Author Topic: Buffett Indicator  (Read 20271 times)

Retire-Canada

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Re: Buffett Indicator
« Reply #50 on: February 06, 2016, 09:24:40 AM »

Here's the path: 

1.  If the market stays high, demand stays the same and supply/demand comes into balance at the end of this year. 

2.  If the market crashes, supply growth will decline, at a fast pace, to eventually meet whatever the decreased demand is.  This is because of the large reductions is capex spending by the oil industry.  With less exploration and new drilling, new wells, etc., supply is going to fall.  Yes, the price of oil could go down drastically even from these depressed levels in a market crash.  However, it's the eventual declining supply that will support prices in either scenario over the longer term.  The longer the price stays low, the faster the supply and demand balance will come.  Also, if the market does crash, the entire US oil industry will be toast as well as any other high cost producer.  OPEC will have won.  And then, I would suspect, with OPEC in full control of the world oil industry again, they would again collude on production to raise the price. 

Either way, oil goes up long term.  Just my opinion.

The two problems I see with this ^^^:

1. supply is not maxed out currently and if oil prices rise so so will supply. Iran hasn't even gotten up to their target production rate  now that sanctions are lifted. All the marginal producers that learned how to produce as efficiently as possible when the price dropped will be better positioned to take advantage of a price recovery

2. many of the major producers cannot stop producing. They literally need every dollar they can get. If they could easily reduce supply it would have happened as not one supplier is happy about current prices. The lower oil prices go the more suppliers have to pump to stay alive.

Keith123

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Re: Buffett Indicator
« Reply #51 on: February 06, 2016, 09:33:44 AM »
Please see the attached chart.  Companies do not typically have a profit margin of 10% or higher like they do now.  They typically earn 6.5% profit margins.  This is why I take 35% off the S&P earnings.  This is over the history of the market.  We are in the only period in history that it has been this high.  Reversion to the mean happens.  I think it is a bit foolish to think that "this time is different".

It seems more reasonable to take this as a given, translating record profit margins to be a basis for expecting better SP500 performance, rather than arbitrarily assuming that companies will get less efficient because they always have been.

Realistically, with the world becoming safer, mature, and more stable globally it seems totally logical that combination should increase profit margins. These are all factors which cannot be meaningfully normalized out of the data.

I also expect that your chart would look very different if it was broken down by sector.

I think you are wrong.  These record profits have been attributed to low wage growth and unemployment mostly - http://blogs.reuters.com/macroscope/2014/01/24/why-are-us-corporate-profits-so-high-because-wages-are-so-low/.  Unemployment and wage growth are improving which should put downward pressure on these margins.  These margins are not sustainable.  If Bernie Sanders wins, you will see these margins contract very hard. 

Keith123

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Re: Buffett Indicator
« Reply #52 on: February 06, 2016, 09:46:30 AM »

Here's the path: 

1.  If the market stays high, demand stays the same and supply/demand comes into balance at the end of this year. 

2.  If the market crashes, supply growth will decline, at a fast pace, to eventually meet whatever the decreased demand is.  This is because of the large reductions is capex spending by the oil industry.  With less exploration and new drilling, new wells, etc., supply is going to fall.  Yes, the price of oil could go down drastically even from these depressed levels in a market crash.  However, it's the eventual declining supply that will support prices in either scenario over the longer term.  The longer the price stays low, the faster the supply and demand balance will come.  Also, if the market does crash, the entire US oil industry will be toast as well as any other high cost producer.  OPEC will have won.  And then, I would suspect, with OPEC in full control of the world oil industry again, they would again collude on production to raise the price. 

Either way, oil goes up long term.  Just my opinion.

The two problems I see with this ^^^:

1. supply is not maxed out currently and if oil prices rise so so will supply. Iran hasn't even gotten up to their target production rate  now that sanctions are lifted. All the marginal producers that learned how to produce as efficiently as possible when the price dropped will be better positioned to take advantage of a price recovery

2. many of the major producers cannot stop producing. They literally need every dollar they can get. If they could easily reduce supply it would have happened as not one supplier is happy about current prices. The lower oil prices go the more suppliers have to pump to stay alive.

I'll agree a little with your first point.  I do believe there will be a "price cap" in the future.  It will be wherever the marginal producers aren't profitable.  If the price goes too high above that, the marginal producers will come back online and increase supply.  I believe the market has already priced in Iran's coming supply as it is not really news anymore that they will be pumping again.  Where else do you see more supply coming in the near-term?  Maybe Iraq can produce a little more.  I dunno, from everything I've read, the world is at full production capacity right now. 

For number two, the reason everyone is pumping like crazy is to protect market share.  It would be easy to reduce supply if they could all agree on a collective production cut and trust each other.  The reason they don't reduce supply is because no one trusts each other.  They all think the next guy is gonna cheat on the agreement.  And yes, they need every dollar right now.  But they can't pump themselves into oblivion.  These oil nations literally can't survive if the prices stay this low forever.  There would be social unrest and eventually skirmishes and wars.  Which would then cause the price of oil to go up anyways.

It's actually hard for me to think of a scenario where oil prices never go up from this level in the medium to long term.  I just don't know the exact time frame and how it will all play out.  No one does. 
« Last Edit: February 06, 2016, 09:52:17 AM by Keith123 »

EarlyStart

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Re: Buffett Indicator
« Reply #53 on: February 06, 2016, 02:08:10 PM »
Prices are not extremely high for almost all of the market. Let's look at Wal-Mart. In 1999, right before the dot-com bust, Wal-Mart's PE was 39. That's insane. They're a retailer. A good one, but just a retailer. In 2008, their PE was 16. Today, their PE is 14.s

That said, if you're investing in companies like Amazon or Facebook, and probably almost all of us are because they make up a huge portion of VTSAX and the S&P 500, then you're buying at extremely high valuations. Facebook is not intrinsically worth more than ExxonMobile. It makes no sense. Amazon has a PE of over 400 which is definitely in 1999 dot com bubble territory. They can say they're funding growth all they want, but I don't believe them. They're a retailer with an amazing technology platform.

(WMT historical data from http://www.rationalwalk.com/?p=896).

I would have to disagree with you.  The p/e for the S&P right now is 21.  That is quite high for a mature economy with low GDP growth expectations.  A high p/e valuation suggests investors anticipate growth.  Walmart's p/e has dropped over time because as the company saturated the US and world with stores, less and less growth was expected.  The same will be true for Amazon once it's growth starts to stall.  Investors are expecting huge earnings growth from Amazon for the next few years (http://www.nasdaq.com/symbol/amzn/earnings-growth). 
 


PE ratios in general aren't theoretically or practically that useful, but if you're going to use P/E, use forward 12 months.

