Author Topic: The Market Could Be Either Undervalued or Overvalued Right Now  (Read 9811 times)

innerscorecard

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http://www.alphaarchitect.com/blog/2015/03/18/market-valuation-metrics-where-do-we-stand/

Very smart people are very confident that we are far overvalued right now. Equally smart people think valuations are reasonable, and we have a good amount of room to run.

That's why timing the broad market based on valuation along is a bad idea.

solon

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #1 on: March 20, 2015, 03:59:07 AM »
I just got paid. Seems like a great time to invest!

retireatbirth

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #2 on: March 20, 2015, 05:56:15 AM »
But the experts seem so confident in themselves!

ArbitraryGuy

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #3 on: March 20, 2015, 06:35:42 AM »
The question "is the market overvalued?" has an interesting corollary, "compared to what?"

Thanks for the link.

WranglerBowman

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #4 on: March 20, 2015, 07:34:19 AM »
The market is def overvalued...just like our money!  But if we all close our eyes and keep believeing, everything will be fine...;)

hodedofome

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #5 on: March 20, 2015, 07:45:59 AM »
This is so good and it's what makes a market. There are buyers and sellers at the same time and both believe they are right.

arebelspy

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #6 on: March 20, 2015, 08:11:52 AM »
For every stock market purchase, there is a sale, and vice versa.
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ioseftavi

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #7 on: March 20, 2015, 08:19:48 AM »
I'd like to go on the record and state that - as an industry insider who is supposed to have an opinion on these things - the market appears overvalued to me right now.

However - and this is where a lot of people fuck themselves - my opinion on valuation will not change my personal investment activity in the slightest.  My wife and I are investing thousands every month in before- and after-tax moneys.  We've got a time horizon measured in decades.  A year or two of correction wouldn't change much for us.

But yeah.  Based on the collection of quantitative metrics I care about...I'd say that people are paying very very rosy prices for equities.  But again, if you're investing for decades, it just doesn't matter.

ScroogeMcDutch

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #8 on: March 20, 2015, 08:39:59 AM »
@ioseftavi

N offense intended, but how can you say both of those things in one post? You are either invalidating your own decisions, or your own profession?

ioseftavi

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #9 on: March 20, 2015, 08:51:00 AM »
@ioseftavi

N offense intended, but how can you say both of those things in one post? You are either invalidating your own decisions, or your own profession?

I'm saying, "I believe that the market is overvalued.  However, I don't feel that my beliefs about near-term market valuations are important, strongly-held, or relevant enough that I should change my own investment plans based on them."

My opinion is likely to turn out wrong, so I won't deviate from my investment strategy.  In general, 80% of the time that I am asked about "the stock market", I don't venture an opinion.  Perhaps 20% of the time (like now), I'm willing to throw an opinion out there.

Basically: I rarely have opinions on "the stock market".  And even when I do, one can have an opinion on the overall valuation of the stock market without feeling compelled to act on it. 
« Last Edit: March 20, 2015, 08:55:19 AM by ioseftavi »

brooklynguy

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #10 on: March 20, 2015, 08:51:42 AM »
Based on the collection of quantitative metrics I care about...I'd say that people are paying very very rosy prices for equities.  But again, if you're investing for decades, it just doesn't matter.

This statement is too cavalier and not quite true.  For the early retirement crowd (who have decades-long time horizons but plan to slowly draw down their assets over that multi-decade period), sequence of returns risk very much matters.  If it turns out that next-year's market tells us that this year's market was highly overvalued, then someone retiring now could find themselves on one of the 5% failure paths reported by decades-from-now-cfiresim if they don't take corrective action.

However, consistent with the OP's sentiment, I believe it is impossible to know what direction the market will take in the short term, and that is the reason I continue to blindly invest thousands of dollars every month without regard to what any quantitative metrics say about valuation.

ShavinItForLater

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #11 on: March 20, 2015, 09:02:47 AM »
I don't think ioseftavi stating those two things together is inconsistent in the least.  The stock markets go up and down, but the long term trend is certainly up.  Your investing time horizon is a crucial component. 

