If Valuation doesn't matter, what does?

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Da5id
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Harry Livermore wrote: Wed May 11, 2022 7:17 am I hope some of the bickering settles down, and I hope the OP posts results 5-10 years from now so we can see if one strategy performs better than the other in the medium term.
If you've read through the thread, what would you say OPs strategy is?
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Harry Livermore
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Re: If Valuation doesn't matter, what does?

Post by Harry Livermore »

Da5id wrote: Wed May 11, 2022 7:29 am
Harry Livermore wrote: Wed May 11, 2022 7:17 am I hope some of the bickering settles down, and I hope the OP posts results 5-10 years from now so we can see if one strategy performs better than the other in the medium term.
If you've read through the thread, what would you say OPs strategy is?
I skimmed the thread, and the OP seems cagey about what his exact strategy and method is. But he seems to have some formula that signals when the market as a whole is "overvalued", at which time he lightens up on equities. Similarly, when the market is "undervalued", he increases.
But the actual mechanism is shrouded in mystery... lol...
I am happy to divulge my strategy. I operate under the assumption that I have no idea, so stay invested an an AA that lets me sleep well. I do nobble at the edges by buying individual equities when they seem undervalued. But I have come to the conclusion that the alpha I seem to generate by this, and the amounts I'm willing to put at risk, are both so small that it does not move my needle very much. So it remains "fun money" or "hobbyist" for me.
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Da5id
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Harry Livermore wrote: Wed May 11, 2022 8:56 am
Da5id wrote: Wed May 11, 2022 7:29 am
Harry Livermore wrote: Wed May 11, 2022 7:17 am I hope some of the bickering settles down, and I hope the OP posts results 5-10 years from now so we can see if one strategy performs better than the other in the medium term.
If you've read through the thread, what would you say OPs strategy is?
I skimmed the thread, and the OP seems cagey about what his exact strategy and method is. But he seems to have some formula that signals when the market as a whole is "overvalued", at which time he lightens up on equities. Similarly, when the market is "undervalued", he increases.
But the actual mechanism is shrouded in mystery... lol...
That is my take too. And the lack of any explicit strategy is my objection to your idea of seeing if "one strategy performs better than the other". Allusions to secret strategies claimed to provide market beating returns (or risk adjusted returns) seem to me to be pretty useless as points of discussion.
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Harry Livermore
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Re: If Valuation doesn't matter, what does?

Post by Harry Livermore »

Da5id wrote: Wed May 11, 2022 9:04 am
Harry Livermore wrote: Wed May 11, 2022 8:56 am
Da5id wrote: Wed May 11, 2022 7:29 am
Harry Livermore wrote: Wed May 11, 2022 7:17 am I hope some of the bickering settles down, and I hope the OP posts results 5-10 years from now so we can see if one strategy performs better than the other in the medium term.
If you've read through the thread, what would you say OPs strategy is?
I skimmed the thread, and the OP seems cagey about what his exact strategy and method is. But he seems to have some formula that signals when the market as a whole is "overvalued", at which time he lightens up on equities. Similarly, when the market is "undervalued", he increases.
But the actual mechanism is shrouded in mystery... lol...
That is my take too. And the lack of any explicit strategy is my objection to your idea of seeing if "one strategy performs better than the other". Allusions to secret strategies claimed to provide market beating returns (or risk adjusted returns) seem to me to be pretty useless as points of discussion.
Haha, good point. I had not considered that. Well, at the very least, it's always amusing to read "debate threads" like this... even though I just skimmed...
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Harry Livermore wrote: Wed May 11, 2022 9:05 am
Da5id wrote: Wed May 11, 2022 9:04 am
Harry Livermore wrote: Wed May 11, 2022 8:56 am
Da5id wrote: Wed May 11, 2022 7:29 am
Harry Livermore wrote: Wed May 11, 2022 7:17 am I hope some of the bickering settles down, and I hope the OP posts results 5-10 years from now so we can see if one strategy performs better than the other in the medium term.
If you've read through the thread, what would you say OPs strategy is?
I skimmed the thread, and the OP seems cagey about what his exact strategy and method is. But he seems to have some formula that signals when the market as a whole is "overvalued", at which time he lightens up on equities. Similarly, when the market is "undervalued", he increases.
But the actual mechanism is shrouded in mystery... lol...
That is my take too. And the lack of any explicit strategy is my objection to your idea of seeing if "one strategy performs better than the other". Allusions to secret strategies claimed to provide market beating returns (or risk adjusted returns) seem to me to be pretty useless as points of discussion.
Haha, good point. I had not considered that. Well, at the very least, it's always amusing to read "debate threads" like this... even though I just skimmed...
Cheers
Nice to meet you, Harry Livermore....,

I think you summed up my strategy perfectly. I learned it from my 4th grade teacher who always beat into us to "keep our thinking caps on"... :happy

And I think the source of the "bickering" you mention is that the Boglehead philosophy is somewhat in conflict with that idea.

For some, the BH way is easy to follow....and most of the time, its as good as any strategy.....

But when we hit extreme moments in either the bond or equity markets, the BH way tells us to march right off the cliff despite the neon flashing signs telling us to stop and think, for just a moment....

Now for those not paying attention, this is what it is..., But for anyone reading a thread discussing valuations, I suspect this becomes very difficult to swallow from time to time...

As far as my "mechanism", I have shared that my default position is Buy-n-Hold... I only deviate when valuations hit extremes. And just as BH's accept their fate of riding off the cliff from time to time...., I accept my fate of sitting on the sidelines from time to time...

And as long as eyes are wide open, either way can eventually work.... as long as one is not being sold as "the only way..."

PS I will make it a point to update this forum as I make significant moves.... The stronger the ridicule I get at the time I change, the more confident I will be that I'm on the right track.... And I will also make a bet that by the time I make one of these moves, you will have also already (secretly) thought you should be doing the same thing...

Good luck to you....
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Harry Livermore
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Re: If Valuation doesn't matter, what does?

Post by Harry Livermore »

I edited your quote a bit for brevity, apologies...
CraigTester wrote: Wed May 11, 2022 1:34 pm
Nice to meet you, Harry Livermore....,

I think you summed up my strategy perfectly...

my default position is Buy-n-Hold... I only deviate when valuations hit extremes. And just as BH's accept their fate of riding off the cliff from time to time...., I accept my fate of sitting on the sidelines from time to time...
As a believer in valuation, and as a value investor when I buy individual stocks, I align with you on all these counts, except I never sit at the sidelines. I have changed my AA as I've gotten older though.
I am happy that you plan to update the group. Sometimes these threads go on for many pages, peter out, and important lessons never result.
Many thanks for starting the thread, and resultant conversation.
Cheers
InvestInPasta
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Re: If Valuation doesn't matter, what does?

Post by InvestInPasta »

Da5id wrote: Wed May 11, 2022 6:40 am As to bonds, people have been saying they were overpriced for quite a few years. The problem with that, to the extent that it is true, is when to get out and when to get back in. Which is the problem with all timing. I'm assuming, since you owned bonds, your long term investment plan says they have a place in your portfolio rather than cash. Have you gone back into bonds yet? If not, under exactly what circumstances would you choose to do that? Does your investing plan say, or do you make these timing calls when it "feels" right? And how accurate do you think these feelings are?
Yes I'm going back now into bonds, they might lose even more, I don't know I can not predict the future, anyway I know their expected nominal return to maturity now is not zero (or less than 1.5% per year over the next 10 years).
Da5id wrote: Wed May 11, 2022 6:40 am Overpriced markets are clearly a risk. Rather than timing, one can to a degree mitigate this problem by owning a diversified portfolio. So if S&P 500 CAPE10 gets high due to speculative/multiple appreciation, some of the gain is balanced to international stocks and to bonds. Or one can sell US stocks when one "feels" the market is overpriced and get back in when one "feels" it is again reasonable. That approach clearly is problematic as people have been saying the US market is overpriced for a very long time. Some who do that approach wait for a crash that may never come -- maybe share price growth will just be slowed, or earnings will rise to match the gaudy valuations.