As of Friday's close, the S&P 500 sells at 1880.05. Take some random 2016 EPS estimate. Goldman Sachs says $117 after their downward adjustment. This means a forward PE ratio of 16.07. Yardini calculates a forward P/E of 15.3.
You could argue that these are too high, that interest rates will increase and make it too pricey, ad infinitum.

Here's another thing too few people understand. Accounting standards for earnings recognition have changed dramatically over time. A dollar of recognized earnings in 1990 may only be recognized as $0.90 today because of new rules regarding asset write-downs, etc. So P/E ratios are going to be forever high compared to history. It's not an apples-to-apples comparison at all.

Really P/E ratios and Market Cap/GDP are awful methods of valuation anyway. "Earnings" are not what create shareholder value. It's the present value of all future free cash flow (cash that can be returned to shareholders). If a company has earnings of $5 per share, but needs to engage in $5 of capital expenditures, they had $0 of free cash flow. Similarly, if a company has earnings of $5 per share but can sustainably reduce their capital (i.e. sell off unneeded assets) by $5/share, their free cash flow for the period is $10.

And even with free cash flow estimates, you have to go out several years and calculate the present value of each year. So it's really a misnomer when we talk about "valuation" by referencing P/E, PEG, forward P/E, P/S ratios. It's not a "valuation" exercise unless you say "the fair value of asset X is $XXX.XX".

I wouldn't be surprised if it fell further either. But calling it a "bubble" is a real leap, especially based on a couple ratios.

ender

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Re: Buffett Indicator
« Reply #54 on: February 07, 2016, 01:40:41 PM »
Please see the attached chart.  Companies do not typically have a profit margin of 10% or higher like they do now.  They typically earn 6.5% profit margins.  This is why I take 35% off the S&P earnings.  This is over the history of the market.  We are in the only period in history that it has been this high.  Reversion to the mean happens.  I think it is a bit foolish to think that "this time is different".

It seems more reasonable to take this as a given, translating record profit margins to be a basis for expecting better SP500 performance, rather than arbitrarily assuming that companies will get less efficient because they always have been.

Realistically, with the world becoming safer, mature, and more stable globally it seems totally logical that combination should increase profit margins. These are all factors which cannot be meaningfully normalized out of the data.

I also expect that your chart would look very different if it was broken down by sector.

I think you are wrong.  These record profits have been attributed to low wage growth and unemployment mostly - http://blogs.reuters.com/macroscope/2014/01/24/why-are-us-corporate-profits-so-high-because-wages-are-so-low/.  Unemployment and wage growth are improving which should put downward pressure on these margins.  These margins are not sustainable.  If Bernie Sanders wins, you will see these margins contract very hard.

Nothing like non-inflation adjusted charts proclaiming "wage growth has decreased for years!" to totally abuse statistics. You cannot look at those percentages in isolation without the context of inflation (among other things).

We can debate whether 50-year relatively stable wages with a roughly 0% real growth is a good or bad thing but non-inflation adjusted wages are fairly stable over the past 50 years.





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Re: Buffett Indicator
« Reply #55 on: February 07, 2016, 09:05:25 PM »
If you bought during 2000 and held through to today, adjusted for inflation you would have returned nothing but dividends.  A 15 year return of 0%.
Using bold does not make it true.  I have multiple sources contradicting your claim of 0% for 15 years (and BTW, 2000-2015 is 16 years):
Morningstar shows Vanguard Total Stock Market (VTSAX) with 4.84%/year for 15 years, which ignores inflation (but inflation did not average 5%).
http://performance.morningstar.com/fund/performance-return.action?t=VTSAX&region=usa&culture=en_US

Portfolio Visualizer shows 2000-2015 performance with and without inflation:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&portfolio3=Custom&portfolio2=Custom&portfolio1=Custom&annualOperation=0&TotalStockMarket1=100&initialAmount=100&endYear=2015&mode=2&inflationAdjusted=true&annualAdjustment=0&startYear=2000&rebalanceType=1&annualPercentage=0.0&TBills2=100
US stock market of 4.46%/year ignoring inflation, and 2.26%/year including inflation.  That suggests anything less than 2%/year will lose to inflation, which brings up my counter-point:
Cash/money market earned 1.73%/year in that time, or -0.41%/year after inflation.

In other words, the data I show gives a real return for US stock market when you said it's zero.  And if people had remained in cash instead, they would have less inflation-adjusted dollars than when they started.  The data I have supports buy and hold.

faramund

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Re: Buffett Indicator
« Reply #56 on: February 07, 2016, 10:03:57 PM »
This originally started with saying the Buffett Indicator was 108. If you think that's elevated and the last 20 years are an anomaly, then for all you know, it could take another 20 years to get back to 100.

So what would that mean, let's assume the US economy expands at 2.5%, and inflation is 1.5%, so over 20 years, it should expand by 1.04^20= 2.19. So it should double in size. For the Buffet Indicator to be at 100 at
that stage, the stock market could expand by 3.6% a year, i.e. 1.08*1.036^20=2.19. Throw in dividends and stock buybacks of X%, and by your reasoning 3.6+X% is the return you could expect over the next 20 years.

i.e. there doesn't have to be a crash, or if it does, it could come sooner or later, it could boom now and then be flat, or it could be flat for a while, and then boom.  You can also imagine, that in 20 years time, the US market could either be reasonable (i.e. at the Buffet indicator level), or it could be booming or crashing, which would cancel out all this reasoning.

The big thing is, the market can be irrational for a long time, and if you wait for it to be rational, you miss out on many gains along the way.

I agree by many historical measures, the US market looks overvalued, but not, really overvalued, and it could take a long time for it to work out these issues (and it may not even do that).   

If you worry about the US market, have you considered Vanguard's international offerings. You could get more diversity, by spreading money across multiple countries.

Manguy888

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Re: Buffett Indicator
« Reply #57 on: February 08, 2016, 07:12:55 AM »
Here's another thing too few people understand. Accounting standards for earnings recognition have changed dramatically over time. A dollar of recognized earnings in 1990 may only be recognized as $0.90 today because of new rules regarding asset write-downs, etc. So P/E ratios are going to be forever high compared to history. It's not an apples-to-apples comparison at all.


Yes - this is what I was trying to get at in an earlier post. I'm not disagreeing that higher CAPE ratios correlate with lower returns over the next 10-15 years, or that CAPE in general can help identify an overvalued market. But in order to make that information actionable, you have to determine what CAPE numbers signify sell/hold/buy for you. And that is really hard, because just taking the median number implies that the underlying data forming the ratios never change over time (as with the quote above. And that 10 years is always the best time frame to capture a business cycle in.

If 15 (the median) was truly the breakeven point, then you wouldn't have invested a dime in nearly 30 years.

At which number does CAPE signal to you that you should sell or at least stop investing in the US total market?
At which number does CAPE signal that it's time for you to get back into the market?

