Author Topic: Shiller P/E, Buying at the Dip, Value Investing  (Read 27978 times)

GreyMatters

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Shiller P/E, Buying at the Dip, Value Investing
« on: October 14, 2014, 10:32:44 AM »
I'm moving this over from another thread.

CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.

What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?

My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.

I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree.  Currently, however, I'm convinced it's too expensive.

I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?

Eric

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #1 on: October 14, 2014, 10:56:04 AM »
While you're learning more, make sure to take some time to read about how market timing is a losers game.  You may be waiting for a crash that never comes.  Or at least, we may never see prices lower than today, even with a future crash.  You just don't know.  Neither do I.  Retire that crystal ball and stop trying to convince yourself that you can successfully predict the future.

http://forum.mrmoneymustache.com/investor-alley/is-the-stock-market-too-expensive-to-get-back-in/

A bunch of links to other similar threads in this above thread as well

mxt0133

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #2 on: October 14, 2014, 11:06:02 AM »
Looking at historical charts its pretty obvious when things are expensive and when things are cheap.  But since you don't know when things will turn around most investors under perform index performance because of their attempt to time the market.

I would state however that do what you are comfortable with, if you can't handle a big down turn then don't invest, because there is nothing worse than buying high and then selling low.  Just remember the objective of investing is not to earn the highest possible returns, it's to reach your financial goals.  You cannot control market returns, the only thing you can control is how you handle market fluctuations. 

trailrated

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #3 on: October 14, 2014, 11:14:04 AM »
There are plenty of people that have sat out the last two years waiting for a correction and missed out on all the growth. Just pull the trigger, it won't make much of a difference if you are in for the long haul and keep adding as you go.

hodedofome

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #4 on: October 14, 2014, 11:15:38 AM »
Using the CAPE ratio to time 1 market (US Stocks) is a bad idea IMO. It will probably work if you use it on a relative basis across all markets. As in, comparing the CAPE ratios of various worldwide countries and buying the cheapest ones.

The problem with using CAPE on a single market is finding what static number tells you that it's 'cheap' vs 'expensive.' A CAPE of 10 or less may have been historically cheap, but what if the market environment changes in the future and 5 turns out to be cheap, or 15? What if expensive in the future is really 35?

The answer has to be finding a dynamic number that can change with the market environment and tells you what is cheap vs what is expensive. I don't know what that is at this time unfortunately.

Kingomri

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #5 on: October 14, 2014, 11:29:56 AM »
The CAPE has averaged 26.79 over the past 20 years, 23.35 over the past 30 years. Suddenly 25 isn't looking egregiously overvalued.

The historical average CAPE that you may hear (around 17) uses data going back to the late 19th century. Does market data from the late 19th century and early 20th century really have that much of a bearing on the modern market? How reliable are the data from those periods anyway? Back then, before the rigorous accounting controls and auditing that we have today, isn't it possible that earnings were inflated to make companies look good (thus driving the price/earnings ratio lower)?

Don't try to time the market, just decide on an asset allocation and stick to it.
« Last Edit: October 14, 2014, 11:33:37 AM by Kingomri »

foobar

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #6 on: October 14, 2014, 11:37:03 AM »
Jan 1, 1996 CAPE 10 was at 25.76.Lets say you decided to wait til it crossed 20 to buy back in. You would have sat in cash til jan 1, 2009. Do you
a) think you could have done that?
b) Stocks returned 4.75 and cash did 3.6%. Did you come out ahead.

And of course none of that takes into account the inflation of CAPE10s that happened due to accounting rule changes in 2001. Throw those in and the CAPE10s look a lot like they did in the early 90s.

I am not saying valuations don't matter. But the current ones are not extreme enough to lose sleep over.  Yes a 20-30% correction is probably coming in the next 3-4 years. But figuring out if it is before or after the market goes up another 30% is a total crap shoot.

rjack

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #7 on: October 14, 2014, 11:49:09 AM »
I don't think it makes sense to get completely out of the market based on CAPE. I do make marginal annual adjustments to my allocation based on CAPE:

Changes to Asset Allocations Based on PE10
Current PE10Stock Allocation ChangeBond Allocation Change
< 7+30%-30%
7 – 12+20%-20%
12 – 17+10%-10%
17 – 22No changeNo change
22 – 27-10%+10%
27 – 32-20%+20%
> 32-30%+30%

For example, if I my normal allocation is 50-50 and CAPE is 25, then I would adjust my allocation to 40% equities and 60% bonds. The most I would ever adjust is 30% which means I would have 20% equities and 80% bonds or vice versa. I think of CAPE as slightly increasing the odds of a market going up or down depending on whether it is high or low.