Anyway, good luck with your market timing if that is the route you feel you should go with. The beauty of managing one's own investment portfolio is we each get to make these calls, and are only accountable to ourselves. Maybe you will be lucky with it.
I never said I will time the market.
But I still think equity valuations matter, like they matter for bonds.
The problem is that it's impossible or too hard to value equity correctly. Thus I can not act on equity valuations changes.
When I study English I am lazier than my portfolio. Feel free to fix my English and investing mistakes.
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

InvestInPasta wrote: Thu May 12, 2022 5:14 pm But I still think equity valuations matter, like they matter for bonds.
The problem is that it's impossible or too hard to value equity correctly. Thus I can not act on equity valuations changes.
Kind of a distinction without a difference.

When I say they don't matter, it's because, so far, they can't easily be used to time the market.

You say they do matter, but they can't easily be used to time the market.

So we agree?? :confused
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InvestInPasta
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Re: If Valuation doesn't matter, what does?

Post by InvestInPasta »

HomerJ wrote: Thu May 12, 2022 6:19 pm
InvestInPasta wrote: Thu May 12, 2022 5:14 pm But I still think equity valuations matter, like they matter for bonds.
The problem is that it's impossible or too hard to value equity correctly. Thus I can not act on equity valuations changes.
Kind of a distinction without a difference.

When I say they don't matter, it's because, so far, they can't easily be used to time the market.

You say they do matter, but they can't easily be used to time the market.

So we agree?? :confused
Yes we do agree for the equity.
But bonds are easy to value, investors can know what they can reasonably expect and act accordingly. If bonds value reaches an extreme (i.e. yield to maturity zero or negative) I'll get out and sit in cash, and it doesn't matter if the bond price will still go up, I'm not investing in stuff where the only possible future return could only come from being able to sell it to someone at an higher price than the price I paid for it.
When I study English I am lazier than my portfolio. Feel free to fix my English and investing mistakes.
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

InvestInPasta wrote: Fri May 13, 2022 3:44 am
HomerJ wrote: Thu May 12, 2022 6:19 pm
InvestInPasta wrote: Thu May 12, 2022 5:14 pm But I still think equity valuations matter, like they matter for bonds.
The problem is that it's impossible or too hard to value equity correctly. Thus I can not act on equity valuations changes.
Kind of a distinction without a difference.

When I say they don't matter, it's because, so far, they can't easily be used to time the market.

You say they do matter, but they can't easily be used to time the market.

So we agree?? :confused
Yes we do agree for the equity.
But bonds are easy to value, investors can know what they can reasonably expect and act accordingly. If bonds value reaches an extreme (i.e. yield to maturity zero or negative) I'll get out and sit in cash, and it doesn't matter if the bond price will still go up, I'm not investing in stuff where the only possible future return could only come from being able to sell it to someone at an higher price than the price I paid for it.
Equity is actually easy to value, also..... At least in the aggregate.

But perhaps because there isn't a pre-defined "term", equities are more susceptible to the "greater fool theory"...

By example, if you buy a 10-year treasury yielding 3%, and hold it for 10 years, you will earn a 3% CAGR....But along the way, if the prevailing interest rate goes up or down, the price another investor will mathmatically pay for your bond could change dramatically. In other words, the bond market simply quantifies your "opportunity cost" of not waiting to buy at a different rate. It's actually very rationale with the only subjective variable being that people make different guesses at future interest rates within the term of your bond.

It "should" work similarly with equities.

By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".

But along the way, all sorts of craziness happens. (e.g. Tulip bulbs become magical, Dot.com stocks change everything, Gov't intervention, etc)....But eventually, despite all the casino behavior, SP500 earnings (in aggregate) appreciate at around 6.5% per year.

So whether you buy the SP500 when priced at 40x earnings or 5x earnings, (versus the historical median of 15x earnings), the market will continuously quantify the opportunity cost of not waiting to buy at a different time...

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....

I personally believe Bogle understood all this better than anyone, but its just too difficult to explain in a sound byte..... So he opted for the saying, "nobody knows nuttin".... So shut your eyes and if you just keep peppering dollars into the market at all sorts of different prices, it will ultimately work out good enough....

And as an occasional (bond and equity) market timer, I think his way is best 95% of the time....
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

CraigTester wrote: Fri May 13, 2022 12:20 pm
So whether you buy the SP500 when priced at 40x earnings or 5x earnings, (versus the historical median of 15x earnings), the market will continuously quantify the opportunity cost of not waiting to buy at a different time...

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)
CraigTester,

That is only true if the person is 100% US stock.

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Last edited by KlangFool on Fri May 13, 2022 1:37 pm, edited 1 time in total.
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Re: If Valuation doesn't matter, what does?

Post by asif408 »

CraigTester wrote: Fri May 13, 2022 12:20 pm By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".....

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

asif408 wrote: Fri May 13, 2022 1:28 pm
CraigTester wrote: Fri May 13, 2022 12:20 pm By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".....

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

CraigTester wrote: Fri May 13, 2022 2:29 pm
asif408 wrote: Fri May 13, 2022 1:28 pm
CraigTester wrote: Fri May 13, 2022 12:20 pm By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".....

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
So, what was your point?

If someone is not 100% US stock and they are diversified with fixed percentage across US Stock, International Stock, and US Bond, they would have stop buying the US stock when the valuation is too high. This is built into the 3 funds portfolio. Why do you claim that the 3 funds portfolio does not take into account of US stock valuation?

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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

KlangFool wrote: Fri May 13, 2022 3:36 pm
CraigTester wrote: Fri May 13, 2022 2:29 pm
asif408 wrote: Fri May 13, 2022 1:28 pm
CraigTester wrote: Fri May 13, 2022 12:20 pm By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".....

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
So, what was your point?

If someone is not 100% US stock and they are diversified with fixed percentage across US Stock, International Stock, and US Bond, they would have stop buying the US stock when the valuation is too high. This is built into the 3 funds portfolio. Why do you claim that the 3 funds portfolio does not take into account of US stock valuation?

KlangFool
Klangfool. Perhaps I don’t understand your question, but as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.

And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
james22
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Re: If Valuation doesn't matter, what does?

Post by james22 »

What matters?

1. Valuation
2. Sentiment
3. Policy
4. Macro

To a varying degree at any time.
When people say things are different, 20 percent of the time they are right. John Templeton
KlangFool
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

CraigTester wrote: Sat May 14, 2022 7:03 am
KlangFool wrote: Fri May 13, 2022 3:36 pm
CraigTester wrote: Fri May 13, 2022 2:29 pm
asif408 wrote: Fri May 13, 2022 1:28 pm
CraigTester wrote: Fri May 13, 2022 12:20 pm By example, the historical earnings yield for the SP500 is around 6.5%.... Note that this is mathematically equivalent to 1/15, which is the inverse of the long term PE multiple. (e.g. PE1=15 and PE10=15).... This is not just a coincidence. And it is the reason that equity markets are ultimately "mean reverting".....

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
So, what was your point?

If someone is not 100% US stock and they are diversified with fixed percentage across US Stock, International Stock, and US Bond, they would have stop buying the US stock when the valuation is too high. This is built into the 3 funds portfolio. Why do you claim that the 3 funds portfolio does not take into account of US stock valuation?

KlangFool
Klangfool. Perhaps I don’t understand your question, but as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.

And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
CraigTester,

<< it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.>>

Only apply if someone is 100% stock.

For someone that has a normal 60/40 portfolio,

A) 40% of the portfolio is bond.

B) 60% stock portfolio has International stock.