Do you have these numbers identified, or are you working more in ranges?

Keith123

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Re: Buffett Indicator
« Reply #58 on: February 08, 2016, 01:21:29 PM »
Here's another thing too few people understand. Accounting standards for earnings recognition have changed dramatically over time. A dollar of recognized earnings in 1990 may only be recognized as $0.90 today because of new rules regarding asset write-downs, etc. So P/E ratios are going to be forever high compared to history. It's not an apples-to-apples comparison at all.


Yes - this is what I was trying to get at in an earlier post. I'm not disagreeing that higher CAPE ratios correlate with lower returns over the next 10-15 years, or that CAPE in general can help identify an overvalued market. But in order to make that information actionable, you have to determine what CAPE numbers signify sell/hold/buy for you. And that is really hard, because just taking the median number implies that the underlying data forming the ratios never change over time (as with the quote above. And that 10 years is always the best time frame to capture a business cycle in.

If 15 (the median) was truly the breakeven point, then you wouldn't have invested a dime in nearly 30 years.

At which number does CAPE signal to you that you should sell or at least stop investing in the US total market?
At which number does CAPE signal that it's time for you to get back into the market?

Do you have these numbers identified, or are you working more in ranges?

CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.  Here is what worries me a bit:  CAPE looks back over 10 years right? Over the past 10 years, corporate profit margins have been, for the most part, much higher than average.  Corporate profit margins have been around 6.5% for the last 65 years, they are 10% now.  This leads me to believe that the CAPE should be even higher than where it stands now if corporate profit margins were normal over the past 10 years.  If the CAPE was around 30, your expected return is 3.33%.  The higher it gets, the worse your expected return is. 

Signals:
The annual s&p return (inflation adjusted and dividend included), for the history of the stock market is just under 7%.  That's what I aim for.  That means the shiller p/e shouldn't be higher than 15ish when you're buying if you want to make ~7% annual long-term returns.  This is not based on whether the market goes up or down.  This is based on earnings and the belief that the market will correlate to earnings results over the long term. 
« Last Edit: February 08, 2016, 01:23:39 PM by Keith123 »

Eric

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Re: Buffett Indicator
« Reply #59 on: February 08, 2016, 02:28:11 PM »
CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.

How did you come up with a return of 4.35%?  Because the last time(s) CAPE was at 23, it returned 4.35% going forward X number of years?  If so, that completely ignores the argument that you're quoting (one which I've pointed out as well), that since Earnings are calculated differently now than in prior periods, compairing CAPE ratios (and therefore future returns) across those periods is not a sound basis for comparison.  For use as a broad estimate, sure, but not one on which to make investment decisions.

Keith123

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Re: Buffett Indicator
« Reply #60 on: February 08, 2016, 03:18:51 PM »
CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.

How did you come up with a return of 4.35%?  Because the last time(s) CAPE was at 23, it returned 4.35% going forward X number of years?  If so, that completely ignores the argument that you're quoting (one which I've pointed out as well), that since Earnings are calculated differently now than in prior periods, compairing CAPE ratios (and therefore future returns) across those periods is not a sound basis for comparison.  For use as a broad estimate, sure, but not one on which to make investment decisions.

No.  It implies 4.35% because $1 of earnings divided by the earnings multiple you are paying (CAPE being 23) = 4.35%.  If you are paying 23 times the earnings of the market, that implies a return of 4.35%.  I like that CAPE smooths it out over the last 10 years.  PE is clearly misleading on a year to year basis.  Am I missing something?  I'm not being sarcastic.  Ignore Mr. Market.  The fundamentals (earnings mostly) are what imply future returns and the stock market, over long periods of time, correlates to this.

faramund

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Re: Buffett Indicator
« Reply #61 on: February 08, 2016, 04:44:53 PM »
CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.

How did you come up with a return of 4.35%?  Because the last time(s) CAPE was at 23, it returned 4.35% going forward X number of years?  If so, that completely ignores the argument that you're quoting (one which I've pointed out as well), that since Earnings are calculated differently now than in prior periods, compairing CAPE ratios (and therefore future returns) across those periods is not a sound basis for comparison.  For use as a broad estimate, sure, but not one on which to make investment decisions.

No.  It implies 4.35% because $1 of earnings divided by the earnings multiple you are paying (CAPE being 23) = 4.35%.  If you are paying 23 times the earnings of the market, that implies a return of 4.35%.  I like that CAPE smooths it out over the last 10 years.  PE is clearly misleading on a year to year basis.  Am I missing something?  I'm not being sarcastic.  Ignore Mr. Market.  The fundamentals (earnings mostly) are what imply future returns and the stock market, over long periods of time, correlates to this.
You are missing out on growth.
I have a rule-of-thumb(formula), that I use to estimate what a stock should be. Its:

(100/PE-dividend)* p/b ratio + dividend.

i.e. What did the stock earn, take away its dividend, that's what's been reinvested in the stock, which should increase its market value by that increase * the price/book ratio, and of course, you also get paid the dividend.

For example, one of my stocks is a bank called NAB, its P/E is 11.28, p/b is 1.28 and dividend is 7.6.

So it earns 100/11.28 = 8.86 and pays out 7.6 of that as a dividend, leaving it with 1.26, which should increase
its market value by 1.26*1.28= 1.6, add in the dividend, and 1.6+7.6 =9.2% is what I expect.

How well does it do? If I sort all my stocks (50) by that ratio, and look at it in thirds. For
the worst third, that ratio is 3.8 and they have returned -4.8 per year,
the middle,               ratio    8.5,                     return     11.0
the best,                  ratio   15.3,                     return     18.1

So its probably good, inflation in Australia, has been about 2.5%, so if you add that, it seems very good for 2/3rds of it, but not so good for the very worst.

Anyway, back to the US market, PE is 20.24, dividend 1.91, p/b 2.52 (this is all just from the top google search for each of these terms with S&P500. So
(100/20.24-1.91)*2.52+1.91 is 9.54% add on inflation 1.5% gives 11.04%.

So there you go, by the faramund (t/m pending (: ) index, happy days are here!

Keith123

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Re: Buffett Indicator
« Reply #62 on: February 08, 2016, 06:29:33 PM »
CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.

How did you come up with a return of 4.35%?  Because the last time(s) CAPE was at 23, it returned 4.35% going forward X number of years?  If so, that completely ignores the argument that you're quoting (one which I've pointed out as well), that since Earnings are calculated differently now than in prior periods, compairing CAPE ratios (and therefore future returns) across those periods is not a sound basis for comparison.  For use as a broad estimate, sure, but not one on which to make investment decisions.