At this point, I'm assuming that a "normal" or average CAPE is between 17 and 22.
« Last Edit: October 14, 2014, 12:00:46 PM by rjack »

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #8 on: October 14, 2014, 12:05:51 PM »
Thank you for all for your helpful insight.


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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #9 on: October 14, 2014, 12:09:54 PM »
Just go for 90-10 now and lets roll !

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #10 on: October 14, 2014, 12:27:47 PM »
I'm going to highjack my topic and I'll probably start a new topic if I don't receive any insight on this.

My goal is build up to $100k sometime in the range of 3-4 years and quit my job. I may quit sooner with less money in a shorter period.

I'll use this savings and take time to explore other possibilities. The possibilities that come to mind are: taking some time to decompress; travel; sign up for classes at the local CC; figure out what different career/profession/job I could get into; start a business; make art; play music; write; and read among others. Any one of these things could lead me down a different path altogether. Regardless, I feel like I need to mix it up.

When I get to my magic number, I may even just go down to part-time (12-14) hours a week and request some time off also. It's definitely not the worst gig I could have and at part-time I'd still be making enough to meet my current expenses and then some.

So, how this relates to the original topic is I guess the level of risk I'm willing to accept right now is low-to-no.

If between now and when I decide to quit or move down to part-time there's a major market correction, I'll plow it all into the market and just stay on for longer than I originally planned (sticking to full-time). When a major correction happens and I've fully quit with no other income, I'll average whatever is left into the market and use that timeframe to run out to increase my income by at minimum getting a job.

I'm sort of thinking out loud here now, but your thoughts are welcome on any of this.

alm0stk00l

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #11 on: October 14, 2014, 12:48:40 PM »
I'm going to highjack my topic and I'll probably start a new topic if I don't receive any insight on this.

My goal is build up to $100k sometime in the range of 3-4 years and quit my job. I may quit sooner with less money in a shorter period.

I'll use this savings and take time to explore other possibilities. The possibilities that come to mind are: taking some time to decompress; travel; sign up for classes at the local CC; figure out what different career/profession/job I could get into; start a business; make art; play music; write; and read among others. Any one of these things could lead me down a different path altogether. Regardless, I feel like I need to mix it up.

When I get to my magic number, I may even just go down to part-time (12-14) hours a week and request some time off also. It's definitely not the worst gig I could have and at part-time I'd still be making enough to meet my current expenses and then some.

So, how this relates to the original topic is I guess the level of risk I'm willing to accept right now is low-to-no.

If between now and when I decide to quit or move down to part-time there's a major market correction, I'll plow it all into the market and just stay on for longer than I originally planned (sticking to full-time). When a major correction happens and I've fully quit with no other income, I'll average whatever is left into the market and use that timeframe to run out to increase my income by at minimum getting a job.

I'm sort of thinking out loud here now, but your thoughts are welcome on any of this.

I think the point some are trying to make is that it doesn't make sense to wait for a market correction. The market could go up another 30% before you ever see a 30% correction which will pretty much put you in the same position you are today. There are no guarantees that the market will ever be 30% lower than it is today. I am not trying to say that it will happen this way either. The whole point is you cannot predict what the markets will do over any particular time period. Saving cash today to invest in the next crash may mean that you will never get to invest at today's values. If you market strategy is built around guessing it may no be the best thing to design your future around.

Le Barbu

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #12 on: October 14, 2014, 12:50:33 PM »
Then, just go 25% VTI and 75%BND, you'll be on the edge of the efficient frontier on a risk/return basis. 100% cash is a loser game because of inflation and waiting a major correction to buy some equity is market timming. Hope this help !

Poorman

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #13 on: October 14, 2014, 04:10:01 PM »
Value investing is not the same as market timing.  The advice of these posters is basically to pay any price for stocks, no matter how ridiculous.  That is the opposite of being frugal and the opposite of being a good investor.