If you want to invest money, let's say for college, and will need it next year, I would strongly advise you to keep your money out of the stock market and put it somewhere safe like a 1-year CD or money market account--yes, even when interest rates are near zero, and even if I personally thought the stock market would go up from here over the next year.  Conversely, if you were socking that money away for college but it was for your newborn so you 18-20 years before you'd need the money, I'd recommend the stock market as a great place to invest, even if I thought we were ripe for a 10% correction in the next year or two. 

Over short periods of time, the volatility risk of the stock market can be large, and if you are counting on that money in the short term, it's not worth the risk.  However if you look out over a decade or two, that volatility historically goes way down--almost always, the stock market will go up significantly over the long term.  Then inflation comes into play as well-over the short term it's usually no big deal, but over the long term even a 2-3% annual inflation rate adds up fast, so a money market or CD account ends up losing a lot of value vs. those average stock market returns that will generally outpace inflation.

Then add in the effect of commissions and taxes if you are going to jump in and out of the market every time you change your mind about the direction it's heading, another huge penalty that adds up fast over the long term.  Then of course, add in the amount of time you'll be wrong in your predictions on timing--which is often the biggest killer.  It's one thing to say you think we're overvalued today.  But anyone who has watched those figures over time will tell you that reality does not march in lockstep with those indicators--it will often go up for long periods of time while the indicators say it should drop, and vice versa.

The buy and hold method for long term investing horizons removes a lot of that risk, and keeps you in the game for the big gains you would miss if you were sitting out until just the right time to jump in.  That's certainly true for the average investor, and even the experts have a pretty bad track record of calling every top and bottom.

For the record, I personally don't think stocks are highly overvalued today.  But I will qualify that by saying if we had a 10% correction tomorrow, it would not surprise me in the least.  I think that can happen at any time during a bull market, especially one that has gone on for as long as this one has.  I don't think it's likely we'll have a 20% drop in the near future though (the general definition of a bear market).  But again, that's just one man's opinion.


Financial.Velociraptor

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #13 on: March 20, 2015, 10:37:31 AM »
You forgot, "The market might be valued exactly right.  To the last damn penny!"  What now?

RapmasterD

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #14 on: March 20, 2015, 10:40:29 AM »
I can tell you this: some day we will all be dead. Enjoy your Friday.

MoneyCat

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #15 on: March 20, 2015, 11:24:01 AM »
If there's a 10% correction after I've earned 30%, then I'm okay with that.

catccc

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #16 on: March 20, 2015, 12:16:26 PM »
I can tell you this: some day we will all be dead. Enjoy your Friday.

ha ha!

But really, it could be under, or over, or just right.   Is Goldilocks in the house?  Only she would know for sure.

I'm a red panda

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #17 on: March 20, 2015, 12:29:03 PM »
So no experts say it could be just right?

NoraLenderbee

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #18 on: March 20, 2015, 12:44:36 PM »
The only logical conclusion is that the market will either rise or fall.

ender

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #19 on: March 20, 2015, 01:05:39 PM »
The only logical conclusion is that the market will either rise or fall.

+1

I'm not planning on withdrawing or converting money for a decade or more. It's pretty likely the market will be up 10+ years from now.


ShavinItForLater

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #20 on: March 20, 2015, 02:07:27 PM »
An opinion is not a position! Strong opinions, weakly held!

Well, I will add that our investable assets are 100% in stocks today, and our ongoing 401k contributions (maxed to Federal limit every year) are set to 100% stocks as well.  So, my position matches my opinion.  We've been investing since around 1992, and have been guilty of market timing, but rarely--we went to cash from March 2000 until 2003.  But we held all through the 2008 drop and the rise back up, and will continue holding unless/until we think a severe bear market is likely--and that has never been the case for the past 12 years.

forummm

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #21 on: March 21, 2015, 07:14:18 AM »
http://www.alphaarchitect.com/blog/2015/03/18/market-valuation-metrics-where-do-we-stand/

Very smart people are very confident that we are far overvalued right now. Equally smart people think valuations are reasonable, and we have a good amount of room to run.

That's why timing the broad market based on valuation along is a bad idea.

The analysis in here is based on data only from 1990--when we've had mostly a pretty significant rise in real value and have been above average in metrics like Shiller CAPE almost the entire time. I don't think comparing the market to just this somewhat overvalued era is a very reliable way to evaluate the data.