No.  It implies 4.35% because $1 of earnings divided by the earnings multiple you are paying (CAPE being 23) = 4.35%.  If you are paying 23 times the earnings of the market, that implies a return of 4.35%.  I like that CAPE smooths it out over the last 10 years.  PE is clearly misleading on a year to year basis.  Am I missing something?  I'm not being sarcastic.  Ignore Mr. Market.  The fundamentals (earnings mostly) are what imply future returns and the stock market, over long periods of time, correlates to this.
You are missing out on growth.
I have a rule-of-thumb(formula), that I use to estimate what a stock should be. Its:

(100/PE-dividend)* p/b ratio + dividend.

i.e. What did the stock earn, take away its dividend, that's what's been reinvested in the stock, which should increase its market value by that increase * the price/book ratio, and of course, you also get paid the dividend.

For example, one of my stocks is a bank called NAB, its P/E is 11.28, p/b is 1.28 and dividend is 7.6.

So it earns 100/11.28 = 8.86 and pays out 7.6 of that as a dividend, leaving it with 1.26, which should increase
its market value by 1.26*1.28= 1.6, add in the dividend, and 1.6+7.6 =9.2% is what I expect.

How well does it do? If I sort all my stocks (50) by that ratio, and look at it in thirds. For
the worst third, that ratio is 3.8 and they have returned -4.8 per year,
the middle,               ratio    8.5,                     return     11.0
the best,                  ratio   15.3,                     return     18.1

So its probably good, inflation in Australia, has been about 2.5%, so if you add that, it seems very good for 2/3rds of it, but not so good for the very worst.

Anyway, back to the US market, PE is 20.24, dividend 1.91, p/b 2.52 (this is all just from the top google search for each of these terms with S&P500. So
(100/20.24-1.91)*2.52+1.91 is 9.54% add on inflation 1.5% gives 11.04%.

So there you go, by the faramund (t/m pending (: ) index, happy days are here!

That's awesome.  Seriously.  For individual companies, that's some cool shit.   I just don't really buy individual corporate equities.  The smallest I'll do is a sector ETF.

The reason I don't put too much weight on earnings growth in market index funds is this:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%).  Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."

« Last Edit: February 08, 2016, 06:37:34 PM by Keith123 »

EarlyStart

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Re: Buffett Indicator
« Reply #63 on: February 08, 2016, 08:29:44 PM »
CAPE implies a return in the ratio itself.  CAPE is 23 right now.  That implies a return of 4.35%.

How did you come up with a return of 4.35%?  Because the last time(s) CAPE was at 23, it returned 4.35% going forward X number of years?  If so, that completely ignores the argument that you're quoting (one which I've pointed out as well), that since Earnings are calculated differently now than in prior periods, compairing CAPE ratios (and therefore future returns) across those periods is not a sound basis for comparison.  For use as a broad estimate, sure, but not one on which to make investment decisions.

No.  It implies 4.35% because $1 of earnings divided by the earnings multiple you are paying (CAPE being 23) = 4.35%.  If you are paying 23 times the earnings of the market, that implies a return of 4.35%.  I like that CAPE smooths it out over the last 10 years.  PE is clearly misleading on a year to year basis.  Am I missing something?  I'm not being sarcastic.  Ignore Mr. Market.  The fundamentals (earnings mostly) are what imply future returns and the stock market, over long periods of time, correlates to this.

The earnings yield does not suggest forward returns. If earnings we're guaranteed to stay flat forever, like an interest payment on a treasury bond, that would be your return. But the earnings of companies can grow, which is what actually makes the difference.


The intrinsic value of any company (or the sum of a bunch of companies like the index) is the present value of future free cash flows. That means that the last 12 months' earnings have zero value. Nothing. Zilch. Nada, regardless of whether it's "cyclically adjusted". Even the next year earnings yield is only 1 year out of 20+ that should be used to appropriately value common stock.


discounted cash flows > everything. Forget p/e, p/gdp, CAPE, forget it all. I mean, you can look at them, but take them with a huge (Donald Trump YUUUGGEEE) grain of salt.

« Last Edit: February 08, 2016, 11:13:36 PM by EarlyStart »

faramund

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Re: Buffett Indicator
« Reply #64 on: February 08, 2016, 08:59:01 PM »

That's awesome.  Seriously.  For individual companies, that's some cool shit.   I just don't really buy individual corporate equities.  The smallest I'll do is a sector ETF.

The reason I don't put too much weight on earnings growth in market index funds is this:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%).  Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."
Thanks...

I don't know about that 1.7% inflation-adjusted figure (although I have a fair amount of respect for Shiller). My favorite investing book is "Stocks for the long run" by Siegal. He has a database of investment data from 1802 onwards, and he does lots of interesting analysis, like, how do high/low dividend stocks compare, or how do high/low PE compare.

Anyway, his book starts, with the US market, from 1802 to 2012. He claims over that period stocks (including reinvested dividends) grew in real terms by 6.6%, and his graph looks like it fits at that rate over the period, so its not really fast to begin with, and really slow later on. So if the 6.6 was correct, add in 1.5 for inflation, and you'd expect 8.1% altogether.

Probably part of the explanation, is that PEs used to be a lot lower in the 19th century, so maybe prices have gradually increased more than earnings. Probably another part is that dividends used to be higher.

So I guess we have 3 figures, mainly taking your approach
dividends are 1.91 and growth is 3.8 = 5.71
Siegal                                              = 8.1
faramund (tm)                                 = 11.0

So... who knows? Although I'd note that the first two numbers are just long term averages, the third is saying buying now will lead to higher returns then usual in the future - which probably meets my way of thinking, after a fall is usually a good time to buy.

Keith123

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Re: Buffett Indicator
« Reply #65 on: February 09, 2016, 12:18:55 PM »

That's awesome.  Seriously.  For individual companies, that's some cool shit.   I just don't really buy individual corporate equities.  The smallest I'll do is a sector ETF.

The reason I don't put too much weight on earnings growth in market index funds is this:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%).  Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."
Thanks...

I don't know about that 1.7% inflation-adjusted figure (although I have a fair amount of respect for Shiller). My favorite investing book is "Stocks for the long run" by Siegal. He has a database of investment data from 1802 onwards, and he does lots of interesting analysis, like, how do high/low dividend stocks compare, or how do high/low PE compare.

Anyway, his book starts, with the US market, from 1802 to 2012. He claims over that period stocks (including reinvested dividends) grew in real terms by 6.6%, and his graph looks like it fits at that rate over the period, so its not really fast to begin with, and really slow later on. So if the 6.6 was correct, add in 1.5 for inflation, and you'd expect 8.1% altogether.

Probably part of the explanation, is that PEs used to be a lot lower in the 19th century, so maybe prices have gradually increased more than earnings. Probably another part is that dividends used to be higher.

So I guess we have 3 figures, mainly taking your approach
dividends are 1.91 and growth is 3.8 = 5.71
Siegal                                              = 8.1
faramund (tm)                                 = 11.0

So... who knows? Although I'd note that the first two numbers are just long term averages, the third is saying buying now will lead to higher returns then usual in the future - which probably meets my way of thinking, after a fall is usually a good time to buy.