Take your money and put it into something that promises a better return than stocks.  Currently, the CAPE ratio is showing an implied return of 1.4%, so if you can beat that, you've found a better value.

GreyMatters

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Shiller P/E, Buying at the Dip, Value Investing
« Reply #14 on: October 14, 2014, 05:10:40 PM »
Value investing is not the same as market timing.  The advice of these posters is basically to pay any price for stocks, no matter how ridiculous.  That is the opposite of being frugal and the opposite of being a good investor.

Take your money and put it into something that promises a better return than stocks.  Currently, the CAPE ratio is showing an implied return of 1.4%, so if you can beat that, you've found a better value.

That is what I have in mind. I'm not talking about timing, but getting a better deal for my money, i.e. value investing. It seems more like speculating by going in at any price (if we're still talking about the broad market).

waltworks

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #15 on: October 14, 2014, 05:23:33 PM »
http://awealthofcommonsense.com/worlds-worst-market-timer/

Nuff said.

If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.

-W

workathomedad

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #16 on: October 14, 2014, 06:22:44 PM »
International CAPEs are a lot cheaper. The PIIGS are all much lower, with implied returns ~10%.

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #17 on: October 14, 2014, 06:28:00 PM »

http://awealthofcommonsense.com/worlds-worst-market-timer/

Nuff said.

If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.

-W

Cool story, bro. :)

That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.

I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.

Am I crazy or crazy like a fox?


waltworks

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #18 on: October 14, 2014, 07:18:49 PM »
Mathematically, your strategy loses to both DCA and lump-sum investing anytime you have money (and DCA loses to lump-sum, assuming you've got a big stash of cash to invest), just due to inflation and missing out on gain/dividends while you're in cash and waiting for a crash. That's the average result, of course. You could get lucky and do great with your timing. Or you might wait and miss a decade of gains and dividends in a time of high inflation and lose horribly.

So non-fox crazy, though that doesn't mean you won't succeed at timing/beating the market. The odds are just against it. Loads of threads here on market timing with good research and links if you're interested, run a search.

-W


http://awealthofcommonsense.com/worlds-worst-market-timer/

Nuff said.

If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.

-W

Cool story, bro. :)

That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.

I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.

Am I crazy or crazy like a fox?

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #19 on: October 15, 2014, 11:01:48 AM »

Mathematically, your strategy loses to both DCA and lump-sum investing anytime you have money (and DCA loses to lump-sum, assuming you've got a big stash of cash to invest), just due to inflation and missing out on gain/dividends while you're in cash and waiting for a crash. That's the average result, of course. You could get lucky and do great with your timing. Or you might wait and miss a decade of gains and dividends in a time of high inflation and lose horribly.

So non-fox crazy, though that doesn't mean you won't succeed at timing/beating the market. The odds are just against it. Loads of threads here on market timing with good research and links if you're interested, run a search.

-W


http://awealthofcommonsense.com/worlds-worst-market-timer/

Nuff said.

If your timeframe is 3 years, go ladder CD or high yield savings acct. Stay the hell away from stocks.

-W

Cool story, bro. :)

That's confidence inspiring. Basically I plan to do what he hypothetically did, except wait for general market panic until I invest.

I'll build up warchests just like Bob that will fund multiple years when I don't have to worry about generating income, and when doom hits, I split whatever I have left by investing one portion and living off the other portion while I look for more work so I can generate more income that I can split between a new warchest and DCA in to the broad market. When I build up a large enough fund that I can live on for at least 7 years, I repeat the process as necessary. Never selling my position. If I get close to running out of money before the next doom scenario, I'll look for more income and repeat.

Am I crazy or crazy like a fox?

Why wouldn't one account for economic cycles - expansion and contraction? As the US expands, credit is more available, business booms, wages and hiring rise, and people gain more confidence/capital to invest, why wouldn't one use the inverse (contraction) of that scenario as information (among others) to invest during a time of uncertainty among the general population? It's not just about timing, it's about getting a good price. Actually, it's solely about getting a good price, timing is just considered.

"Be greedy when others are fearful", right?


mxt0133

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #20 on: October 15, 2014, 11:08:53 AM »
I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now.  Economist can't even predict it and they spend all their lives studying and training to do it.  That is why Economics is a social science and not a hard science.  The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior.  All the text book current, backward, and leading indicators are constantly revised.  During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.

