The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: hadabeardonce on July 16, 2019, 01:14:03 PM
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Keynote Presentation: Are Stocks Too High? A Historical Perspective
https://www.youtube.com/watch?v=wFyXVrlp0-8
Robert Shiller, Yale
Jeremy Siegel, Wharton
Lots of CAPE discussion. Siegel's argument that a P/E ratio of 18 being the new normal as a result of indexing was wild.
The economist heavyweight fight of the year...
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Thanks for posting that.
When I watch/read Shiller and Siegel, I feel like both of them have evidence to prove they are correct!
Interesting points that choosing accounting methodologies, and differences in accounting standards, can move the indicators up or down significantly. It seems like they haven't yet completely figured out the crystal ball. It's also interesting that Shiller and Siegel both agree on some points - mean reversion, overvaluations (although not the level of overvaluation), and the utility of smoothing the data.
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Shiller is legit. Every time he publishes an updated version of Irrational Exuberance, it has been time to buckle the heck up.
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It's a bit of a moot question... stocks are priced where they are, which most agree is undoubtedly expensive by historical standards. Is it "too high"? Well, evidently no it isn't for all those who remain invested and continue to buy at these prices. That may change if and when economic conditions change.
I'm personally quite underweight in equities as I deem the risk of significant downside in the markets outweighs the expected future return, but no one has a crystal ball and so I remain reluctantly invested in a smaller way.
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Interesting stuff. Thanks for posting!
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Stocks might be overpriced but missing out on gains bothers me whereas market crashes don’t, I’ve git another 20 years at least
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Geesh, not another one of these. Someone once posted a link a bunch of threads over the last few years of people voicing this same concern.
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Shiller is legit. Every time he publishes an updated version of Irrational Exuberance, it has been time to buckle the heck up.
Well, he published his last edition in 2016, and I'm glad that I have kept investing since. I don't disagree with his premise, but where else am I going to store spare capital? Real Estate, Cash, and Bonds? Not me.
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Yeah, the first edition was March 2000, so people felt pretty smart until maybe September. The second edition was in 2005 so we had a couple of years before the steam roller. (From memory) The new stuff in 2016 was mostly about the elevated risks/lower future returns in long-term bonds, but he did say housing was in a bubble and U.S. stock prices are "high." So the main calls were tech stocks, housing, and long-term bonds.
What to do with what he's saying about U.S. stocks? I've heard him talk about this many times and he just says it seems prudent to assess the risks in light of valuations and to be diversified (however you define that, but probably not 100% SPY). One obvious place he would tell you to perhaps consider is foreign stocks. But I mean if you have a self-imposed mandate of 100% U.S. stonks then yeah there aren't a lot of options other than to try and prepare yourself mentally for potentially lower returns or a bumpy ride.
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What to do with what he's saying about U.S. stocks? I've heard him talk about this many times and he just says it seems prudent to assess the risks in light of valuations and to be diversified (however you define that, but probably not 100% SPY). One obvious place he would tell you to perhaps consider is foreign stocks. But I mean if you have a self-imposed mandate of 100% U.S. stonks then yeah there aren't a lot of options other than to try and prepare yourself mentally for potentially lower returns or a bumpy ride.
Well, I'm market cap globally diversified, so I'm 55/45 US/International. But I'm almost 100% equities. In fact I am 100% equities if you ignore my EF.
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Yeah, I don't think he would beat you up about that. I think madfientist has reasonably used the data too, in his sort of floating SWR rate too, based on the inverse of the CAPE.
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Bogle would say, "Stay the course." That's pretty much the end result of all of this for the average investor (tl;dr if you don't want to listen to these two guys for an hour.)
