BJJ_GUY wrote: ↑Wed Nov 29, 2023 10:57 pm
HomerJ wrote: ↑Wed Nov 15, 2023 8:21 pm
BJJ_GUY wrote: ↑Wed Nov 15, 2023 7:48 pm
HomerJ wrote: ↑Mon Feb 10, 2020 12:24 pm
Ignore valuations. They have been poor at predicting returns ever since they were "discovered".
What is the point of investing in stocks? Do they just increase over time on an entirely arbitrary basis?
It's not a closed system. Billions of humans go to work every day, and energy is pulled from the ground and from the wind and from the sun, and therefore every day more value is input into the system.
So the system becomes more valuable over time.
The only thing I assume, based on the above, is that investing has a positive real return over the long run. That's it.
My point about valuations is that they are not useful for making market-timing moves. They have not predicted returns well since Shiller formulated them in 1988. US Valuations almost immediately went "high" in 1992 and have remained "high" ever since.
I'm honestly not entirely sure what you mean. 'More value is put into the system'? What is value in your definition, and what is the system?
I don't know how to explain it.
It seems self-explanatory to me. Even if valuations remain constant, a business can be worth more and more over time.
A business is worth more over time because of the work put into it.
An IPhone is worth more than the ore taken from the ground that is used to make the components. The software written by multiple humans over time makes the IPhone more valuable as well.
Apple doesn't "increase over time on an entirely arbitrary basis".
All the products on Wal-marts shelves are worth more than their component parts. The guys in Walmart logistics who move the merchandise around more effectively from warehouse to store at lower costs make Walmart more profitable too. All that work matters.
That's the main reason stocks rise in value over time. Sure, people can value companies at different prices at different times, based on future expectations (valuations), and the price can change just purely because of increased or decreased valuations.
But the long-term rise of stock and value of all the companies is not based on valuations.
Anyway, the point I was making wasn't about trying to time markets. There is a different between making allocation adjustments based on valuations and making them based on a result in a short time period (or any specific pre-defined time period).
Buying stocks is literally buying a contractual right to a percentage of profits. You are trading cash today in exchange for a perpetual cash stream plus some terminal value.
There is actually really strong relationship between valuation and subsequent stock market returns. Granted, P/E and even adjusted P/E are not the best, and the 10-12 year time-frame is not often exactly correct. Still, there is a high level of statistical significance over time.
So yeah, valuations aren't a great tool for predicting equity market returns in any given 10 year period. But to say valuations don't have a relationship with expected returns makes no sense to me, and would suggest there is zero reason to own them in the first place.
That relationship has changed over time, and therefore has not proven be predictive. That's it.
People here like to say "high" valuations predict lower returns. But the definition of "high" has changed over time. So CAPE of 25 now predicts close to historical average returns. Less than 30 years ago, a CAPE of 25 predicted 0% 10-year real returns. That's not a small change.
Valuations are not actionable, because the relationship has not been stable.
And here's the real thing. If you believe in valuations, then you have to believe in them BOTH ways.
If indeed, "high" valuations predicts lower returns, and we actually get the lower returns, then valuations will become "low", and start predicting higher returns.
So, in the long run, it all averages out. And that's what we see in history. Cycles of poor returns, followed by cycles of good returns, repeat, repeat, repeat.
The long-term historical averages of the US stock market AND the ex-US stock market INCLUDES all the crashes and bad years.
Just buying and holding and ignoring valuations, so far, in US and ex-US, has made investors wealthy over the long run.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59