So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?

trailrated

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #21 on: October 15, 2014, 11:19:14 AM »
I would argue the most efficient way to "time the market" is to just re-balance according to your IPS and keep investing.

alm0stk00l

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #22 on: October 15, 2014, 11:25:59 AM »
I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now.  Economist can't even predict it and they spend all their lives studying and training to do it.  That is why Economics is a social science and not a hard science.  The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior.  All the text book current, backward, and leading indicators are constantly revised.  During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.

So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?

I agree with this. You can use all of the information you want to make decisions about the market, but I just don't think you will ever have enough information. Value investing is a great strategy and has worked very well for many people you have heard of. WB used that strategy to become recognized as the greatest investor of all time. Kudos to him. But his investment strategy was to identify individual companies with strong management teams and great business plans that he felt he could buy at a bargain. If that is what you are proposing, and you have the knowledge and ability to identify those companies, it can work very well for you.

But trying to apply value investing based principles to the entire market is impossible. There are too many factors to consider. You can look at ratios and averages and everything else you want and they tell you nothing but a small part of what happened before. Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.

2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #23 on: October 15, 2014, 11:27:27 AM »
I'm moving this over from another thread.

CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.

What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?

My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.

I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree.  Currently, however, I'm convinced it's too expensive.

I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?

As you appear to be out of the market and in cash right now, I would remain there until the market again increases above it's 200 day MA ( moving average). The recent sell-off was triggered by going below this average.
Here you can track 10 month moving averages ( 200 trading days ) for various sectors

http://www.advisorperspectives.com/dshort/updates/Interim-Timing-Updates.php,


Of course if your in for the long haul and not worried about big bear markets then buy hold and check yearly
« Last Edit: October 15, 2014, 11:31:07 AM by 2lazy2retire »

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #24 on: October 15, 2014, 11:43:05 AM »

I guess the point of all this is that it's difficult to know what economic cycle we are currently in right now.  Economist can't even predict it and they spend all their lives studying and training to do it.  That is why Economics is a social science and not a hard science.  The actors are humans and are irrational, they do not follow any fundamentals laws, history changes our behavior.  All the text book current, backward, and leading indicators are constantly revised.  During the GFC economist did not know when went into an official recession until 18 months later due to adjustments in the data.

So can I ask you what cycle we are currently on, downturn, trough, expansion, or peak?

I'll be the first to admit I've got a lot to learn. Still, it seems to be a good time to be suspicious of broad market returns when most are all for it. I'm not trying to pick the bottom, but I think the general economic climate along with various metrics is a decent indicator of when to drop a lump sum. Because it's a social science, the irrational emotions and by extension the claims of the population at large can be an informative, I think.

Again, I know that I know very little about all of this. My general mode of thinking is finding connections and pattens in seemingly disparate things. From what I have learned, I can't help but make these connections, but I digress.

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #25 on: October 15, 2014, 11:44:55 AM »

I'm moving this over from another thread.

CAPE (U.S) sits at around 25, which has historically been followed by a reversion to the mean (or lower). The general consenus of the US population seems to be, "stocks for the long run, they always go up" - which is the same thing that could be said about tulips, housing, and dotcom in the 90s. Sure they all go up over time, but they still get too expensive when demand is high.

What are your thoughts of sitting on 100% cash and waiting for a better price based on lower CAPE ratio?

My current plan until I learn more, at 31 and beginning my cash accumulation phase (about $7k now and making a sprint for $100k), I figure I've got time and patience to wait for a crash or least a major correction - at which point I'll go in 90/10 (equity/cash) in something like VTSAX with what I've accumulated up to that point.

I can learn more about other investment opportunities and look for deals elsewhere in the mean time. I might even come across information that could convince me to buy in at a CAPE (U.S) of 25, or whatever number, to some degree.  Currently, however, I'm convinced it's too expensive.

I believe there are so many other factors (personal and otherwise) to consider, but what thoughts/advice could you offer regarding current market valuations in general and/or relative to my plan?

As you appear to be out of the market and in cash right now, I would remain there until the market again increases above it's 200 day MA ( moving average). The recent sell-off was triggered by going below this average.
Here you can track 10 month moving averages ( 200 trading days ) for various sectors

http://www.advisorperspectives.com/dshort/updates/Interim-Timing-Updates.php,


Of course if your in for the long haul and not worried about big bear markets then buy hold and check yearly

Thanks for this. I don't have time to check it out right now, but I'll look into it.