This is a difficult comparison.  At least how I am reading it.  You're talking about real stock price growth whereas I'm talking about real earnings growth.  Also, if Siegal stated that stocks grew in "real terms by 6.6%", he is already adjusting for inflation.  You can't throw another 1.5% on top of that.  I also wish dividends reinvested wasn't included in that number as it inflates the price growth rate vs. the real earnings growth rate (since dividends are paid out of earnings aka retained earnings). 

I looked for another source and found that if you take dividends out, the real annual S&P 500 return (inflation-adjusted) from 1871 to 2016 is 2.17% - http://dqydj.net/sp-500-return-calculator/.  Pretty close to Shiller's 1.7% real earnings growth number over a similar period.  This is why I believe we all should be focused on earnings when doing valuation.  It's seems to me that the real return of the S&P over the long-term (without dividends reinvested) is pretty correlated to the long-term real earnings growth rate of the S&P.  If you are a buy and hold forever investor, you can't ignore this. 


faramund

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Re: Buffett Indicator
« Reply #66 on: February 09, 2016, 04:13:06 PM »

That's awesome.  Seriously.  For individual companies, that's some cool shit.   I just don't really buy individual corporate equities.  The smallest I'll do is a sector ETF.

The reason I don't put too much weight on earnings growth in market index funds is this:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%).  Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."
Thanks...

I don't know about that 1.7% inflation-adjusted figure (although I have a fair amount of respect for Shiller). My favorite investing book is "Stocks for the long run" by Siegal. He has a database of investment data from 1802 onwards, and he does lots of interesting analysis, like, how do high/low dividend stocks compare, or how do high/low PE compare.

Anyway, his book starts, with the US market, from 1802 to 2012. He claims over that period stocks (including reinvested dividends) grew in real terms by 6.6%, and his graph looks like it fits at that rate over the period, so its not really fast to begin with, and really slow later on. So if the 6.6 was correct, add in 1.5 for inflation, and you'd expect 8.1% altogether.

Probably part of the explanation, is that PEs used to be a lot lower in the 19th century, so maybe prices have gradually increased more than earnings. Probably another part is that dividends used to be higher.

So I guess we have 3 figures, mainly taking your approach
dividends are 1.91 and growth is 3.8 = 5.71
Siegal                                              = 8.1
faramund (tm)                                 = 11.0

So... who knows? Although I'd note that the first two numbers are just long term averages, the third is saying buying now will lead to higher returns then usual in the future - which probably meets my way of thinking, after a fall is usually a good time to buy.

This is a difficult comparison.  At least how I am reading it.  You're talking about real stock price growth whereas I'm talking about real earnings growth.  Also, if Siegal stated that stocks grew in "real terms by 6.6%", he is already adjusting for inflation.  You can't throw another 1.5% on top of that.  I also wish dividends reinvested wasn't included in that number as it inflates the price growth rate vs. the real earnings growth rate (since dividends are paid out of earnings aka retained earnings). 

I looked for another source and found that if you take dividends out, the real annual S&P 500 return (inflation-adjusted) from 1871 to 2016 is 2.17% - http://dqydj.net/sp-500-return-calculator/.  Pretty close to Shiller's 1.7% real earnings growth number over a similar period.  This is why I believe we all should be focused on earnings when doing valuation.  It's seems to me that the real return of the S&P over the long-term (without dividends reinvested) is pretty correlated to the long-term real earnings growth rate of the S&P.  If you are a buy and hold forever investor, you can't ignore this.

I think you misunderstand the term real value. Say if you have a house, worth $100, and over a year, it appreciates to be $104, while inflation is 1.5%. I am almost sure, that this would be referred to as real growth of 2.5%.

So, if you have a stock worth $100, and it appreciates in value to $104, pays a dividend of $2 and inflation is 1.5%. I'd describe that as the stock's price increased in real terms by 2.5%. Its total return would be its real price increase + inflation + dividend, so 2.5+1.5+2 = 6%.

If you don't agree with the above 2 paragraphs, I'll poke around to get some references.

I don't understand why you wouldn't include dividends in your expectations of earnings. In my holdings, over half my profits come from dividends, and that's what I plan to live off when I retire.

Keith123

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Re: Buffett Indicator
« Reply #67 on: February 09, 2016, 08:44:18 PM »

That's awesome.  Seriously.  For individual companies, that's some cool shit.   I just don't really buy individual corporate equities.  The smallest I'll do is a sector ETF.

The reason I don't put too much weight on earnings growth in market index funds is this:  "According to economist Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004 (inflation-adjusted growth rate was 1.7%).  Since 1980, the most bullish period in U.S. stock market history, real earnings growth according to Shiller, has been 2.6%."
Thanks...

I don't know about that 1.7% inflation-adjusted figure (although I have a fair amount of respect for Shiller). My favorite investing book is "Stocks for the long run" by Siegal. He has a database of investment data from 1802 onwards, and he does lots of interesting analysis, like, how do high/low dividend stocks compare, or how do high/low PE compare.

Anyway, his book starts, with the US market, from 1802 to 2012. He claims over that period stocks (including reinvested dividends) grew in real terms by 6.6%, and his graph looks like it fits at that rate over the period, so its not really fast to begin with, and really slow later on. So if the 6.6 was correct, add in 1.5 for inflation, and you'd expect 8.1% altogether.

Probably part of the explanation, is that PEs used to be a lot lower in the 19th century, so maybe prices have gradually increased more than earnings. Probably another part is that dividends used to be higher.

So I guess we have 3 figures, mainly taking your approach
dividends are 1.91 and growth is 3.8 = 5.71
Siegal                                              = 8.1
faramund (tm)                                 = 11.0

So... who knows? Although I'd note that the first two numbers are just long term averages, the third is saying buying now will lead to higher returns then usual in the future - which probably meets my way of thinking, after a fall is usually a good time to buy.

This is a difficult comparison.  At least how I am reading it.  You're talking about real stock price growth whereas I'm talking about real earnings growth.  Also, if Siegal stated that stocks grew in "real terms by 6.6%", he is already adjusting for inflation.  You can't throw another 1.5% on top of that.  I also wish dividends reinvested wasn't included in that number as it inflates the price growth rate vs. the real earnings growth rate (since dividends are paid out of earnings aka retained earnings). 

I looked for another source and found that if you take dividends out, the real annual S&P 500 return (inflation-adjusted) from 1871 to 2016 is 2.17% - http://dqydj.net/sp-500-return-calculator/.  Pretty close to Shiller's 1.7% real earnings growth number over a similar period.  This is why I believe we all should be focused on earnings when doing valuation.  It's seems to me that the real return of the S&P over the long-term (without dividends reinvested) is pretty correlated to the long-term real earnings growth rate of the S&P.  If you are a buy and hold forever investor, you can't ignore this.