It's fun to hear a couple of economists attempt to "look under the hood" for longer than a sound bite. Their perspective on the history of the market, corporate accounting, buybacks, mean reversion, etc. provides a lot of background detail. Here's a link to where Siegel starts talking about the potential impact of indexing: https://youtu.be/wFyXVrlp0-8?t=2102
Shiller mentioned this book toward the end of the talk:
https://www.worldcat.org/title/stock-market-crash-and-after/oclc/224196196
by https://en.wikipedia.org/wiki/Irving_Fisher
Football games are the same regardless of the announcers, but watching along with John Madden and Pat Summerall made it more entertaining ( https://youtu.be/NNgaPmoIsOA ). Economic commentary by Shiller and Siegel could be along the same vein.
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Some notes from Siegel's talk:
- Historically US stocks returned 6.7% real over the very long term.
- That's not going to happen going forward.
- Expect low 5's % real going forward.
- PE of 18 is the new normal (was 15).
- Indexing allows us to keep more of the market return, so a higher market valuation is OK.
- S&P500 at 2871 stocks are overvalued, bonds are enormously overvalued.
I won't be disappointed with a 5% real return over the long term.
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It's a bit of a moot question... stocks are priced where they are, which most agree is undoubtedly expensive by historical standards. Is it "too high"? Well, evidently no it isn't for all those who remain invested and continue to buy at these prices. That may change if and when economic conditions change.
I'm personally quite underweight in equities as I deem the risk of significant downside in the markets outweighs the expected future return, but no one has a crystal ball and so I remain reluctantly invested in a smaller way.
This is a lot of words to say you don't know what is going on. To which, no one does. There can not be a real intellectual or informed discussion on where stocks are going with basically ANY certainty.
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I am doing 80% stocks, 20% Gold in 2020. US stocks are a bit high, but internationally they are most likely on average valuations. Gold is my diversifier here as well as rebalancing anchor. Wouldn't know where else to put my money, since buying a house is neither achievable concerning down payments of €60k+ for a basic buy and renovate house (20% down) and I do not need one right now. Family is still of size 2 for now.
Well, there is always the option of decreasing savings rate and just blow it all :-D Just kidding!
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I am doing 80% stocks, 20% Gold in 2020. US stocks are a bit high, but internationally they are most likely on average valuations. Gold is my diversifier here as well as rebalancing anchor. Wouldn't know where else to put my money, since buying a house is neither achievable concerning down payments of €60k+ for a basic buy and renovate house (20% down) and I do not need one right now. Family is still of size 2 for now.
Well, there is always the option of decreasing savings rate and just blow it all :-D Just kidding!
I have been considering adding gold to my portfolio for the first time ever, just a small percentage. In what aspect are you considering it? if you dont mind me asking. Ourtight or miners or and etf?
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I am doing 80% stocks, 20% Gold in 2020. US stocks are a bit high, but internationally they are most likely on average valuations. Gold is my diversifier here as well as rebalancing anchor. [...]
I have been considering adding gold to my portfolio for the first time ever, just a small percentage. In what aspect are you considering it? if you dont mind me asking. Ourtight or miners or and etf?
I am doing unleveraged long ETCs, and might add physical gold (coins) if that ever becomes more than the 3 ounces equivalent of USD/EUR.
The reason is that I can easily trade it for stocks if I hit a rebalancing point, and a special case in German tax laws. There have been court rulings that two specific ETCs ("EUWAX GOLD II" and "Xetra-Gold") are equivalent to physical gold, since their value is backed by physical gold lying in a vault in Frankfurt. And gains on physical gold are tax free in Germany, if there is more than a calender year between buying and selling the asset. No matter how much.
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Geesh, not another one of these. Someone once posted a link a bunch of threads over the last few years of people voicing this same concern.
Yup. In 2010, and 2011 there were talks that the worst was yet to come. Bottom line, the stock market climbs a wall of worry every single day every decade.
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I think gold is good now....market is near last legs of growth before correction....my gold is up 16 percent since last October....
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.......the stock market climbs a wall of worry every single day every decade.
Poetic alliteration and truth! Beautiful!
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Add TLT for deflation, between TLT, GLDM, and stock ETF... covered for most economic conditions.