Regardless, I think all of your comments are helpful in helping me find the holes in what I'm proposing.

waltworks

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #26 on: October 15, 2014, 11:52:12 AM »
Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.

It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.

Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/

-W
« Last Edit: October 15, 2014, 12:15:23 PM by waltworks »

GreyMatters

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #27 on: October 15, 2014, 12:04:28 PM »

Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.

It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.

-W

Do I detect an air of condecension?

I've been pretty lucky so far in life, so I like my odds. Seriously though, it just so happens that sitting in cash is part of my personal life strategy so it's rather convenient for me to wait on the sidelines.

Once I'm in, I'm in though.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #28 on: October 15, 2014, 12:15:37 PM »
From Bogleheads

Quote
Mark W. Riepe, from Charles Schwab, tests perfect market timing against four other investment strategies in his article, Does Market Timing Work?

The study tracks the performance of five hypothetical long-term investors following one of the five following  investment strategies.

Perfect timing: investing at the market low each year;
Invest immediately: invest at the beginning of each year;
Dollar cost average: invest in 12 monthly installments (also mirrors payroll installment investments in a 401-k type retirement plan);
Bad timing: invest at the market high each year;
Stay in cash investments: stay invested in treasury bills.
Each investor received $2,000 at the beginning of every year for the 20 years ending in 2012 and left the money in the market, as represented by the S&P 500 index.

The table below shows the ranking order of performance  and  accumulated wealth over the 1993 – 2012 period for each investment strategy:

Strategy   Terminal wealth
Perfect timing   $87,004
Invest immediately   $81,650
Dollar cost averaging   $79,510
Bad timing   $72,487
Stay in cash investments   $51,291
The totally unrealistic strategy of perfect timing will always occupy the top place in the ranking.  The measured period was also one which included a realized equity premium return over cash investments.

The study then examined 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the ranking order was exactly the same. In only one period did investing immediately fall to the fourth ranking  (in 1962 to 1981, a period of weak equity markets). However, during that period, fourth, third and second places were virtually tied.

The study concludes that “the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.”

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #29 on: October 15, 2014, 12:17:17 PM »
Nobody is being condescending, AFAIK. I'm sorry if I came across that way. But your strategy is almost certainly a bad one, according to all the available research, because it's impossible to execute without perfect information.

-W

2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #30 on: October 15, 2014, 12:46:18 PM »
Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.

It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.

Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/

-W

"You will lose more waiting for the crash unless you get lucky" - this may hold true if one is waiting for a crash, but to suggest that you should go ahead and invest with the knowledge that a major correction may be underway ( ie last 3 days )  would not be sound advice. With DCA it may be ok to continue and ignore recent momentum or if your are already in for the long haul stay invested, but a big initial investment surely hold your cash until the momentum shows some upside.?

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #31 on: October 15, 2014, 01:00:49 PM »
Look, you are just proposing market timing. Lots of people try to do this, and they mostly fail at it, which is why everyone here advises against it. Lots of people sit in cash because "the market is at an all time high!" and lose out because the market never takes the big dump they're waiting for, so everyone here advises against it.

It is quite possible that the S&P will never go lower than it is today, ever. It's also possible it'll fall 50% tomorrow. But the math says trying to time the market is a sucker's bet. Lots and lots of studies have been done about it, and it's not at all controversial. You will lose more waiting for the crash unless you get lucky.

Some reading for you:
http://www.schwab.com/public/schwab/nn/articles/Does-Market-Timing-Work
http://www.ifa.com/12steps/step4/

-W

"You will lose more waiting for the crash unless you get lucky" - this may hold true if one is waiting for a crash, but to suggest that you should go ahead and invest with the knowledge that a major correction may be underway ( ie last 3 days )  would not be sound advice. With DCA it may be ok to continue and ignore recent momentum or if your are already in for the long haul stay invested, but a big initial investment surely hold your cash until the momentum shows some upside.?

I'll just leave this discussion right here. Feel free to ignore it and keep up with the market timing er... sideline waiting.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #32 on: October 15, 2014, 01:24:11 PM »
Note that even professor Shiller (as indicated in recent interviews) would only marginally adjust his asset allocation based on the Graham (his) P/E ratio.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #33 on: October 15, 2014, 01:25:18 PM »
From Bogleheads

[SNIP]

Thanks for posting this trailrated. Good stuff.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #34 on: October 15, 2014, 01:29:01 PM »
Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.