I think you misunderstand the term real value. Say if you have a house, worth $100, and over a year, it appreciates to be $104, while inflation is 1.5%. I am almost sure, that this would be referred to as real growth of 2.5%.

So, if you have a stock worth $100, and it appreciates in value to $104, pays a dividend of $2 and inflation is 1.5%. I'd describe that as the stock's price increased in real terms by 2.5%. Its total return would be its real price increase + inflation + dividend, so 2.5+1.5+2 = 6%.

If you don't agree with the above 2 paragraphs, I'll poke around to get some references.

I don't understand why you wouldn't include dividends in your expectations of earnings. In my holdings, over half my profits come from dividends, and that's what I plan to live off when I retire.

You're totally correct about the meaning of the term "real".  My mistake.   

I only didn't include dividends in the measure because I was trying to show that the real earnings growth rate for the S&P (1.7% for my source), over 130 years, correlates well to the real S&P annual return of 2.17%(excluding dividends).  My point was that earnings matter a lot and investors shouldn't just pay any multiple for them as most investors on here suggest.  The real S&P price seems to grow at a similar rate to its real earnings over the very long term.  So knowing that, wouldn't it be prudent to focus on earnings the most when trying to determine value and expected return?  This is why I like the shiller PE so much.  It's also why elevated corporate profit margins bother me so much also.  Maybe I'm wrong.  Does this makes sense to you?
« Last Edit: February 09, 2016, 08:58:01 PM by Keith123 »

faramund

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Re: Buffett Indicator
« Reply #68 on: February 09, 2016, 10:32:57 PM »

I only didn't include dividends in the measure because I was trying to show that the real earnings growth rate for the S&P (1.7% for my source), over 130 years, correlates well to the real S&P annual return of 2.17%(excluding dividends).  My point was that earnings matter a lot and investors shouldn't just pay any multiple for them as most investors on here suggest.  The real S&P price seems to grow at a similar rate to its real earnings over the very long term.  So knowing that, wouldn't it be prudent to focus on earnings the most when trying to determine value and expected return?  This is why I like the shiller PE so much.  It's also why elevated corporate profit margins bother me so much also.  Maybe I'm wrong.  Does this makes sense to you?
I would expect in general over the medium term, price growth and earnings growth should be similar, but earnings is a 'soft' measure, so that probably explains at least some of the differences.

I understand using shiller/cape PE to smooth out results and look for bubbles,  but I'm a bit wary of comparing it with long term values. Although, if you're trying to work out the earnings in one year, I think straight 100/PE would be more accurate than 100/CAPE.

Say if a company earned, over 10 years

$1 $2 $3 $4 $5 $6 $7 $8 $9 $10,

 and its market price is 100, its CAPE is 100/((1+2+3+4+5+6+7+8+9+10)/10) =100/5.5 = 18.2. Its PE is 100/10=10, So if you know its market price is 100, and you want to know what its current year earnings are, its 100/10=10, if you do 100/18.2=5.5 (which is only the average of its recent earnings).

In general, earnings increase with inflation, and as the economy grows, so if you use CAPE, most of the time you will get an underestimate.

As to if they should buy at these levels or not, as far as I can deduce from what I've read, simply putting money as soon as you get it, into index funds, will beat the vast majority of professionals and amateurs who invest in the stock market.

Some people might be able to beat that, but the vast majority of people who try, won't. So its hard to say that following the above strategy is bad. Personally, I spend a lot of time studying individual companies, and I tend to buy companies with low PEs, high dividends, high ROE and high dividend growth - so even if I feel the market is expensive, I can usually find some good underdogs.

Estimating the total return, is useful when considering an undervalued market, I find this a bit pessimistic, but wouldn't you agree that you'd expect shares to grow by,

(earnings)+(growth)+(inflation), so
100/23.6+1.7+1.5= 7.4%.
http://www.gurufocus.com/shiller-PE.php claims that by CAPE the market is overvalued by 41.3%.
So if it took 6 years for cape to get back to normal, you'd about break even, if it takes longer than that, you'd be increasingly worse off, for each year you were out of the market. The market has been 'above average' for almost all of the last 23 years - you could be waiting a very long time.


Seppia

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Re: Buffett Indicator
« Reply #69 on: February 10, 2016, 12:16:32 AM »
If I'm not mistaken, I've read somewhere that Europe Stoxx600 has a Shiller P/E of just under 15

Keith123

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Re: Buffett Indicator
« Reply #70 on: February 10, 2016, 06:28:28 AM »

I only didn't include dividends in the measure because I was trying to show that the real earnings growth rate for the S&P (1.7% for my source), over 130 years, correlates well to the real S&P annual return of 2.17%(excluding dividends).  My point was that earnings matter a lot and investors shouldn't just pay any multiple for them as most investors on here suggest.  The real S&P price seems to grow at a similar rate to its real earnings over the very long term.  So knowing that, wouldn't it be prudent to focus on earnings the most when trying to determine value and expected return?  This is why I like the shiller PE so much.  It's also why elevated corporate profit margins bother me so much also.  Maybe I'm wrong.  Does this makes sense to you?
I would expect in general over the medium term, price growth and earnings growth should be similar, but earnings is a 'soft' measure, so that probably explains at least some of the differences.

I understand using shiller/cape PE to smooth out results and look for bubbles,  but I'm a bit wary of comparing it with long term values. Although, if you're trying to work out the earnings in one year, I think straight 100/PE would be more accurate than 100/CAPE.

Say if a company earned, over 10 years

$1 $2 $3 $4 $5 $6 $7 $8 $9 $10,

 and its market price is 100, its CAPE is 100/((1+2+3+4+5+6+7+8+9+10)/10) =100/5.5 = 18.2. Its PE is 100/10=10, So if you know its market price is 100, and you want to know what its current year earnings are, its 100/10=10, if you do 100/18.2=5.5 (which is only the average of its recent earnings).

In general, earnings increase with inflation, and as the economy grows, so if you use CAPE, most of the time you will get an underestimate.

As to if they should buy at these levels or not, as far as I can deduce from what I've read, simply putting money as soon as you get it, into index funds, will beat the vast majority of professionals and amateurs who invest in the stock market.

Some people might be able to beat that, but the vast majority of people who try, won't. So its hard to say that following the above strategy is bad. Personally, I spend a lot of time studying individual companies, and I tend to buy companies with low PEs, high dividends, high ROE and high dividend growth - so even if I feel the market is expensive, I can usually find some good underdogs.

