Author Topic: Philosophical Economics Post re: Stock Market Valuation  (Read 11707 times)

brooklynguy

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #50 on: April 10, 2017, 03:27:06 PM »
So, it's a "new normal" of converging stock and bond returns based upon a data set of 9 years? You find that to be a compelling and irrefutable argument?

As noted in the article, elevated valuations are now a multi-decade trend, which began in the mid-90's (coinciding with a jump in the percentage of the equity market invested through mutual funds and ETFs) and which has persisted ever since.

The only thing that I said I found "irrefutable" was the assertion that stock market prices are, as of today, "doing fine."

ulrichw

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #51 on: April 10, 2017, 11:10:52 PM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

DavidAnnArbor

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #52 on: April 11, 2017, 05:59:43 AM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

Was there also a peak around 1969 that took around ten years before the market surpassed it ?

FireLane

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #53 on: April 12, 2017, 07:36:18 PM »
This is a great article. It gets at something I've been thinking about myself.

One of the common arguments I've seen for the 4% rule is that it would have worked through everything the 20th century could come up with: depressions, stagflation, two world wars, an oil crisis, etc. As long as you assume the future won't have anything worse or dramatically different than what came before, your success is all but guaranteed.

But there is something new in the world, and it's us, the Mustachians. We invest in a way that's very different from most groups of investors that came before. We're more patient, less reactive, less prone to wild swings of sentiment. And the more people see that it's working for us, the more of them will follow our lead.

I realize this is an exaggeration. There aren't enough of us to move the needle on the entire stock market. But there are also big players, pension funds, endowments and the like, that are adopting a similar strategy, switching from active management to passive indexing. That can't help but make a difference to the way markets react. The knowledge of how to extract a predictable profit from the stock market's irrationality is itself a factor that's changing the behavior of the market.

Obviously, if this is a trend, it's a brand-new one, so it's too soon to draw any long-term conclusions. I doubt the future will be a smooth slope of ever-higher valuations and ever-decreasing volatility. Herd behavior is a powerful force that won't go away. Nevertheless, we should consider that previous experience may not have prepared us for what the market will do in the coming decades. The old rules-of-thumb may not work anymore.

gerardc

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #54 on: April 12, 2017, 10:22:46 PM »
But there is something new in the world, and it's us, the Mustachians. We invest in a way that's very different from most groups of investors that came before. We're more patient, less reactive, less prone to wild swings of sentiment. And the more people see that it's working for us, the more of them will follow our lead.

I've been thinking the same. If a significant number of people follow the index buy-and-hold investment strategy, it could soften the lows, and make future valuations higher, which is fine if you came in right before this new investment strategy became commonplace. If true, this wouldn't actually be over valuations, but rather correct valuations, knowing what we know now (i.e. better statistical model of the future). It might have side effects though, because people stop doing their due diligence and assume other investors will do it on their behalf (tragedy of the commons).
« Last Edit: April 12, 2017, 10:24:59 PM by gerardc »

TomTX

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #55 on: April 15, 2017, 01:13:29 PM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

I believe that chart fails to include dividend returns, which completely changes the answers.

...and including dividend return makes the results a lot more favorable to the stock investor.

dandarc

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #56 on: April 15, 2017, 01:39:27 PM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

I believe that chart fails to include dividend returns, which completely changes the answers.

...and including dividend return makes the results a lot more favorable to the stock investor.
Yeah the dividend yields after the 1929 crash were astronomical.  Not to mention the deflation made any dollars you did have go further.

ulrichw

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #57 on: April 15, 2017, 03:40:28 PM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

I believe that chart fails to include dividend returns, which completely changes the answers.

...and including dividend return makes the results a lot more favorable to the stock investor.
Yeah the dividend yields after the 1929 crash were astronomical.  Not to mention the deflation made any dollars you did have go further.

Well, if we're being detail-oriented, the charts are in nominal rather than real dollars, which also changes things around a little. Most notably, in real terms, the market did not recover back to its peak after 2000 before hitting the next downturn in 2008 (both including and excluding dividends: source: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm)

TomTX

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Re: Philosophical Economics Post re: Stock Market Valuation
« Reply #58 on: April 15, 2017, 04:04:28 PM »
[...]
In the Great Depression, the market had 4 years in a row with negative returns. Since that time, there were only 2 sets of years where the market was down 3 years in a row. 1939, 1940, 1941. And the 2nd period? 2000, 2001, 2002. How about the year with the absolute worst return? -43.84% in 1931. The second? -36.55%...in 2008. [...]
[...]
But looking at the last chart in the original, it took from the peak in '29 to about '54 for the market to recover back to its peak. From the peak in 2000, it took until 2007 to recover, and from the peak in 2007 it took until 2013. So roughly 25, 7 and 6 years.

So perhaps these quicker bounces back are a manifestation of the greater confidence investors have in the market.

I believe that chart fails to include dividend returns, which completely changes the answers.

...and including dividend return makes the results a lot more favorable to the stock investor.
Yeah the dividend yields after the 1929 crash were astronomical.  Not to mention the deflation made any dollars you did have go further.

Well, if we're being detail-oriented, the charts are in nominal rather than real dollars, which also changes things around a little. Most notably, in real terms, the market did not recover back to its peak after 2000 before hitting the next downturn in 2008 (both including and excluding dividends: source: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm)

And if you read your source, across an 80 year timeframe, reinvesting dividends meant 8x the overall return

Including dividends isn't "detail oriented" - it's a huge component of your gains.