Does anybody else see the glaring contradiction here?

Index investing is based on paying any price for an investment.  Value investing is based on paying a good price.  You can apply the principles to individual companies, sectors, or entire markets.

The CAPE ratio shows that stocks have a really low expected return over the next decade.  That means stocks are a poor value.  Other asset classes should be favored if they show a higher expected return.



Terrestrial

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #35 on: October 15, 2014, 01:42:03 PM »

Do I detect an air of condecension?

I've been pretty lucky so far in life, so I like my odds. Seriously though, it just so happens that sitting in cash is part of my personal life strategy so it's rather convenient for me to wait on the sidelines.

Once I'm in, I'm in though.

I don't think there was any condescension there.  He simply pointed out (with plenty of people posting backup hard data) that sideline sitting rarely works out the best if you are interested in making the best return.   If you view the historical data and still chose to do it, of course that's your prerogative. 

There is a difference between holding cash because you might need it in the short term or in general your risk tolerance is low and you prefer XX% cash allocation and will accept the correspondingly higher safety net/lower return, and holding it because you want it to be in the market and are trying to time it, which is what I understood your circumstance to be.




2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #36 on: October 15, 2014, 02:08:04 PM »
"hard data" ? seriously, anyone can dig around the web to select data to support their argument

trailrated

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #37 on: October 15, 2014, 02:21:46 PM »
"hard data" ? seriously, anyone can dig around the web to select data to support their argument

Literally posted this a few comments before, but alas feel free to argue with these "cherry-picked" results.

Quote
Mark W. Riepe, from Charles Schwab, tests perfect market timing against four other investment strategies in his article, Does Market Timing Work?

The study tracks the performance of five hypothetical long-term investors following one of the five following  investment strategies.

Perfect timing: investing at the market low each year;
Invest immediately: invest at the beginning of each year;
Dollar cost average: invest in 12 monthly installments (also mirrors payroll installment investments in a 401-k type retirement plan);
Bad timing: invest at the market high each year;
Stay in cash investments: stay invested in treasury bills.
Each investor received $2,000 at the beginning of every year for the 20 years ending in 2012 and left the money in the market, as represented by the S&P 500 index.

The table below shows the ranking order of performance  and  accumulated wealth over the 1993 – 2012 period for each investment strategy:

Strategy   Terminal wealth
Perfect timing   $87,004
Invest immediately   $81,650
Dollar cost averaging   $79,510
Bad timing   $72,487
Stay in cash investments   $51,291
The totally unrealistic strategy of perfect timing will always occupy the top place in the ranking.  The measured period was also one which included a realized equity premium return over cash investments.

The study then examined 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the ranking order was exactly the same. In only one period did investing immediately fall to the fourth ranking  (in 1962 to 1981, a period of weak equity markets). However, during that period, fourth, third and second places were virtually tied.

The study concludes that “the best strategy for most of us mere mortal investors is not to try to market-time at all. Instead, make a plan and invest as soon as possible.”

waltworks

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #38 on: October 15, 2014, 02:24:53 PM »
So, where's *your* data supporting your argument? Dig some up, homeboy!

-W

"hard data" ? seriously, anyone can dig around the web to select data to support their argument

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #39 on: October 15, 2014, 02:45:17 PM »
Acting on that information is just guessing. You may guess correctly, but the odds are against it. Index investing simplifies all of that. You are buying a part of a market that you think will continue to be profitable going forward.

Does anybody else see the glaring contradiction here?

Index investing is based on paying any price for an investment.  Value investing is based on paying a good price.  You can apply the principles to individual companies, sectors, or entire markets.

The CAPE ratio shows that stocks have a really low expected return over the next decade.  That means stocks are a poor value.  Other asset classes should be favored if they show a higher expected return.

And I am saying that you cannot determine a good price accurately and consistently. That doesn't mean you shouldn't invest; it means you shouldn't worry about the perfect investment.

2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #40 on: October 15, 2014, 03:17:19 PM »
So, where's *your* data supporting your argument? Dig some up, homeboy!