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Must look into TLT and what UK version is. Ta
Barry
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Are stocks overpriced? Maybe. Should you keep buying them? Yes. If you already own them, should you hold on to them? Yes. Because surges and dips are merely short term behavior. And NO ONE here is a short term investor, RIGHT?
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You're going to fail at timing the market. You don't know when the right time is to jump out and to jump in.
There is some tool on a website that shows you the changing stock market on a graph. And you could decide based on this graph (which is going up or down as you stare at it) whether you should jump out, and then try to jump back in. You'll always lose trying to play that game.
And part of the reason for the high valuations right now is the tech stocks. Alphabet just came out with some great earnings today for example.
And one of the reasons why the factor funds have done poorly against the total stock market index is because of tech stocks.
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I used to get excited about these kinds of threads but at this point I have read enough of them that I have managed to make peace with the risk that stocks (in the US) are too high. Mainly I achieve that by asking myself "so, what?".
I don't believe in trying to time the market and I'm guaranteed to be terrible at it even if I tried. So I need a long-term strategy to carry me for the next 50 years. So if stocks are high, then what are my options?
- Dump stocks in favor of something like bonds - hell no. That would be guaranteeing that our portfolio won't go the distance
- Dump stocks in favor of real estate or gold or Beanie babies or Bitcoin or something else - no thanks. Don't want to be a landlord and my risk appetite isn't up for speculation. I want investments.
- Keep stocks, knowing that I am as diversified as possible across the globe, and accept that if returns are lower in the future, well, at least I'm still getting the best available option out there to take me the distance.
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I've said it before but it bears re-stating. People that get riled up by these types of articles are making 2 big mistakes. First, they are focused on the short term and not the long term. Second, they wildly misunderstand risk.
Re: the risk statement, here is what I mean. They observe that CAPE is at historically high levels, conclude that stocks are "overpriced" and thus risky because returns might be lower over the next few years and thus there's risk of keeping their money in during a bear market. I agree, there is indeed a risk of a bear market, it's just the nature of stocks.
But here's the funny part - instead of just riding it out, they start to engage in EVEN MORE RISKY behavior to try to compensate for this volatility. Moving money around based on your gut feeling, that's just insanity. You may think you're smarter than the average bear and the exception to the rule and you'll somehow do better than the market. Over the long term, I guarantee that you will not. In the short term, you might do better, that's true. It's also true that you might do much, much worse. That's a crazy amount of risk to take on based on short term market fluctuations.
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I've said it before but it bears re-stating. People that get riled up by these types of articles are making 2 big mistakes. First, they are focused on the short term and not the long term. Second, they wildly misunderstand risk.
Re: the risk statement, here is what I mean. They observe that CAPE is at historically high levels, conclude that stocks are "overpriced" and thus risky because returns might be lower over the next few years and thus there's risk of keeping their money in during a bear market. I agree, there is indeed a risk of a bear market, it's just the nature of stocks.
But here's the funny part - instead of just riding it out, they start to engage in EVEN MORE RISKY behavior to try to compensate for this volatility. Moving money around based on your gut feeling, that's just insanity. You may think you're smarter than the average bear and the exception to the rule and you'll somehow do better than the market. Over the long term, I guarantee that you will not. In the short term, you might do better, that's true. It's also true that you might do much, much worse. That's a crazy amount of risk to take on based on short term market fluctuations.
The stock market is not the only investment in town. There is nothing wrong with wanting to change your exposure to stocks based on their current valuations which are a large component of their expected future return. Investors may decide that the risk premium of holding stocks is not worth it for the return the are expecting, and may instead choose to do other things with the money.
Investors do all sorts of irrational things. They increase their exposure when valuations are expensive and reduce their exposure when valuations are cheap; we all know this is how dumb money behaves, and yet you are criticizing people for who are reducing exposure when valuations are expensive (perhaps to put it into something that has a better chance of outperforming stocks over the next few years).
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Larry Swedroe has also mentioned that accounting standards have resulted in a less risky market. As much as I respect Robert Schiller, I agree more with Siegel's points about GAAP accounting being "useless" (from a quote of Warren Buffet, in his presentation).
