vineviz wrote: ↑Wed Nov 23, 2022 10:17 am
HomerJ wrote: ↑Wed Nov 23, 2022 9:32 am
The concept that 1/CAPE gives an good estimate of 10-year returns going forward is a recent construct.
The trend-line did not support that until very recently, but many writers seem to think it's some kind of natural economic law these days, maybe confusing it with the general valuations tool you reference.
I'll repeat: the idea the an earnings yield provides an estimate of expected return is absolutely not new.
It's true that we've learned a thing or two since 1934, but that's a good thing not a bad thing.
And I repeat, the idea that 1/CAPE gives a good estimate absolutely is new.
Show me anywhere, in any literature, from 1934 - 2010 where someone says a CAPE of 25 gives an "expected" return of 4% real.
We're obviously talking about two different things... Just like this whole Monte Carlo discussion, where you are technically correct about the inputs and the design of various Monte Carlo systems being the important factors, but missing the big picture of how they are used in the real world.
You're missing the difference between academic researchers and excellent financial advisors such as yourself and poor financial advisors/general financial blogs/average investors.
You're right, when talking in generalities, that financial experts used earnings yield in the past in their calculations. That's not new. But I'm talking directly about someone using 1/CAPE as a predictor.
There are plenty of blogs and websites that claim that 1/CAPE can used to accurately describe the relationship between CAPE and historical 10-year returns. People do it routinely here as well now. It's almost an article of faith now.
But this wasn't very accurate until about 5 years ago.
You won't find blogs or websites talking about 1/CAPE in 2005, or even 2011, because it didn't fit the trendline as it existed back then. I'd be interested if anyone on Bogleheads mentioned it before 2012.
It's a recent data construct, now that we've had numerous 10-year periods starting with a CAPE of 20-25 that returned 4%-5% real. But those didn't exist until the 2002-2012, 2003-2013, 2004-2014, 2005-2015, 2006-2016, etc. data points showed up.
In 2011, experts were still saying a CAPE of 22 predicted 1% real, not 4.5% real, because that's what the data up to 2011 was still saying.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59