-W

"hard data" ? seriously, anyone can dig around the web to select data to support their argument

The main objective of using moving averages is not to beat the market on returns ( which it also appears to do) but to greatly reduce maximum drawdowns, the system like any other is not perfect but who would have liked a maxDD of -0.59% ( timing ) v -30.01% ( B&H ) in 2008 along with slightly better long term returns.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%,  still rock solid? , - honest answers please.

Bogleheads are a popular point of reference for persons here - so here is a link to 200-day ma dissussion, good arguments for and against - and without the name calling ;)

http://www.bogleheads.org/forum/viewtopic.php?t=27460

For those not wanting to read the paper - this website from an early retiree discusses quant investing in layman terms
http://investingforaliving.wordpress.com/2014/09/22/a-better-retirement-through-quantitative-investing/

« Last Edit: October 15, 2014, 03:27:36 PM by 2lazy2retire »

waltworks

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #41 on: October 15, 2014, 03:45:03 PM »
From that great thread:

psteinx wrote:
"I'd be interested in seeing a huge grid of analysis - overlaying many lag periods and different buffer sizes. Then I'd like to see the results for different markets, time frames, and perhaps different assumptions about transaction costs and taxes. Results would include simple returns, risk-adjusted returns, number of trades, and perhaps a few other things.

I'm sure if you backtest enough strategies and tinker with the variables enough, some would look good.

And in fact, it's possible that there's a bit of merit to these kinds of strategies, provided your costs are low enough, because from various things I've read, there is a bit of momentum to the stock market, short term.

But I wonder how robust these strategies are, on the whole. If we backtest and find that a 200 DMA with a 1% boundary looks good, but that the same thing with a 2% boundary does not, or that using a 180 DMA yields substantially different results, then the whole exercise becomes a bit suspicious. In theory, by varying a number of the key parameters, you could come up with thousands or perhaps even millions of potential strategies. If 70% of strategies with reasonable parameters work, then I'd be somewhat interested. If only 15% of them work, and somebody is cherry picking the most successful from within that 15% to advocate the strategy, then I'd be very skeptical. Of course, many folks might have different thresholds/standards for saying something "works", as well."

That pretty much sums it up for me. The stock market is *random*, folks. You can't "beat" random with a formula. Luckily, it trends up, so if in doubt, invest.

-W

2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #42 on: October 15, 2014, 04:09:08 PM »
So you see no value in limiting you maxDD in retirement?

PS - why change a habit, pick an argument from the thread that supports your vieww
« Last Edit: October 15, 2014, 04:13:15 PM by 2lazy2retire »

matchewed

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #43 on: October 15, 2014, 04:27:08 PM »
I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%,  still rock solid? , - honest answers please.

Yes still rock solid. Even when I'm 65 my timeline isn't going to be a six month perspective. It will be a twenty year perspective. Furthermore I expect that between FIRE and 65 that my portfolio would have grown and I will handily exceed my needs for 65+. Even if I don't I'll have gained the skills and knowledge to mitigate these circumstances. Fear mongering doesn't hold much water w/ me. Maybe this sort of emotionally based investing based on how you feel about your investments works for others but for me I'm investing in an entire country's economy. A country that may have some dips in the short term thinking but will continue to be successful for my lifetime. But go ahead and wait until the Shiller P/E hits... what level again?

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #44 on: October 15, 2014, 04:36:24 PM »
You could buy GVAL, which uses the Shiller PE to invest in the global stock market.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #45 on: October 15, 2014, 04:45:55 PM »
Anyone else use the following website?

http://www.multpl.com/

Super basic, but I like the presentation of the various bits of data without commentary.  You can click on the "more" button in the upper right to see a ton more historical data charts they have available.

2lazy2retire

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #46 on: October 15, 2014, 04:56:54 PM »
I am aware that most people on this site are big supporters of B&H and for good reasons outlined on this thread and elsewhere on MMM, however if other options are shown to work longterm while allowing retirees to sleep better during prolonged bear markets why dismiss them as "homeboy" ramblings.
Its all well and good to say ignore the crashes but how blase will you be if it happens when your 65 with no other source of income and your 1 million dollar portfolio drops to 600k and is still dropping, are you going to ride it out, maybe, maybe not, 6 months later down another 10%,  still rock solid? , - honest answers please.