C) The person would have use Total Stock Market Index fund instead of S&P 500.

So, where does the 50% of the portfolio in S&P 500 comes from?

And, when the S&P 500 valuation is crazy, the person would have been buying bond and International Stock. So, where is the problem?

When someone is using the 3 funds portfolio and maintain the allocation, the person would stop buying the US stock when the valuation is high relative to other asset classes. This is part of the beauty and magic of fixed percentage allocation.

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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

KlangFool wrote: Sat May 14, 2022 9:25 am
CraigTester wrote: Sat May 14, 2022 7:03 am
KlangFool wrote: Fri May 13, 2022 3:36 pm
CraigTester wrote: Fri May 13, 2022 2:29 pm
asif408 wrote: Fri May 13, 2022 1:28 pm
That would be true if your only option in stock investing is US stocks. Japan, the UK, Europe, and other developed markets, as well as the emerging markets, have CAPEs in the 15-20 range on average, and in the value realm of those markets they are less than 10. Taken the inverse of those CAPEs and it indicates foreign value stocks offer potentially double digit returns over the coming decade or two, and just plain old EAFE and EM stocks offer a 5-7% return, not great but not terrible either. So as long as you aren't the typical Boglehead heavily overweight in US stocks you should do fine.
Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
So, what was your point?

If someone is not 100% US stock and they are diversified with fixed percentage across US Stock, International Stock, and US Bond, they would have stop buying the US stock when the valuation is too high. This is built into the 3 funds portfolio. Why do you claim that the 3 funds portfolio does not take into account of US stock valuation?

KlangFool
Klangfool. Perhaps I don’t understand your question, but as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.

And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
CraigTester,

<< it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.>>

Only apply if someone is 100% stock.

For someone that has a normal 60/40 portfolio,

A) 40% of the portfolio is bond.

B) 60% stock portfolio has International stock.

C) The person would have use Total Stock Market Index fund instead of S&P 500.

So, where does the 50% of the portfolio in S&P 500 comes from?

And, when the S&P 500 valuation is crazy, the person would have been buying bond and International Stock. So, where is the problem?

When someone is using the 3 funds portfolio and maintain the allocation, the person would stop buying the US stock when the valuation is high relative to other asset classes. This is part of the beauty and magic of fixed percentage allocation.

KlangFool
The 3 fund portfolio works best when valuation distortions are “gentle”.

But problems arise when “anomalies” occur.

For instance, recently US bonds and US equities got significantly over-valued at the same time.

And at times, your chosen rebalancing frequency can cause you to catch a falling knife….or sell too early….

These are the times when a valuation-informed 3 fund portfolio is suddenly worth the extra effort….
KlangFool
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Re: If Valuation doesn't matter, what does?

Post by KlangFool »

CraigTester wrote: Sat May 14, 2022 11:12 am
KlangFool wrote: Sat May 14, 2022 9:25 am
CraigTester wrote: Sat May 14, 2022 7:03 am
KlangFool wrote: Fri May 13, 2022 3:36 pm
CraigTester wrote: Fri May 13, 2022 2:29 pm

Yes, the long-term Earnings Yield for EAFE and EM is 5.1% and 6.4% respectively .... and they are currently priced at their 44th and 45th percentile prices respectively.... So it would be quite reasonable to assume that despite their lost decade, if bought today and held long-term, you should do fine.... Certainly doesn't mean it won't be a bumpy ride, but if you just buy and shut your eyes for 10 or 20 years, your "expected value" should fall within these ranges....And who knows, if the casino psychology breaks out along the way of you holding these markets, you may get the opportunity to sell at crazy heights....
So, what was your point?

If someone is not 100% US stock and they are diversified with fixed percentage across US Stock, International Stock, and US Bond, they would have stop buying the US stock when the valuation is too high. This is built into the 3 funds portfolio. Why do you claim that the 3 funds portfolio does not take into account of US stock valuation?

KlangFool
Klangfool. Perhaps I don’t understand your question, but as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.

And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
CraigTester,

<< it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.>>

Only apply if someone is 100% stock.

For someone that has a normal 60/40 portfolio,

A) 40% of the portfolio is bond.

B) 60% stock portfolio has International stock.

C) The person would have use Total Stock Market Index fund instead of S&P 500.

So, where does the 50% of the portfolio in S&P 500 comes from?

And, when the S&P 500 valuation is crazy, the person would have been buying bond and International Stock. So, where is the problem?

When someone is using the 3 funds portfolio and maintain the allocation, the person would stop buying the US stock when the valuation is high relative to other asset classes. This is part of the beauty and magic of fixed percentage allocation.

KlangFool
The 3 fund portfolio works best when valuation distortions are “gentle”.

But problems arise when “anomalies” occur.

For instance, recently US bonds and US equities got significantly over-valued at the same time.
CraigTester,

Which still does not create a problem. And, you had admitted that International Stock is under-value at this moment. With the fixed percent allocation and rebalancing, the money would be diverted to the International Stock.

Back to you again.

What is the problem?

The 3 funds portfolio divert money to best value asset class at the moment. It is not perfect. But, it is much better than assuming we can predict the future.

KlangFool
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sat May 14, 2022 7:03 am as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.
Except we can't tell when we are in those moments until years AFTERWARDS. You've been completely out of the market since 2018.
And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
Except, so far, there is not mathematical risk with only 50% in the SP500. A temporary crash is not "mathematically" risky.

So far, the market has always come back, and gone on to new heights, and the 50% in fixed-income is enough to get you through the crash without having to sell any of the stocks while they are temporarily down.

Might that change in the future? Sure. But your "math" is based on past events, and past valuations, and so far, markets have recovered enough, and recovered strongly enough every time, that 50% in stocks is not that risky. It's very conservative.

And here's the thing... You forget about rebalancing on the way up. You got out of the market in 2018 at SP500 at 2700... I was at 50/50, and rebalanced on the way up, and locked in hundreds of thousands of dollars from rebalancing while the market gained 80% in 3 short years.

Sitting on the sidelines is risky. Your big mistake was going 0% SP500. That's risky too.

We don't fear market crashes, because the long-term return of the SP500, so far, has been 9%-10% nominal even when you INCLUDE the crashes.

Sure, if you could only invest when the market is going up, and get out when the market is about to crash, you'd get even more. But you have proven that this is hard.

You made a timing call in 2018, and it was wrong. You might get another chance to buy back if the market drops below 2700, but it might not. And really, it's going to have to be a lot below 2700 for the move to pay off, to make up for the large gains you could have banked in the run-up.

So you are taking risk too.

We prepare for the risk certainty of a market crash in retirement by having enough in fixed-income to cover short-term needs, and wait for the market to recover.

So far, this has worked in the past.

Market-timing and trying to get out of the market based on valuations, so far, has not worked very well in the past.

Does this make sense to you? Do you understand the reasoning behind the Boglehead strategy?
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Topic Author
CraigTester
Posts: 355
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sat May 14, 2022 11:39 am
CraigTester wrote: Sat May 14, 2022 7:03 am as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.
Except we can't tell when we are in those moments until years AFTERWARDS. You've been completely out of the market since 2018.
And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
Except, so far, there is not mathematical risk with only 50% in the SP500. A temporary crash is not "mathematically" risky.

So far, the market has always come back, and gone on to new heights, and the 50% in fixed-income is enough to get you through the crash without having to sell any of the stocks while they are temporarily down.

Might that change in the future? Sure. But your "math" is based on past events, and past valuations, and so far, markets have recovered enough, and recovered strongly enough every time, that 50% in stocks is not that risky. It's very conservative.

And here's the thing... You forget about rebalancing on the way up. You got out of the market in 2018 at SP500 at 2700... I was at 50/50, and rebalanced on the way up, and locked in hundreds of thousands of dollars from rebalancing while the market gained 80% in 3 short years.