But Schiller warned people about 2000 and the real estate bubble.. both of those were during modern times, using GAAP accounting to determine earnings (and so P/E, and CAPE). So if Schiller is using the wrong measure for CAPE... how does he get the right result twice?
The other problem is timing. Schiller's book was titled after a quote from Greenspan about irrational exuberance. But that quote was rather early - years before the dot-com crash.
Vanguard shows VTI has a P/E of 20.4, while VXUS (the rest of the world) has a P/E of 14.4. So if high CAPE values concern you, and you don't want to exit equities, you could shift to a higher percentage of non-US equities.
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I've said it before but it bears re-stating. People that get riled up by these types of articles are making 2 big mistakes. First, they are focused on the short term and not the long term. Second, they wildly misunderstand risk.
Re: the risk statement, here is what I mean. They observe that CAPE is at historically high levels, conclude that stocks are "overpriced" and thus risky because returns might be lower over the next few years and thus there's risk of keeping their money in during a bear market. I agree, there is indeed a risk of a bear market, it's just the nature of stocks.
But here's the funny part - instead of just riding it out, they start to engage in EVEN MORE RISKY behavior to try to compensate for this volatility. Moving money around based on your gut feeling, that's just insanity. You may think you're smarter than the average bear and the exception to the rule and you'll somehow do better than the market. Over the long term, I guarantee that you will not. In the short term, you might do better, that's true. It's also true that you might do much, much worse. That's a crazy amount of risk to take on based on short term market fluctuations.
It’s also the nature of people to look at things in terms of only two available options. You’re either IN equities or OUT. You’re FULLY INVESTED or you’re MISSING OUT.
I’ve noticed that we are usually offered a longer list of choices. Saying that US equities are overpriced, which I do on a frequent basis, does not preclude my investment in equities or other investments.
Sometimes it really is smarter to take a pass on what looks like a crummy deal in favor of other potential opportunities.
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Vanguard shows VTI has a P/E of 20.4, while VXUS (the rest of the world) has a P/E of 14.4. So if high CAPE values concern you, and you don't want to exit equities, you could shift to a higher percentage of non-US equities.
Exactly. This isn’t a case of invest in VTSAX or do nothing. There is a big world out there. Equities don’t end at the US border. There are also other investments.
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Sigh, I am simply advocating BUY and HOLD. That's it. All the other smarty pants out thinking the market stuff might pay off, or it might not. But it's definitely more risky.
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Larry Swedroe has also mentioned that accounting standards have resulted in a less risky market. As much as I respect Robert Schiller, I agree more with Siegel's points about GAAP accounting being "useless" (from a quote of Warren Buffet, in his presentation).
Why would that be so? Ultimately, holding equities is a leveraged play on increasing economic prosperity, the long term drivers of which are technological advance, ongoing accumulation of capital, and favourable demographic trends. I don't see how different accounting practices can do anything to influence any of those.
The main difference nowadays is that the market has become a political barometer. There are vested interests that, at least in the short term, act to protect equities from small corrections developing into something more serious. However some believe that by always protecting the market and preventing true short term market clearing prices to be found it will cause bigger instability in the long term.. the final chapter in the 40yr+ ever-loosening monetary experiment has still to be written.
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Larry Swedroe has also mentioned that accounting standards have resulted in a less risky market. As much as I respect Robert Schiller, I agree more with Siegel's points about GAAP accounting being "useless" (from a quote of Warren Buffet, in his presentation).
Why would that be so? Ultimately, holding equities is a leveraged play on increasing economic prosperity, the long term drivers of which are technological advance, ongoing accumulation of capital, and favourable demographic trends. I don't see how different accounting practices can do anything to influence any of those.
I was referring to the video. Have you watched it?
In it, Schiller claims the market is overvalued owing to a high P/E. Siegel points to a lower P/E based on non-GAAP earnings. The question posed by the video is if P/E is slightly high or very high.
