Author Topic: Another must read  (Read 2473 times)

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Another must read
« on: March 23, 2015, 10:27:46 AM »
http://www.philosophicaleconomics.com/2015/03/payout/

This website provides some of the most insightful analytics of equity valuation methods I have seen

TLDR: Shiller CAPE is accurate even adjusted for declining dividend payout ratios over time; the market is expensive and future returns are likely to disappoint due to ubiquitous acceptance of "stocks for the long run" as well as dividends/profits being reinvested (either by individuals via DRIP or corporations via buy backs) at high levels (another argument for volatility being a true buy & holder's ally)

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: Another must read
« Reply #1 on: March 23, 2015, 10:35:55 AM »
Analysis in a vacuum still results in the same question - what's the alternative right now to investing in equities? If you have the knowledge and expertise (not to mention capital requirements) to operate a private business or investing into real estate, then you are already doing it. The other alternatives are holding cash waiting for a correction that might not come (look how crazy the prices were pushed in 2000) and buying bonds at the lowest interest rates we've had in years.

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Another must read
« Reply #2 on: March 23, 2015, 10:41:28 AM »
Analysis in a vacuum still results in the same question - what's the alternative right now to investing in equities? If you have the knowledge and expertise (not to mention capital requirements) to operate a private business or investing into real estate, then you are already doing it. The other alternatives are holding cash waiting for a correction that might not come (look how crazy the prices were pushed in 2000) and buying bonds at the lowest interest rates we've had in years.

If you read the article (or even just the conclusion) the author does point out the perceived problem of "there is no alternative" (TINA); to me that does not excuse mindlessly buying (especially with money earmarked for spending needs in the near future)

The facts are the facts - how an individual chooses to respond to them depends on one's personal circumstance and temperament

forummm

  • Walrus Stache
  • *******
  • Posts: 7396
  • Senior Mustachian
Re: Another must read
« Reply #3 on: March 23, 2015, 12:02:56 PM »
The author actually finds that the Shiller CAPE overestimates the amount of the overvaluation of the current market for a few reasons. But that the market is still significantly overvalued by that amended measure.

TheNewNormal2015

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Another must read
« Reply #4 on: March 23, 2015, 12:19:01 PM »
The author actually finds that the Shiller CAPE overestimates the amount of the overvaluation of the current market for a few reasons. But that the market is still significantly overvalued by that amended measure.

"As you can see, the deviation between the two measures comes out to be much smaller. Normalized to the same historical average, the current value of the Total Return EPS (Fair Value) CAPE ends up being 25.9, versus 27.5 for the original Shiller CAPE.  The difference between the total return and the original measures comes out at 5.7%, a little over 100 current S&P points (versus 12% and 250 points earlier).

Surprisingly, then, properly reinvesting the dividends at the same valuation across history more than cuts the deviation in half, to the point where it can almost be ignored.  As far as the CAPE is concerned, when it comes to the kinds of changes that have occurred in the dividend payout ratio over the last 144 years, there appears to be little effect on the accuracy of Shiller’s original version.  The entire exercise was therefore unnecessary. Admittedly, this was not the result that I was anticipating, and certainly not the result that I was hoping to see.  But it is what it is.

It turns out that Shiller was right to reject the dividend payout ratio argument in his famous 2011 debate with Siegel and Bianco:

“Mr. Shiller did his own calculation about the impact of declining dividends on earnings growth and concluded that it is marginal at best, not meriting any adjustment.” — “Is the Market Overvalued?”, Wall Street Journal, April 9th, 2011.

If the subsequent foray into Total Return space caused him to change that view, then he should change it back.  He was right to begin with.  His critics on that point, myself included, were the ones that were wrong."

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1218
  • Age: 40
  • Location: Texas
Re: Another must read
« Reply #5 on: March 23, 2015, 01:54:46 PM »
My response to all this has been to adopt a trend following strategy. It's not for everyone, but it basically guarantees that I won't ride the market all the way down (if it ever goes down again). I do like buy and hold for 5-10 year periods when we're talking about times like the 1970s or 2008.