Sitting on the sidelines is risky. Your big mistake was going 0% SP500. That's risky too.

We don't fear market crashes, because the long-term return of the SP500, so far, has been 9%-10% nominal even when you INCLUDE the crashes.

Sure, if you could only invest when the market is going up, and get out when the market is about to crash, you'd get even more. But you have proven that this is hard.

You made a timing call in 2018, and it was wrong. You might get another chance to buy back if the market drops below 2700, but it might not. And really, it's going to have to be a lot below 2700 for the move to pay off, to make up for the large gains you could have banked in the run-up.

So you are taking risk too.

We prepare for the risk certainty of a market crash in retirement by having enough in fixed-income to cover short-term needs, and wait for the market to recover.

So far, this has worked in the past.

Market-timing and trying to get out of the market based on valuations, so far, has not worked very well in the past.

Does this make sense to you? Do you understand the reasoning behind the Boglehead strategy?
Homer - Let's do some level-setting.

An 18% fall from yesterday's SP500 price would match my 2018 sell price (inf. adj).
I have been safely earning 3.5% per year interest since that time.

So congrats, despite your falling behind in 2020, you're currently a little ahead....

But,

Despite falling 17% since Nov 2021, SP500 valuation is still at its 96th percentile.

The following are examples of what happened historically when reaching similar valuation levels:

From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%

The Fed is raising rates.
Inflation = 8.4%
$6.1T in pandemic stimulus is ending
Your balanced portfolio is losing money in both SP500 AND BND.

Your rules won't allow you to move to the sidelines.

So to answer your question, "yes", I believe I understand your strategy perfectly.
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tadamsmar
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Re: If Valuation doesn't matter, what does?

Post by tadamsmar »

CraigTester wrote: Wed Jan 05, 2022 11:07 am
Copernicus wrote: Wed Jan 05, 2022 10:32 am Valuation matters, but it is a poor tool to time investing decisions.
I'm trying really hard to not start another market timing debate...,

But rather am trying to understand why someone out there apparently believes that $1 of SP500 earnings is worth $40 today, where the same dollar of earnings was only worth $15 in 2009.

What is causing so many people to reach this new consensus at the same time?

Who is "deciding" this for the rest of us...? And what are they basing this decision on?

Why doesn't everyone just refuse to pay 3X more today than they were in 2009?

Or more broadly, why are they willing to pay more than just about any other time in history for that same $1 of SP500 earnings?
Your premise is somewhat wrong. Bogleheads like me who rebalance into a bond allocation actually end up doing net selling when the overall market valuation going up at a high rate. So we are not willing pay, we are willing to sell to those who are willing to pay.

You are confusing Bogleheads with the people who are willing to pay when valuations are high!
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sat May 14, 2022 1:19 pm I have been safely earning 3.5% per year interest since that time.
If CDs and stable value funds, I have them too. So my 50% in fixed-income has the same returns as you since 2018. While my 50% in market is way higher than you... And I sold stocks as they were going to up to rebalance to 50/50, so I locked in a lot of those gains and won't be giving them back.
Despite falling 17% since Nov 2021, SP500 valuation is still at its 96th percentile.

The following are examples of what happened historically when reaching similar valuation levels:

From 2000-2009 SP500 fell 50%
Except SP500 valuation hit 96% percentile in 1996, long before 2000, and you included TWO crashes in the 2000-2009 time-frame.

1996-2002 SP500 still gained 7% a year even at the bottom of the predicted crash because the market went UP over 120% before crashing 40%.
1996-2006 SP500 gained 9% a year.
1996- March 2009 SP500 gained 4% a year. Even after two crashes.
1996-today SP500 gained 9% a year (historical long-term average even starting from a 96th+ percentile valuations level in 1996)

Also, another example of valuations reaching 96% percentile
2018-today SP500 gained 12% a year (that's YTD, so that's even after the correction we've had so far)

So your thesis that high valuations always predict short-term crashes and/or losses is false. We have examples that counter that theory.

And, in the long-run, so far, in U.S. history, there are ZERO long-term (20 years) losses in the stock market even starting from the highest valuations.

Heck, 2000-today has returned almost 7% a year.

Investing in the highest valuations in U.S. history in 2000 still returned almost 7% a year over the long run. Read that again, and think about it.

So that's why we think valuations don't matter for long-term investing. Will this pattern hold? No idea... But you proclaim that the PAST shows valuations are valuable market-timing tools, and that valuations have mattered in the past.

But they haven't. Ignoring valuations since the theory was formulated in 1988 has been the right move and has made people MORE money than making moves based on valuations. As of today.

You may be right in the future... You're not right about the past.
Last edited by HomerJ on Sat May 14, 2022 3:03 pm, edited 1 time in total.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
marcopolo
Posts: 6059
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Re: If Valuation doesn't matter, what does?

Post by marcopolo »

CraigTester wrote: Sat May 14, 2022 1:19 pm
HomerJ wrote: Sat May 14, 2022 11:39 am
CraigTester wrote: Sat May 14, 2022 7:03 am as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.
Except we can't tell when we are in those moments until years AFTERWARDS. You've been completely out of the market since 2018.
And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
Except, so far, there is not mathematical risk with only 50% in the SP500. A temporary crash is not "mathematically" risky.

So far, the market has always come back, and gone on to new heights, and the 50% in fixed-income is enough to get you through the crash without having to sell any of the stocks while they are temporarily down.

Might that change in the future? Sure. But your "math" is based on past events, and past valuations, and so far, markets have recovered enough, and recovered strongly enough every time, that 50% in stocks is not that risky. It's very conservative.

And here's the thing... You forget about rebalancing on the way up. You got out of the market in 2018 at SP500 at 2700... I was at 50/50, and rebalanced on the way up, and locked in hundreds of thousands of dollars from rebalancing while the market gained 80% in 3 short years.

Sitting on the sidelines is risky. Your big mistake was going 0% SP500. That's risky too.

We don't fear market crashes, because the long-term return of the SP500, so far, has been 9%-10% nominal even when you INCLUDE the crashes.

Sure, if you could only invest when the market is going up, and get out when the market is about to crash, you'd get even more. But you have proven that this is hard.

You made a timing call in 2018, and it was wrong. You might get another chance to buy back if the market drops below 2700, but it might not. And really, it's going to have to be a lot below 2700 for the move to pay off, to make up for the large gains you could have banked in the run-up.

So you are taking risk too.

We prepare for the risk certainty of a market crash in retirement by having enough in fixed-income to cover short-term needs, and wait for the market to recover.

So far, this has worked in the past.

Market-timing and trying to get out of the market based on valuations, so far, has not worked very well in the past.

Does this make sense to you? Do you understand the reasoning behind the Boglehead strategy?
Homer - Let's do some level-setting.

An 18% fall from yesterday's SP500 price would match my 2018 sell price (inf. adj).
I have been safely earning 3.5% per year interest since that time.

So congrats, despite your falling behind in 2020, you're currently a little ahead....

But,

Despite falling 17% since Nov 2021, SP500 valuation is still at its 96th percentile.

The following are examples of what happened historically when reaching similar valuation levels:

From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%

The Fed is raising rates.
Inflation = 8.4%
$6.1T in pandemic stimulus is ending
Your balanced portfolio is losing money in both SP500 AND BND.

Your rules won't allow you to move to the sidelines.

So to answer your question, "yes", I believe I understand your strategy perfectly.
Where can you go to buy back in at inflation adjusted prices?!?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

marcopolo wrote: Sat May 14, 2022 3:03 pm
CraigTester wrote: Sat May 14, 2022 1:19 pm An 18% fall from yesterday's SP500 price would match my 2018 sell price (inf. adj).
Where can you go to buy back in at inflation adjusted prices?!?
Yeah that is junk. ALL money has fallen by the same amount inflation-wise.