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Larry Swedroe has also mentioned that accounting standards have resulted in a less risky market. As much as I respect Robert Schiller, I agree more with Siegel's points about GAAP accounting being "useless" (from a quote of Warren Buffet, in his presentation).
Why would that be so? Ultimately, holding equities is a leveraged play on increasing economic prosperity, the long term drivers of which are technological advance, ongoing accumulation of capital, and favourable demographic trends. I don't see how different accounting practices can do anything to influence any of those.
I was referring to the video. Have you watched it?
In it, Schiller claims the market is overvalued owing to a high P/E. Siegel points to a lower P/E based on non-GAAP earnings. The question posed by the video is if P/E is slightly high or very high.
Sorry, did not watch the video, though I'm aware of the argument.. Actually I'm aware of the reverse argument - that changes to accounting standards make stocks appear cheaper today that they would be had they still been using past methodology.
One of the metrics which I think is significant is.. the S&P's price:sales ratio. Since 2011 this has risen from 1.2 to a record 2.2... or, to put it another way, corporate revenue has basically flatlined since 2011, and all the stock market's gains have come from increased operating margins (ie reducing costs) and ever increasing valuations. On an individual basis and on a single-company basis we can easily deduce that your earnings will at some point be restricted by your income, no matter how efficient your operation is. The same is true on a macro basis... at some point without top line revenue growth it will be like trying to squeeze blood from a stone.
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One of the metrics which I think is significant is.. the S&P's price:sales ratio. Since 2011 this has risen from 1.2 to a record 2.2... or, to put it another way, corporate revenue has basically flatlined since 2011, and all the stock market's gains have come from increased operating margins (ie reducing costs) and ever increasing valuations. On an individual basis and on a single-company basis we can easily deduce that your earnings will at some point be restricted by your income, no matter how efficient your operation is. The same is true on a macro basis... at some point without top line revenue growth it will be like trying to squeeze blood from a stone.
Oh come on! The stock market always goes up over time. You’ll be missing out if you don’t invest. Valuation and ratios are soooooo 20th century! 😉
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One of the metrics which I think is significant is.. the S&P's price:sales ratio. Since 2011 this has risen from 1.2 to a record 2.2... or, to put it another way, corporate revenue has basically flatlined since 2011, and all the stock market's gains have come from increased operating margins (ie reducing costs) and ever increasing valuations. On an individual basis and on a single-company basis we can easily deduce that your earnings will at some point be restricted by your income, no matter how efficient your operation is. The same is true on a macro basis... at some point without top line revenue growth it will be like trying to squeeze blood from a stone.
Oh come on! The stock market always goes up over time. You’ll be missing out if you don’t invest. Valuation and ratios are soooooo 20th century! 😉
Fact check: sales per share are up about 30% 40% since January 1, 2011. Although prices are up by even more!
https://www.multpl.com/s-p-500-sales/table/by-year
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One of the metrics which I think is significant is.. the S&P's price:sales ratio. Since 2011 this has risen from 1.2 to a record 2.2... or, to put it another way, corporate revenue has basically flatlined since 2011, and all the stock market's gains have come from increased operating margins (ie reducing costs) and ever increasing valuations. On an individual basis and on a single-company basis we can easily deduce that your earnings will at some point be restricted by your income, no matter how efficient your operation is. The same is true on a macro basis... at some point without top line revenue growth it will be like trying to squeeze blood from a stone.
Oh come on! The stock market always goes up over time. You’ll be missing out if you don’t invest. Valuation and ratios are soooooo 20th century! 😉
Fact check: sales per share are up about 30% 40% since January 1, 2011. Although prices are up by even more!
https://www.multpl.com/s-p-500-sales/table/by-year
To hear some of the people on these forums carrying on and complaining about high CAPE ratios and high price/sales ratios, you’d think the US stock market is the most expensive in the world! It’s only 3rd highest.
The S+P is a bargain at twice the price! 😆