Estimating the total return, is useful when considering an undervalued market, I find this a bit pessimistic, but wouldn't you agree that you'd expect shares to grow by,

(earnings)+(growth)+(inflation), so
100/23.6+1.7+1.5= 7.4%.
http://www.gurufocus.com/shiller-PE.php claims that by CAPE the market is overvalued by 41.3%.
So if it took 6 years for cape to get back to normal, you'd about break even, if it takes longer than that, you'd be increasingly worse off, for each year you were out of the market. The market has been 'above average' for almost all of the last 23 years - you could be waiting a very long time.

All of your math seems correct to me.  I follow.  The only curve ball, to me at least, is the the significantly elevated corporate profit margins over the CAPE period though (see attached chart).  I think that makes the total expected return of 7.4% better than it really is.  Would you agree? 

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham, Barron’s

“You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” – Warren E. Buffett

Manguy888

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Re: Buffett Indicator
« Reply #71 on: February 10, 2016, 06:55:57 AM »
semi-tangent, and apologize if this takes the thread off-topic.

The Schiller P/E (CAPE) was invented by Schiller in the late 90's/early 2000's, right? So for all periods prior to that, people were operating in the markets without the idea of a CAPE index in their heads. From the point of its invention onward, though, everyone is operating with the CAPE index as one of their economic indicators to help determine market valuations.

Wouldn't this change people's behavior and thus change the accuracy/usefulness of CAPE as an economic indicator? Not saying it makes it useless, but my opinion is that it would probably soften its ability to project future returns with the type of accuracy you want out of it.

faramund

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Re: Buffett Indicator
« Reply #72 on: February 10, 2016, 02:40:48 PM »
semi-tangent, and apologize if this takes the thread off-topic.

The Schiller P/E (CAPE) was invented by Schiller in the late 90's/early 2000's, right? So for all periods prior to that, people were operating in the markets without the idea of a CAPE index in their heads. From the point of its invention onward, though, everyone is operating with the CAPE index as one of their economic indicators to help determine market valuations.

Wouldn't this change people's behavior and thus change the accuracy/usefulness of CAPE as an economic indicator? Not saying it makes it useless, but my opinion is that it would probably soften its ability to project future returns with the type of accuracy you want out of it.
I'd agree with this.

faramund

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Re: Buffett Indicator
« Reply #73 on: February 10, 2016, 02:47:32 PM »

All of your math seems correct to me.  I follow.  The only curve ball, to me at least, is the the significantly elevated corporate profit margins over the CAPE period though (see attached chart).  I think that makes the total expected return of 7.4% better than it really is.  Would you agree? 

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham, Barron’s

“You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” – Warren E. Buffett
I think my thoughts on this, match my earlier ones. If you are looking at indicators, that seem to show the market is overvalued, and they seem to have been overvalued for a long time, there are 3 possibilities
1) its overvalued and well correct soon
2) its overvalued and it will correct, but in an erratic manner over a long time
3) for some reason, circumstances will change, and it will never correct.

I really don't know which one it is, so reverting to immediately indexing probably isn't a bad strategy - but if you have an alternate investment, which has good historical performance - thats also probably not bad, but its definitely more work.

Keith123

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Re: Buffett Indicator
« Reply #74 on: February 10, 2016, 06:36:13 PM »

All of your math seems correct to me.  I follow.  The only curve ball, to me at least, is the the significantly elevated corporate profit margins over the CAPE period though (see attached chart).  I think that makes the total expected return of 7.4% better than it really is.  Would you agree? 

“Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham, Barron’s

“You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” – Warren E. Buffett
I think my thoughts on this, match my earlier ones. If you are looking at indicators, that seem to show the market is overvalued, and they seem to have been overvalued for a long time, there are 3 possibilities
1) its overvalued and well correct soon
2) its overvalued and it will correct, but in an erratic manner over a long time
3) for some reason, circumstances will change, and it will never correct.

I really don't know which one it is, so reverting to immediately indexing probably isn't a bad strategy - but if you have an alternate investment, which has good historical performance - thats also probably not bad, but its definitely more work.

I really appreciate your feedback.  I'm really not sure where I stand on this anymore.  Maybe I'll try systematic indexing with 50% of my investment funds and try fundamental valuation strategy with the other 50%.  Someone suggested that a while back.  I'll leave you with this - http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.  Please read it if you haven't before.  It is a talk by Warren Buffett in November of 1999, right before the crash.  It has probably influenced my views on investing more than any piece of financial literature I have ever read.

faramund

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Re: Buffett Indicator
« Reply #75 on: February 10, 2016, 07:43:09 PM »


I really appreciate your feedback.  I'm really not sure where I stand on this anymore.  Maybe I'll try systematic indexing with 50% of my investment funds and try fundamental valuation strategy with the other 50%.  Someone suggested that a while back.  I'll leave you with this - http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.  Please read it if you haven't before.  It is a talk by Warren Buffett in November of 1999, right before the crash.  It has probably influenced my views on investing more than any piece of financial literature I have ever read.
And I really appreciate that article, I have a lot of time for Buffett. But note that he expected 6% growth, which I assume was
100/PE+dividends+inflation, i.e. 3+1+2=6. One of the main reasons I've been using the formulas above, is because of what I've read by him before.

If you're going to put in the effort, I think there's a lot to be said for fundamental valuation investing. I used that approach for many years before I found out about indexing, and since then, I've bought indexes and expected that they'd do better than me, but they don't.

Down here in Australia, Vanguard has two broad stock indexes, VHY which buys stocks with high dividends, and VAS, that broadly buys the Australian market. Since they were created, the total return of VHY is a bit higher than VAS, in spite of VHY having a slightly higher (around 0.17%) management fee - which is what I expected. However, since I've bought them in 2014, VAS has done slightly better than VHY.

I wonder if there's anything similar you can find in the US. i.e. a vanguard index that buys companies on some sort of fundamental value basis.

When I found out about indexing, and bought VAS/VHY, I thought they'd very quickly beat me, and then I'd do exactly the same as you, i.e. go 50% VAS, 50% VHY - or at least do that until I threw in some international indexes as well (I already have lots of international stuff in my retirement accounts, so I don't feel the need to hold any directly... yet)

CorpRaider

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Re: Buffett Indicator
« Reply #76 on: February 12, 2016, 06:19:55 AM »
When you say "fundamental indexing strategy" are you talking about buying a fundamental index or smart beta?  It sounds like you just want to value tilt, even Fama would be cool with that.  I'm pretty sure he draws a check from Dimension Funds, a shop that pretty much just does that.  If you're looking for a low ER fundamental index; blackrock and schwab have some. 
« Last Edit: February 12, 2016, 06:23:17 AM by CorpRaider »

MustacheAndaHalf

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Re: Buffett Indicator
« Reply #77 on: February 12, 2016, 11:50:28 PM »
I see a couple comments dismissive or confused about P/E ratios.  This white paper from Vanguard might be educational, and maybe surprising:
https://personal.vanguard.com/pdf/s338.pdf

Quoting from page 9 of the paper:
"Our third primary finding is that valuation indicators—P/E ratios, in particular—have shown some modest historical ability to forecast longrun returns."