So you don't get to adjust for inflation for buying back in (except new money), because the money you pulled out in 2018 waiting for the market to crash has also decreased by the same inflation amount.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sat May 14, 2022 1:19 pm From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%
Also, it's obvious none of those included dividends (and dividends in the far past were in the 5%-6% a year range)

Even going from August 2000 to March 2009, from the absolute peak to the absolute bottom, one was only down 30% (over 9 years that stinks, but it wasn't 50%).

And from January 2000 to December 2009, one was basically even (i.e. the lost decade). So a few months make a huge difference.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
Topic Author
CraigTester
Posts: 355
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sat May 14, 2022 2:48 pm
CraigTester wrote: Sat May 14, 2022 1:19 pm I have been safely earning 3.5% per year interest since that time.
If CDs and stable value funds, I have them too. So my 50% in fixed-income has the same returns as you since 2018. While my 50% in market is way higher than you... And I sold stocks as they were going to up to rebalance to 50/50, so I locked in a lot of those gains and won't be giving them back.
Despite falling 17% since Nov 2021, SP500 valuation is still at its 96th percentile.

The following are examples of what happened historically when reaching similar valuation levels:

From 2000-2009 SP500 fell 50%
Except SP500 valuation hit 96% percentile in 1996, long before 2000, and you included TWO crashes in the 2000-2009 time-frame.

1996-2002 SP500 still gained 7% a year even at the bottom of the predicted crash because the market went UP over 120% before crashing 40%.
1996-2006 SP500 gained 9% a year.
1996-2009 SP500 gained 6% a year. Even after two crashes.
1996-today SP500 gained 9% a year (historical long-term average even starting from a 96th+ percentile valuations level in 1996)

Also, another example of valuations reaching 96% percentile
2018-today SP500 gained 12% a year (that's YTD, so that's even after the correction we've had so far)

So your thesis that high valuations always predict short-term crashes and/or losses is false. We have examples that counter that theory.

And, in the long-run, so far, in U.S. history, there are ZERO long-term (20 years) losses in the stock market even starting from the highest valuations.

Heck, 2000-today has returned almost 7% a year.

Investing in the highest valuations in U.S. history in 2000 still returned almost 7% a year over the long run. Read that again, and think about it.

So that's why we think valuations don't matter for long-term investing. Will this pattern hold? No idea... But you proclaim that the PAST shows valuations are valuable market-timing tools, and that valuations have mattered in the past.

But they haven't. Ignoring valuations since the theory was formulated in 1988 has been the right move and has made people MORE money than making moves based on valuations. As of today.

You may be right in the future... You're not right about the past.
Homer -

If you're happy driving at high speeds around wet mountain roads, that's great.... But just don't rationalize the decision by saying you saw some other guy do it and get away with it... (at least so far).... and don't forget to tell about the enormous crashes he found himself in along the way...

As for 1996, (remember, I got out in 1998), 7% treasuries out-performed all your examples and didn't require having to ride through two crashes...

As for rebalancing:

- Remember that Bengen's research found the optimal rebalancing frequency to be 6 years.
- Remember that if you are selling off your gains every time they reach some 5% band, you can't then claim you rec'd the full CAGR the market went on to generate.
- Remember that even if you sell off your gains, you still have 50% of your portfolio exposed to a market valued at the 96th percentile.
- Remember if you're losing money in "BOTH" SP500 and BND, rebalancing really doesn't do much for you.

As for your claim that we've never having had a 20 year period where the SP500 was underwater, we've actually had two:

20 yrs. May 1901-Aug 1921.
20 yrs. Aug 1929–May 1949
15 yrs. Nov 1968-Mar 1983
13 yrs. Mar 2000- Jan 2013

Granted the last two, didn't require a full 20 years to recover, but holding one's breath for over a decade, is a long time in my book....
Topic Author
CraigTester
Posts: 355
Joined: Wed Aug 08, 2018 6:34 am

Re: If Valuation doesn't matter, what does?

Post by CraigTester »

marcopolo wrote: Sat May 14, 2022 3:03 pm
CraigTester wrote: Sat May 14, 2022 1:19 pm
HomerJ wrote: Sat May 14, 2022 11:39 am
CraigTester wrote: Sat May 14, 2022 7:03 am as I said above, I believe a rigid 3-fund type portfolio is a great strategy 95% of the time.

I only deviate when valuations force a decision to either walk off the cliff or sit on the sidelines. I wish the market never reached these moments, but unfortunately it does sometimes.
Except we can't tell when we are in those moments until years AFTERWARDS. You've been completely out of the market since 2018.
And yes, rebalancing can help automate these decisions on the edges, but it still leaves you holding say 50% of your portfolio in the SpP500 at moments when valuations make that decision very mathematically risky.
Except, so far, there is not mathematical risk with only 50% in the SP500. A temporary crash is not "mathematically" risky.

So far, the market has always come back, and gone on to new heights, and the 50% in fixed-income is enough to get you through the crash without having to sell any of the stocks while they are temporarily down.

Might that change in the future? Sure. But your "math" is based on past events, and past valuations, and so far, markets have recovered enough, and recovered strongly enough every time, that 50% in stocks is not that risky. It's very conservative.

And here's the thing... You forget about rebalancing on the way up. You got out of the market in 2018 at SP500 at 2700... I was at 50/50, and rebalanced on the way up, and locked in hundreds of thousands of dollars from rebalancing while the market gained 80% in 3 short years.

Sitting on the sidelines is risky. Your big mistake was going 0% SP500. That's risky too.

We don't fear market crashes, because the long-term return of the SP500, so far, has been 9%-10% nominal even when you INCLUDE the crashes.

Sure, if you could only invest when the market is going up, and get out when the market is about to crash, you'd get even more. But you have proven that this is hard.

You made a timing call in 2018, and it was wrong. You might get another chance to buy back if the market drops below 2700, but it might not. And really, it's going to have to be a lot below 2700 for the move to pay off, to make up for the large gains you could have banked in the run-up.

So you are taking risk too.

We prepare for the risk certainty of a market crash in retirement by having enough in fixed-income to cover short-term needs, and wait for the market to recover.

So far, this has worked in the past.

Market-timing and trying to get out of the market based on valuations, so far, has not worked very well in the past.

Does this make sense to you? Do you understand the reasoning behind the Boglehead strategy?
Homer - Let's do some level-setting.

An 18% fall from yesterday's SP500 price would match my 2018 sell price (inf. adj).
I have been safely earning 3.5% per year interest since that time.

So congrats, despite your falling behind in 2020, you're currently a little ahead....

But,

Despite falling 17% since Nov 2021, SP500 valuation is still at its 96th percentile.

The following are examples of what happened historically when reaching similar valuation levels:

From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%

The Fed is raising rates.
Inflation = 8.4%
$6.1T in pandemic stimulus is ending
Your balanced portfolio is losing money in both SP500 AND BND.

Your rules won't allow you to move to the sidelines.

So to answer your question, "yes", I believe I understand your strategy perfectly.
Where can you go to buy back in at inflation adjusted prices?!?
Remember, Inflation has only been an issue for the last year or so... 3.5% in 2018,19,20,21 was pretty nice to achieve with no risk.
Topic Author
CraigTester
Posts: 355
Joined: Wed Aug 08, 2018 6:34 am

Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sat May 14, 2022 3:15 pm
CraigTester wrote: Sat May 14, 2022 1:19 pm From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%
Also, it's obvious none of those included dividends (and dividends in the far past were in the 5%-6% a year range)

Tell that to the guy jumping out the window in the Great Depression....

But to be fair, if you reinvest dividends, here are the time frames for final break-even....

