I see is "flight to safety," if the stocks markets crash ex-US. But that's a two-edged sword also.
Random Walker wrote:
Sun Feb 17, 2019 11:10 am

When thinking about valuations, it’s important to appreciate that not only does the mean expected return shift, the whole potential distribution of returns shifts. When valuations are high the potential good outcomes are less good and the potential bad outcomes are more bad: whole distribution shifts left.

Dave
Thank you for explaining that. Good point.

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sun Feb 17, 2019 1:07 pm

revhappy wrote:
Sun Feb 17, 2019 11:33 am
HomerJ wrote:
Sun Feb 17, 2019 11:13 am
revhappy wrote:
Sun Feb 17, 2019 2:37 am
Now earnings are expected to fall, due to fading tax cut effect, global slowdown related to trade war uncertainty or in general high rates now compared to few years ago. So earnings falling is a given. Hence S&P 500 should fall if it has to stay at the same valuation. If not it becomes even more overvalued.
Earnings falling is never a given. I'm not saying you're wrong, or that it won't happen.

But nothing in economics is a given.
In my opinion, when you know markets are overvalued, it is okay to miss the next 30% returns, especially now that we know this is the longest cycle and recession can happen anytime now and rates are only going up. Bogle himself said next decade will have poor returns. So over the next decade we could have +30% followed by -80%.
People said the markets were overvalued 5 years ago. People said rates are only going up 5 years ago. Plenty of stuff was going on in the world that made it "certain" that things were going to go poorly. Greek debt crisis, U.S. government shutdown and downgrade on the debt, Brexit, etc.
I am okay with missing the +30 as well as the -80.
No one can predict the future. What if it's a +120% followed by a -40%?

(An 80% drop is quite a bold prediction, by the way.)
Which is more devastating? Losing money or not making money. Lets say my networth is 600k, which it is btw, if I invest in fixed income, yeah, I wont beat inflation, but if I am able to save at a higher rate, like 50% instead of 20% and I am able to add another 400k to my savings and in another 10 years my networth becomes 1m and I stay frugal, I will get by. If I invest in equities and for some reason markets dont behave like in the past i.e. over a 10 year period instead of 600 + 400 k, I end up with 800k and if markets are really good I end up with like 1.5M. I think I will take the 1M and wouldnt want to risk losing 200k to make another 500k.
You are conflating two different topics.

The risk investing in stocks is never zero. Regardless of valuations or metrics, or any other indicators or predictions, one should invest according to your "need, willingness, and ability" to take risk.

For instance I'm 50/50 stocks/bonds about 5 years away from retirement. For the exact reasons you post above. Because losing money would be more devastating to me than not making money. I agree with you.

But I would be 50/50 regardless of what any chart shows or experts predict. I'm managing risk assuming it might show up. It doesn't matter if the chance is 1% or 10%. I've been around long enough to know there is no way for anyone to say "earnings falling is a given."

There is no given. No one knows enough to predict anything in economics. There are too many variables.
The J stands for Jay

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sun Feb 17, 2019 1:09 pm

marcopolo wrote:
Sun Feb 17, 2019 11:38 am
The reason I am not making changes triggered by CAPE is because i don't feel like i know what the thresholds should be.
30 years ago, 23 would have been really high, and probably a "sell" signal. You are now saying it would be screaming "buy".
On the upper end, maybe 30+ should be a screaming "sell", but at the December lows, CAPE only got down to about 28ish, and maybe that was "buy" signal, who knows. So, with any quantitative way to determine it reliably (that i am aware of), I would be left to rely on my emotions, gut feel, or some other sentiment. I don't have enough faith in my own ability to make such decisions. So, for better or worse, I ignore CAPE, even at "extremes", and maintain my chosen AA, re-balancing as necessary.
This. Great post.
The J stands for Jay

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HomerJ
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Re: You Can Market Time At Valuation Extremes

Post by HomerJ » Sun Feb 17, 2019 1:24 pm

gmaynardkrebs wrote:
Sun Feb 17, 2019 11:40 am
HomerJ wrote:
Sun Feb 17, 2019 11:13 am

No one can predict the future. What if it's a +120% followed by a -40%?