 

Yes still rock solid. Even when I'm 65 my timeline isn't going to be a six month perspective. It will be a twenty year perspective. Furthermore I expect that between FIRE and 65 that my portfolio would have grown and I will handily exceed my needs for 65+. Even if I don't I'll have gained the skills and knowledge to mitigate these circumstances. Fear mongering doesn't hold much water w/ me. Maybe this sort of emotionally based investing based on how you feel about your investments works for others but for me I'm investing in an entire country's economy. A country that may have some dips in the short term thinking but will continue to be successful for my lifetime. But go ahead and wait until the Shiller P/E hits... what level again?

Clearly you have read only parts of  my post
1/ I refer to the 200 day  ma to reduce maxDD - not P/E
2/ The averages are clearly based on data, no emotion involved - one of the strong points I would say

I still hold that the possibilty of reducing DD in  retirement is worth consideration, you talk about "short term thinking" the 200MA has not prompted a sell in 2 years, hardly day trading. What about a 50% DD in first few years of retirement, I guess sequence of return risk is to be ignored also.
Let me be clear B&H is hard to beat, but only if you stomach the DD's and extended bear markets that can last for years (no fear mongering intended)

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #47 on: October 15, 2014, 05:27:22 PM »
Also, for those saying that index investing beats value investing Ben Graham, Tweedy & Browne, Peter Lynch, and Warren Buffet would like to have a word with you. Please note that all of these investors have 20-30 year plus track records that absolutely trounce the index markets.

Secondly, this stuff isn't rocket science but the same type of common sense that MMM advocates - buying wisely. Go read Ben Graham's Security Analysis or Tweedy & Browne's report on how they make their investments below:

http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Christopher%20Browne/WhatHasWorkedInInvesting.pdf

For those who are critical of 2lazy2retire's 200MA please go read about Ed Seykota who uses a very similar trend following system. His audited, post management fee (2% + 20%) returns are 30% compounded over 30 years. His first client started an account with him in the 1970s that was $10,000. It is worth well over $15 million today. There are others like him: Paul T. Jones, George Soros, Stanley Druckenmiller, Tom Basso and many others.

The silly stuff you hear in the media that average investors lose money and average mutual funds don't beat the average index are nonsensical. Of course you must be better than average. Consider that MMM philosophy is not average either - after all the average person is a volcano of wastefulness and a complete sukka.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #48 on: October 15, 2014, 06:08:37 PM »
The silly stuff you hear in the media that average investors lose money and average mutual funds don't beat the average index are nonsensical. Of course you must be better than average. Consider that MMM philosophy is not average either - after all the average person is a volcano of wastefulness and a complete sukka.

Getting the average market return actually places you well above the average investor.  That's because lots of people think they can beat the market using this formula or that, dancing in and out, and predicting the future.  But the fact remains that most don't.  If you're one of the lucky ones, then great!  But even if you succeed, your extra returns did not come for free.  You're likely trading lots of free time to earn that extra return.

I'm an accountant.  The thought of wading through financial reports and reading prospectuses and board meeting notes in my free time makes me think I'll soon wake up in a cold sweat, thankful that it was only a bad dream.  I'll gladly choose to be in the 75th percentile of investors, with no risk of being lower, while also using all of my free time for enjoyable activities.  But if your idea of fun is to read, log, analyze, and act on quarterly profit reports, then more power to you.  And even then, you may find that spending your free time doing this didn't net you any extra return and possibly you did worse than the market, which would seem to be the worst of both worlds to me.  It seems like a common enough outcome that the double downside risk isn't worth it to me.  But of course everyone will have to decide on their own path.

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Re: Shiller P/E, Buying at the Dip, Value Investing
« Reply #49 on: October 15, 2014, 06:17:36 PM »
And I am saying that you cannot determine a good price accurately and consistently. That doesn't mean you shouldn't invest; it means you shouldn't worry about the perfect investment.

Anybody with an average IQ can determine a good price accurately and consistently.  Read some investment books.  Study the fundamentals.  Valuing a cash-generating asset isn't rocket science.  People do it every day so it's a skill set that can be learned just like everything else on this site.

Ask yourself, how much cash is this investment likely to earn you?  How much is this stream of cash selling for?  What are the risks to this cash flow?

Right now, the cash being generated by the stock market is not enough to compensate me for the risk or the prices being asked.  Better returns can be had elsewhere for a lower entry price and less risk.