20 yrs. May 1901-Aug 1921.
20 yrs. Aug 1929–May 1949
15 yrs. Nov 1968-Mar 1983
13 yrs. Mar 2000- Jan 2013
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

CraigTester wrote: Sat May 14, 2022 3:49 pm
HomerJ wrote: Sat May 14, 2022 3:15 pm
CraigTester wrote: Sat May 14, 2022 1:19 pm From 1901-1920, SP500 fell 70%
From 1929-2032 SP500 fell 80%
From 1968-1982 SP500 fell 60%
From 2000-2009 SP500 fell 50%
Also, it's obvious none of those included dividends (and dividends in the far past were in the 5%-6% a year range)

Tell that to the guy jumping out the window in the Great Depression....

But to be fair, if you reinvest dividends, here are the time frames for final break-even....

20 yrs. May 1901-Aug 1921.
20 yrs. Aug 1929–May 1949
15 yrs. Nov 1968-Mar 1983
13 yrs. Mar 2000- Jan 2013
https://finance.zacks.com/dow-jones-dog ... -3390.html
The Dow Jones industrial average in 1929 did not maintain static membership. Some stocks were taken out of the average, and others were added. When the Dow reached its old peak 25 years later, it did so with different stocks than were in it during the crash. This means a comparison of Dow levels in 1929 and 25 years later is an apples-to-oranges comparison.

Individual Stocks
Some individual stocks recovered in four years, according to website Seeking Alpha. For example, Dow Chemical had recovered to the break-even point by 1933. Honeywell and 3M Recovered by 1936. The average time for stocks to recover was 12 years. While this certainly means some took longer, others took much less time.

Overall Market
Mark Hulbert, writing for "The New York Times," suggests that an investor could have fully recovered from the 1929 crash in four-and-one-half years. He bases his claim on the fact that deflation and inflation haven't been figured in to true stock values from the period, and the fact that dividends paid an average of 14 percent. In addition, he points out that the Dow is not the entire market, and that the broader market had some quick-recovery stocks in it.
That NY Times one is a bit disingenuous since the market crashed again in 1937.

But living through those periods doesn't really work out like you think.

We all here lived through 2000-2013, and there was ups and downs, and rebalancing definitely paid off. It recovered by 2006-2007 and then crashed again... it wasn't just one long 13 year down period.

And if you were accumulating during these periods, it's a completely different story. Investing each year in all those years made most of here very rich.

If you retired in 2000, yes it was a tough patch... But, of course, your money went up 120% from 1996-2000 so you probably had a lot more than you expected. Good thing none of us recommend 100% in stocks when retiring... so someone who decided to retire around that time would have been moving towards a more conservative allocation, and would have locked in those gains, and could have done well living off the bonds in 2000-2003, and then spending some stock money in 2004-2007, and then back to bonds, etc.

You really really FEAR the crash... I'm telling you don't have to be so scared. A good balanced conservative allocation gives you best of both worlds.

You get to experience some of the upside, and you're protected from the downside...

Moving from 0/100 to100/0 based on market-timing signals is far more risky than just holding a balanced portfolio.

Peace.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Beensabu
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Re: If Valuation doesn't matter, what does?

Post by Beensabu »

CraigTester wrote: Wed Jan 05, 2022 11:07 am Why doesn't everyone just refuse to pay 3X more today than they were in 2009?

Or more broadly, why are they willing to pay more than just about any other time in history for that same $1 of SP500 earnings?
Inflation? j/k, sort of

I mean, you can apply the same thing to real estate. Or anything you buy that you don't need right now for survival in this moment, really.

The fact of the matter is that when enough people are willing to overpay for stuff they need later, then the price stays up for everyone else who's not.

You will never change such a person's mind. If someone is willing to overpay, it's because they are able to overpay.

There's a tipping point where there are just enough fewer able to overpay and just enough more of those who are still able that are unwilling to do so.

One of the interesting bits when it comes to something like the stock market, is that some who are unwilling to overpay do so because they don't know they're overpaying (and sadly, some of those unknowing are actually unable as well - and they don't know that either).

When we get a drawdown significant enough to catch the attention of the unknowing, they start to suspect they've been overpaying. Even if just on an emotional level, that's enough to start a reset. And what should have been a normal "whatever" correction turns into something different. And that's why I think the stock market of the last couple decades has been so weird compared to earlier -- it's the target date funds and the whole "equity-heavy accumulation" line increasing the ranks of both the willing and the unknowing.

Sustained high prices for things we need later depend on the "able and willing" + "the unknowing".
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: If Valuation doesn't matter, what does?

Post by Nathan Drake »

To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
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Re: If Valuation doesn't matter, what does?

Post by marcopolo »

Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
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: If Valuation doesn't matter, what does?

Post by Nathan Drake »

marcopolo wrote: Sat May 14, 2022 9:23 pm
Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
I'm in the "unknown" camp certainly and don't agree with the OP's perspective on going all-in or all-out. But Homer also seems pretty certain that valuations don't matter, and that if there is a big correction that it's a safe bet that the market will still do close to its long term average in the fairly long horizon of the next 10-20 years or so. I'm simply dubious of that kind of certainty as well.
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JBTX
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Re: If Valuation doesn't matter, what does?

Post by JBTX »

Do valuations matter? Yes. There is a higher probability that future returns will be less than average. Is it actionable information that will allow you to market time? Probably not.
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
I will concede that the future may not resemble the past.

You may be 100% correct that the Fed will not repeat what they did in the past 26 years.

But you CANNOT say that the past was bad for buy and hold. It was very good even completely ignoring valuations.

Maybe valuations may matter going forward... But you cannot say valuations mattered since 1988. Maybe the Fed cheated... I don't know...

But the past is written... And ignoring valuations from 1988 didn't hurt... It may hurt going forward... you may be right.

But you don't get to lie about the past.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

marcopolo wrote: Sat May 14, 2022 9:23 pm
Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
Ding Ding Ding.
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HomerJ
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Re: If Valuation doesn't matter, what does?

Post by HomerJ »

Nathan Drake wrote: Sat May 14, 2022 9:34 pm
marcopolo wrote: Sat May 14, 2022 9:23 pm
Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
I'm in the "unknown" camp certainly and don't agree with the OP's perspective on going all-in or all-out. But Homer also seems pretty certain that valuations don't matter, and that if there is a big correction that it's a safe bet that the market will still do close to its long term average in the fairly long horizon of the next 10-20 years or so. I'm simply dubious of that kind of certainty as well.
I'm saying that, so far, valuations haven't matter... I'm not 100% sure they won't matter going forward... But CraigTester keeps trying to point out 2000-to-whatever...

(1) 2000 was way too late... Valuations people got out before then.
(2) 2000 wasn't even that bad... Highest valuations in U.S history and we still returned nearly 7% from 2000 to today.

So the past says... who cares in the long-term?

I might be wrong about the future...

But it's ridiculous and wrong to say that valuations have been useful predictors in the past.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

The challenge is that valuation metrics tend to lag, even for something short-term like TTM. S&P TTM hit 39.26 on Dec 1 2020; S&P hit ATH a year later, at which point the PE already came down from 39.26 to 23.63.

In 2022 we almost hit -20% but as far as TTM, it only came down from 23 to 20.

Needless to say, CAPE10 lags even more.
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CraigTester
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

Marseille07 wrote: Sat May 14, 2022 10:43 pm The challenge is that valuation metrics tend to lag, even for something short-term like TTM. S&P TTM hit 39.26 on Dec 1 2020; S&P hit ATH a year later, at which point the PE already came down from 39.26 to 23.63.

In 2022 we almost hit -20% but as far as TTM, it only came down from 23 to 20.

Needless to say, CAPE10 lags even more.
What your referencing is the variability of measuring just one year of earnings as we progressed through the pandemic….. In later 2020 the market was betting that all the government stimulus was going to be very friendly to earnings relative to the first wave of the pandemic….

This is why it’s so helpful to look at multiple metrics spanning across the business cycle … PE10, PE20,etc.