Rubic

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Re: Buffett Indicator
« Reply #78 on: February 13, 2016, 11:55:42 AM »
I really appreciate your feedback.  I'm really not sure where I stand on this anymore.  Maybe I'll try systematic indexing with 50% of my investment funds and try fundamental valuation strategy with the other 50%.  Someone suggested that a while back.  I'll leave you with this - http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm.  Please read it if you haven't before.  It is a talk by Warren Buffett in November of 1999, right before the crash.  It has probably influenced my views on investing more than any piece of financial literature I have ever read.

Keith123,

Keep in mind that Buffett's purpose in writing the article was to lower investors' expectations for future market returns in 1999, not to avoid the stock market altogether.  I knew people back then who assumed they'd get a 15%+ annual return if they kept their money in the S&P 500  (or 20%+ by investing in dot-com tech stocks).

I sent out copies of that article to family and friends at the time, but it wasn't particularly well-received.  Nobody likes a party-pooper  ;-)

Similarly, I think Jack Bogle has been recently telling people to lower their expectations (4% nominal, 2% real returns), but he's not recommending people to avoid investing in index funds.


faramund

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Re: Buffett Indicator
« Reply #79 on: February 13, 2016, 02:53:03 PM »
When you say "fundamental indexing strategy" are you talking about buying a fundamental index or smart beta?  It sounds like you just want to value tilt, even Fama would be cool with that.  I'm pretty sure he draws a check from Dimension Funds, a shop that pretty much just does that.  If you're looking for a low ER fundamental index; blackrock and schwab have some.

I was thinking of an index, which biases the index, based on some fundamental value measure. So down here in Australia, we have VHY, which is made up of 20 or so stocks that have high dividends - thats the sort of thing I was thinking about. So it can be a type of smart beta - and this one, VHY, is also cheap, its got a 0.25% MER.

(I'm not sure, but I don't think all smart beta emphasize value. For example, I think you can have a smart beta index that buys high PE/growth stocks - which would be the opposite of what I mean)

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Re: Buffett Indicator
« Reply #80 on: February 13, 2016, 03:26:28 PM »
When you say "fundamental indexing strategy" are you talking about buying a fundamental index or smart beta?  It sounds like you just want to value tilt, even Fama would be cool with that.  I'm pretty sure he draws a check from Dimension Funds, a shop that pretty much just does that.  If you're looking for a low ER fundamental index; blackrock and schwab have some.

I was thinking of an index, which biases the index, based on some fundamental value measure. So down here in Australia, we have VHY, which is made up of 20 or so stocks that have high dividends - thats the sort of thing I was thinking about. So it can be a type of smart beta - and this one, VHY, is also cheap, its got a 0.25% MER.

I'm not aware of an ETF exactly what you are talking about (if I understand you correctly).   But there are ETFs based on indicies of value stocks.  VTV (large cap value) and VBR (small cap value), for example. 

You could make a convincing argument that value outperforms growth, and small cap outperforms large cap, so it is a good idea to overweight your portfolio with some VBR.  But keep in mind small caps get completely murdered every so often.


faramund

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Re: Buffett Indicator
« Reply #81 on: February 13, 2016, 05:25:00 PM »


I'm not aware of an ETF exactly what you are talking about (if I understand you correctly).   But there are ETFs based on indicies of value stocks.  VTV (large cap value) and VBR (small cap value), for example. 

You could make a convincing argument that value outperforms growth, and small cap outperforms large cap, so it is a good idea to overweight your portfolio with some VBR.  But keep in mind small caps get completely murdered every so often.
Yes, that's what I was thinking about, although both of those seem to under perform just a straight S&P500 index (although not by much). So maybe its harder with a US index than I thought. I'd only be interested in a value based index if at least over 10 years, it outperformed a straight index.

Oddly, I looked at vanguard's total market, growth and value stocks, and all of them showed similar performance - perhaps the way vanguard does value (or growth) selection is not very strong, and so the shares in its selections end up very similar to just the total market.

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Re: Buffett Indicator
« Reply #82 on: February 13, 2016, 06:01:19 PM »
^ that's the thing.  Value stocks don't always outperform.   The outperformance is a multi-decade thing.   Growth can outperform value for long periods of time. 

That's why I'm a little skeptical in these threads when people say something like "I'll just rotate into a different sector, until all this blows over."   Well, you might be in the wrong sector for a decade.   What do you do if that happens?   


faramund

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Re: Buffett Indicator
« Reply #83 on: February 13, 2016, 08:47:45 PM »
^ that's the thing.  Value stocks don't always outperform.   The outperformance is a multi-decade thing.   Growth can outperform value for long periods of time. 

That's why I'm a little skeptical in these threads when people say something like "I'll just rotate into a different sector, until all this blows over."   Well, you might be in the wrong sector for a decade.   What do you do if that happens?
Well, I was quite surprised when I looked that up a few hours ago. Here in Australia, the Vanguard high dividend has outperformed the all market index by about 1% a year over the last decade, and my value bought shares collectively outperform the index by, as far as I can tell, by much more than 1% a year. The studies I've seen that support value over an index - were all based on US markets, but since 1970 or so, so maybe the value advantage has been arbitraged out of the US market, but not down here, at least not yet (or maybe the last 10 years are non-typical).

Maybe the difference between what I do, and an index, is I buy shares, based on their value characteristics, and hold them 'forever', the Vanguard value indexes seem to have turnover of up to around 20% a year.

Still, this is something new for me to think about.

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Re: Buffett Indicator
« Reply #84 on: February 14, 2016, 11:45:07 AM »
Here in Australia, the Vanguard high dividend has outperformed the all market index by about 1% a year over the last decade
They were probably all mining stocks, same here in Canada. Over the last couple of years the high dividend index hasn't done so great.

Just saying that in a small economy concentrated in a few sectors, the high dividend companies tend to be even more concentrated.
It may not be dividends that were doing so great

faramund

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Re: Buffett Indicator
« Reply #85 on: February 14, 2016, 02:59:02 PM »
Here in Australia, the Vanguard high dividend has outperformed the all market index by about 1% a year over the last decade
They were probably all mining stocks, same here in Canada. Over the last couple of years the high dividend index hasn't done so great.

Just saying that in a small economy concentrated in a few sectors, the high dividend companies tend to be even more concentrated.
It may not be dividends that were doing so great
While dividends beat the index over the decade, down here, dividends have also underperformed, but I don't think its got a lot of resources in it (they've been expensive), its more banks, telecoms, now its got a few big retailers. And it might now be getting some mining stocks - because they've fallen so far.