(An 80% drop is quite a bold prediction, by the way.)
It's just hard for me to see how we get the big upsides you think are at least conceivable. Can you come up with a plausible scenario? A big spurt in earnings growth? Negative interest rates? Even more favorable tax treatment? A huge surge in GDP? An even higher ratio of corporate profits to GDP? The most likely upside surprise I see is "flight to safety," if the stocks markets crash ex-US. But that's a two-edged sword also.
I have no idea.

I'm pretty sure it was inconceivable in 1996 that the market would more than double from that point. Shiller himself, who invented CAPE, predicted 0% 10-year real return going forward from 1996. It appeared to be a terrible time to invest.

But the market hasn't been that low since. It was the CHEAPEST time to buy stocks in the past 23 years. Crazy I know.

As far a plausible reason for the markets to double from here? No idea. I'm making no predictions.

I'm prepared for the market to crash 50% and stay down for 5-10 years starting tomorrow.

Because it might.

But that's ALWAYS true. So nothing has changed for me in the past few years.
The J stands for Jay

mariezzz
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Re: You Can Market Time At Valuation Extremes

Post by mariezzz » Sun Feb 17, 2019 1:29 pm

gmaynardkrebs wrote:
Sun Feb 17, 2019 8:32 am
mariezzz wrote:
Sun Feb 17, 2019 12:45 am
Somewhere on bogleheads is an old thread which mentioned that missing just a few of the top earnings days a year would massively affect your personal earnings ... if you try to market time, you likely miss those days, was part of the discussion.
Except that over whatever period of time you are out, wouldn't you miss all the down days as well?
The points made in the thread indicated that the logic you seem to be following was wrong. (You could just stay out of the market all together if your ultimate goal was to miss the best & worst days in the market.)

The arguments presented in the thread I referred to was that long term, you're better off getting in & staying in ... and weathering the ups &, downs, all of them - in other words, market timing doesn't work as a strategy long-term. That's the entire premise of this forum, in case that wasn't apparent.

You seem to think it can work, from other responses here.

(But there's a lot of research that suggests a subset of people are more strongly influenced by their wins (when they tried to market time & it seemed to work) than by their losses (when it didn't work). This is the same mechanism which tends to drive gamblers across the board. This unequal assessment of outcomes lead some to believe (based on anecdotal evidence) that it can work.)

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Re: You Can Market Time At Valuation Extremes

Post by mariezzz » Sun Feb 17, 2019 1:34 pm

Random Walker wrote:
Sun Jul 01, 2018 3:41 pm
Can’t time a market, but I do believe one can somewhat judiciously and opportunistically time their glidepath to the retirement portfolio. This is why I somewhat disagree with Target Date Funds. They only account for our age in determining glidepath. Why not account for other variables than just age when moving towards the retirement AA. I think it’s also beneficial to account for past returns, current valuations, future expected returns, changing ability willingness need when moving to the retirement AA. This likely results in more of a stepwise transition to the retirement AA than a smooth glide. If the market has been more generous than expected, net worth greater than expected, and future expected returns less, why not take more than a measles 1-2% in a given year if approaching retirement?

Dave
It's unfortunate that Target Date funds took that approach. They really should have called themselves "Target Asset Allocation" funds. (But that may have made it too transparent that you really don't need a 'target date fund' at all. Although they do the work of rebalancing for you, the benefits of rebalancing are grossly overstated. The most obvious benefit is that it keeps your portfolio within your own risk tolerance.)

Despite the name, anyone who does just a bit of research quickly learns to ignore the 'date', and look at the asset allocation, to be sure it matches your own target asset allocation.

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