But remember the long-term average of all of these converge to ~16. There’s a reason for that!

Further, as discussed earlier, look at the current difference between PE1 and PE10. Given the sugar boost TTM earnings enjoyed from stimulus, which do you think paints a more accurate picture?

PS you can safely just ignore any ratio representing a forecast. Despite the medias referencing them at times to tilt a story, their statistical correlation to actual results is very near zero.
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Re: If Valuation doesn't matter, what does?

Post by CraigTester »

HomerJ wrote: Sat May 14, 2022 10:38 pm
Nathan Drake wrote: Sat May 14, 2022 9:34 pm
marcopolo wrote: Sat May 14, 2022 9:23 pm
Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
I'm in the "unknown" camp certainly and don't agree with the OP's perspective on going all-in or all-out. But Homer also seems pretty certain that valuations don't matter, and that if there is a big correction that it's a safe bet that the market will still do close to its long term average in the fairly long horizon of the next 10-20 years or so. I'm simply dubious of that kind of certainty as well.
I'm saying that, so far, valuations haven't matter... I'm not 100% sure they won't matter going forward... But CraigTester keeps trying to point out 2000-to-whatever...

(1) 2000 was way too late... Valuations people got out before then.
(2) 2000 wasn't even that bad... Highest valuations in U.S history and we still returned nearly 7% from 2000 to today.

So the past says... who cares in the long-term?

I might be wrong about the future...

But it's ridiculous and wrong to say that valuations have been useful predictors in the past.
Not sure what to tell you Homer.

As you know, even though you keep telling it differently, I got out in 1998 (not 2000 or 1996). But regardless, any of these exits would have worked out great.

And before you regurgitate old comments, look at Treasuries during that time frame.

Further, if you’re going to quote a CAGR with an endpoint reflecting a market in its 96th percentile, ask yourself why you need to do this….
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

CraigTester wrote: Sun May 15, 2022 9:31 am But remember the long-term average of all of these converge to ~16. There’s a reason for that!
I'm not aware of a reason if / why PE converges to 16x. If you see this, there is a paradigm shift post-1995 or so: https://www.multpl.com/s-p-500-pe-ratio

Same for CAPE, the average is creeping up over time.
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nedsaid
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Re: If Valuation doesn't matter, what does?

Post by nedsaid »

CraigTester wrote: Fri May 13, 2022 12:20 pm

Bogleheads prefer to just buy no matter what the market price is today, implicitly betting that no matter what they pay, they will ultimately be entitled to a proportionate share of earnings.... And that's good enough (as long as you have a long enough time horizon)

"Market Timers" by contrast are willing to occassionally wait for a better price when the market deviates too far from its historical norms....

I personally believe Bogle understood all this better than anyone, but its just too difficult to explain in a sound byte..... So he opted for the saying, "nobody knows nuttin".... So shut your eyes and if you just keep peppering dollars into the market at all sorts of different prices, it will ultimately work out good enough....

And as an occasional (bond and equity) market timer, I think his way is best 95% of the time....
Yep, Mr. Bogle did advocate for Tactical Asset Allocation at Market Extremes. In fairness, the shifts were relatively modest, maybe 20% to 25% of the portfolio at most, and executed rarely. He was mostly a buy and hold investor but reserved for himself the right to make changes with market conditions and/or changes in personal circumstances.

Bogle did tell a Morningstar Conference that he went from 70% stocks to 30% stocks because of concerns about valuations and concerns about failing health. Bogle didn't know he would live approximately another 20 years. He called Bonds "the steal of the Century." This was probably in 1999 or 2000 when he told the world about what he had done.

There is another version of the story where Bogle said that he went from 70% stocks to 50% stocks over a two year period. Don't know which one happened since Mr. Bogle isn't around anymore to ask.

But in real life, Mr. "Stay the Course" didn't always stay the course.

Yes, valuations matter but for the average Joe or Jane, it isn't really actionable except for at market extremes. Even then, bubbles can last for quite a while. There really is a "being right too early problem" with market timing. My experience has been that Tactical Asset Allocation is more about reducing risk than boosting returns.
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Re: If Valuation doesn't matter, what does?

Post by marcopolo »

CraigTester wrote: Sun May 15, 2022 9:45 am
HomerJ wrote: Sat May 14, 2022 10:38 pm
Nathan Drake wrote: Sat May 14, 2022 9:34 pm
marcopolo wrote: Sat May 14, 2022 9:23 pm
Nathan Drake wrote: Sat May 14, 2022 7:12 pm To play devil’s advocate to Homer, he continually pounds the drum of “the market always comes back”

So despite being overvalued in 1996, you still has a good return despite experiencing some significant corrections along the way.

However, as I’ve explained to him before, this was in an environment of the rise of the “Fed Put”, and up until 2022, the “Fed Put” had literally no resistance vis-a-vis inflation

That has now changed. The impacts are unknown, but if the Fed Put is no longer tenable due to inflation and this phenomenon is persistent, investing at the peak of a bubble may not recover and go on to return 7-8% annually

So much of the return baked into the S&P500 has been predicated on valuation expansion and Fed backstopping
If you guys were saying something like "there are a lot of unknowns, we can't expect to get the returns we have had during this long bull run", I doubt HomerJ would be taking much exception to that. Instead what we are seeing is a lot of proclaimed certainty about how things are bound to be dire. It seems that it is this professed ability to see the "obvious" outcomes that is being challenged.

Every little dip, people come out of the wood work and claim how "obvious" it was, and how the recent down turn is going to continue into a blood bath. The vast majority of times that does not occur those same people seem to disappear, only to return in the next dip making the same proclamations, completely ignoring the numerous times they were mistaken. They may in fact be right this time.

The markets can crash at any time. Many of us fully expect that to happen from time to time. The difference is that we have the humility to acknowledge that we can't predict when that will be.
I'm in the "unknown" camp certainly and don't agree with the OP's perspective on going all-in or all-out. But Homer also seems pretty certain that valuations don't matter, and that if there is a big correction that it's a safe bet that the market will still do close to its long term average in the fairly long horizon of the next 10-20 years or so. I'm simply dubious of that kind of certainty as well.
I'm saying that, so far, valuations haven't matter... I'm not 100% sure they won't matter going forward... But CraigTester keeps trying to point out 2000-to-whatever...

(1) 2000 was way too late... Valuations people got out before then.
(2) 2000 wasn't even that bad... Highest valuations in U.S history and we still returned nearly 7% from 2000 to today.

So the past says... who cares in the long-term?

I might be wrong about the future...

But it's ridiculous and wrong to say that valuations have been useful predictors in the past.
Not sure what to tell you Homer.

As you know, even though you keep telling it differently, I got out in 1998 (not 2000 or 1996). But regardless, any of these exits would have worked out great.

And before you regurgitate old comments, look at Treasuries during that time frame.

Further, if you’re going to quote a CAGR with an endpoint reflecting a market in its 96th percentile, ask yourself why you need to do this….
You seem fixated with the "market at 96th percentile".
You claim to not have gotten out in 1996.
Why would you have stayed in?!?
Markets were much more over-valued on a historical percentile basis back then. CAPE was more like 99% percentile. Anyone using valuation relative to history would have bailed at least in 1996, if not earlier, and never had a better re-entry point.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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CyclingDuo
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Re: If Valuation doesn't matter, what does?

Post by CyclingDuo »

CraigTester wrote: Wed May 11, 2022 1:34 pm And I think the source of the "bickering" you mention is that the Boglehead philosophy is somewhat in conflict with that idea.

For some, the BH way is easy to follow....and most of the time, its as good as any strategy.....

But when we hit extreme moments in either the bond or equity markets, the BH way tells us to march right off the cliff despite the neon flashing signs telling us to stop and think, for just a moment....

Now for those not paying attention, this is what it is..., But for anyone reading a thread discussing valuations, I suspect this becomes very difficult to swallow from time to time...

As far as my "mechanism", I have shared that my default position is Buy-n-Hold... I only deviate when valuations hit extremes. And just as BH's accept their fate of riding off the cliff from time to time...., I accept my fate of sitting on the sidelines from time to time...

And as long as eyes are wide open, either way can eventually work.... as long as one is not being sold as "the only way..."
Reading your threads since you have joined BH, it always reminds me that you resemble the classic investor (Brittany) depicted in Personal Finance Club's illustration of Tiffany, Brittany, and Sarah.

Brittany timed it perfectly and only invested her money at bottoms from 1979 - 2020+. She, like you, was satisfied with her money returning 3% interest while waiting for the bottoms to appear. Contrasting Brittany's bottom fishing strategy and gathering the 3% interest while waiting, Tiffany only bought stocks during extreme euphoria at the market tops. Contrasting both strategies of Brittany and Tiffany is the investor named Sarah who invested out of every paycheck along the way (buying at tops, bottoms and everything in between along the way) during her years of accumulation.

You can view the results at the link to the Personal Finance Club here...

https://www.personalfinanceclub.com/how ... he-market/

Image

I don't think any Boglehead is too visibly upset when you keep calling us a bunch of Sarahs because we invest on automatic pilot which means we buy at bottoms, tops and everything in between for the duration of our accumulation years. There are plenty who fall under the strategies and could identify with either Tiffany, Brittany or Sarah. As long as one reaches their goals we have the choice to invest on a steady basis using the buy and hold strategy, or we have the choice to follow another strategy such as you are following along with Brittany.

CyclingDuo
"Save like a pessimist, invest like an optimist." - Morgan Housel
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spencydub
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Re: If Valuation doesn't matter, what does?

Post by spencydub »

CyclingDuo wrote: Sun May 15, 2022 10:31 am
CraigTester wrote: Wed May 11, 2022 1:34 pm And I think the source of the "bickering" you mention is that the Boglehead philosophy is somewhat in conflict with that idea.

For some, the BH way is easy to follow....and most of the time, its as good as any strategy.....

But when we hit extreme moments in either the bond or equity markets, the BH way tells us to march right off the cliff despite the neon flashing signs telling us to stop and think, for just a moment....

Now for those not paying attention, this is what it is..., But for anyone reading a thread discussing valuations, I suspect this becomes very difficult to swallow from time to time...

As far as my "mechanism", I have shared that my default position is Buy-n-Hold... I only deviate when valuations hit extremes. And just as BH's accept their fate of riding off the cliff from time to time...., I accept my fate of sitting on the sidelines from time to time...

And as long as eyes are wide open, either way can eventually work.... as long as one is not being sold as "the only way..."
Reading your threads since you have joined BH, it always reminds me that you resemble the classic investor (Brittany) depicted in Personal Finance Club's illustration of Tiffany, Brittany, and Sarah.

Brittany timed it perfectly and only invested her money at bottoms from 1979 - 2020+. She, like you, was satisfied with her money returning 3% interest while waiting for the bottoms to appear. Contrasting Brittany's bottom fishing strategy and gathering the 3% interest while waiting, Tiffany only bought stocks during extreme euphoria at the market tops. Contrasting both strategies of Brittany and Tiffany is the investor named Sarah who invested out of every paycheck along the way (buying at tops, bottoms and everything in between along the way) during her years of accumulation.

You can view the results at the link to the Personal Finance Club here...

https://www.personalfinanceclub.com/how ... he-market/

Image

I don't think any Boglehead is too visibly upset when you keep calling us a bunch of Sarahs because we invest on automatic pilot which means we buy at bottoms, tops and everything in between for the duration of our accumulation years. There are plenty who fall under the strategies and could identify with either Tiffany, Brittany or Sarah. As long as one reaches their goals we have the choice to invest on a steady basis using the buy and hold strategy, or we have the choice to follow another strategy such as you are following along with Brittany.

CyclingDuo
That was an awesome article. Thanks for sharing.
Da5id
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

marcopolo wrote: Sun May 15, 2022 10:22 am You seem fixated with the "market at 96th percentile".
You claim to not have gotten out in 1996.
Why would you have stayed in?!?
Markets were much more over-valued on a historical percentile basis back then. CAPE was more like 99% percentile. Anyone using valuation relative to history would have bailed at least in 1996, if not earlier, and never had a better re-entry point.
His exact market timing methods are opaque and (thus) I guess conveniently immune to criticism.

I don't believe in market timing in the least. But IMO getting out is the easier half of the market timing problem. Getting back in is even stickier. Many who get out expect that the crash is coming which will make market valuations be in line with whatever they are predicting. And the market may never crash no matter how stubbornly one waits for that. And probably the longer one waits, the more cognitive biases make one continue to wait. The market can go up sharply still from high valuations (as it has since OP bailed in 2018). It can fall some, but not enough to trigger buying back in by whatever ones means are, and then drift upwards. The market can also plummet on cue, and convince the market timer that they are in fact a market timing guru. Which they probably aren't, and are setting up to be sabotaged by that mistaken belief in the future.
Marseille07
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

Da5id wrote: Sun May 15, 2022 11:10 am I don't believe in market timing in the least. But IMO getting out is the easier half of the market timing problem. Getting back in is even stickier. Many who get out expect that the crash is coming which will make market valuations be in line with whatever they are predicting. And the market may never crash no matter how stubbornly one waits for that. And probably the longer one waits, the more cognitive biases make one continue to wait. The market can go up sharply still from high valuations (as it has since OP bailed in 2018). It can fall some, but not enough to trigger buying back in by whatever ones means are, and then drift upwards. The market can also plummet on cue, and convince the market timer that they are in fact a market timing guru. Which they probably aren't, and are setting up to be sabotaged by that mistaken belief in the future.
Both are easy. I'm not advocating timing but it's a matter of crafting a simple rule, such as 200-day moving average above/below, or if you use valuations then you get out above PE 20, get back in at 15 or what have you.

The difficult part is actually beating B&H. That's what's difficult.
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Da5id
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Re: If Valuation doesn't matter, what does?

Post by Da5id »

Marseille07 wrote: Sun May 15, 2022 11:22 am
Da5id wrote: Sun May 15, 2022 11:10 am I don't believe in market timing in the least. But IMO getting out is the easier half of the market timing problem. Getting back in is even stickier. Many who get out expect that the crash is coming which will make market valuations be in line with whatever they are predicting. And the market may never crash no matter how stubbornly one waits for that. And probably the longer one waits, the more cognitive biases make one continue to wait. The market can go up sharply still from high valuations (as it has since OP bailed in 2018). It can fall some, but not enough to trigger buying back in by whatever ones means are, and then drift upwards. The market can also plummet on cue, and convince the market timer that they are in fact a market timing guru. Which they probably aren't, and are setting up to be sabotaged by that mistaken belief in the future.
Both are easy. I'm not advocating timing but it's a matter of crafting a simple rule, such as 200-day moving average above/below, or if you use valuations then you get out above PE 20, get back in at 15 or what have you.

The difficult part is actually beating B&H. That's what's difficult.
Meh, sure. I clearly meant hard as a winning strategy. And I think people often don't have mechanical strategies tbh, which makes the issues worse.
Marseille07
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Re: If Valuation doesn't matter, what does?

Post by Marseille07 »

Da5id wrote: Sun May 15, 2022 11:23 am Meh, sure. I clearly meant hard as a winning strategy. And I think people often don't have mechanical strategies tbh, which makes the issues worse.
Ah gotcha, yeah if you meant hard as a winning strategy then it's hard on a CAGR basis. On a risk-adjusted basis, something like the 200-day moving average beats B&H. Not sure about valuation-based strategies.
85% US + FM + RSU | 15% Cash
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