MoneyCat

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #22 on: March 21, 2015, 07:42:21 AM »
I have it on good authority that the markets are about to collapse, so I've bought up thousands of Beanie Babies for the new economy that's coming and ammunition to fight off the zombie hordes.

cjottawa

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #23 on: March 21, 2015, 08:30:54 AM »
J. P. Morgan, when asked what the stock market will do: "It will fluctuate."

What you don't know about your portfolio may help you:
http://bucks.blogs.nytimes.com/2013/06/11/what-you-dont-know-about-your-portfolio-may-help-you/

Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein:

Quote
He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour.
What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.

Stop watching the excitable dog.
« Last Edit: March 21, 2015, 08:32:29 AM by cjottawa »

arebelspy

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #24 on: March 21, 2015, 08:44:57 AM »
Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein:

Quote
He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour.
What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.

Stop watching the excitable dog.

That's fantastic.  Thanks for sharing.  :)
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Indexer

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #25 on: March 21, 2015, 11:07:58 AM »
Well there is always someone saying this is a good time to buy, and someone else saying its a good time to sell.  Thats the markets for you.

I am a little surprised they didn't include CAPE since basically every study done on the subject has shown CAPE to be a better predictor of long term stock market returns than ANY of the other metrics they used.  Well maybe I'm not surprised.  They are only using data from 1990-now, and CAPE makes the market look overvalued.  Including CAPE or older information would completely destroy their thesis that the markets aren't overvalued.  Cherry picking data, big surprise.....

However even if the markets are overvalued its not really information you can trade on.  Even CAPE is only useful over 10 year periods; it is useless for short term trading.  Stocks are still likely to outperform bonds or any other asset class over the next 10 years.  So you might as well keep investing in stocks for the long term, but you might want to scale down your expected returns for the next 10 years.  Obviously you can't predict the future, but it looks like the odds of having 6-8% returns are higher than the odds of having 10-12% returns over the next 10 years.

TreeTired

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #26 on: March 21, 2015, 11:19:56 AM »
Much to my surprise, that was a very interesting article.    In short,  they said the market may appear overvalued when compared to valuations since the beginning of time (or some very long period)  but the market is fairly valued looking at metrics from 1990 to present.   (Wish they had gone back to 1980 and included 1987 crash)

My problem with current valuations is that income streams are being valued using a zero interest rate.   In this environment you pay a lot of money for a little income.

MarciaB

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #27 on: March 22, 2015, 05:55:32 PM »
Investor Ralph Wagoner once explained how markets work, recalled by Bill Bernstein:

Quote
He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog's owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch. But in the long run, you know he's heading northeast at an average speed of three miles per hour.
What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.



Stop watching the excitable dog.

That's fantastic.  Thanks for sharing.  :)

Wow! I just sent that quote to my young adult children (Vanguard index fund investors) who live in NYC. Talk about a perfect analogy for them!

innerscorecard

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #28 on: March 22, 2015, 08:30:33 PM »
Well there is always someone saying this is a good time to buy, and someone else saying its a good time to sell.  Thats the markets for you.

I am a little surprised they didn't include CAPE since basically every study done on the subject has shown CAPE to be a better predictor of long term stock market returns than ANY of the other metrics they used.  Well maybe I'm not surprised.  They are only using data from 1990-now, and CAPE makes the market look overvalued.  Including CAPE or older information would completely destroy their thesis that the markets aren't overvalued.  Cherry picking data, big surprise.....

However even if the markets are overvalued its not really information you can trade on.  Even CAPE is only useful over 10 year periods; it is useless for short term trading.  Stocks are still likely to outperform bonds or any other asset class over the next 10 years.  So you might as well keep investing in stocks for the long term, but you might want to scale down your expected returns for the next 10 years.  Obviously you can't predict the future, but it looks like the odds of having 6-8% returns are higher than the odds of having 10-12% returns over the next 10 years.

That was why I posted this link. Everyone on this forum uses CAPE as the end-all-be-all indicator, and doesn't usually look at these other metrics. If you do that, it's easy to convince yourself that the markets are hideously overvalued. If you look at other indicators in isolation, you could convince yourself easily the other way. In reality, based on how you measure things, you can support any argument or viewpoint you like. You only know in hindsight which was correct.

innerscorecard

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #29 on: March 22, 2015, 08:31:55 PM »
Much to my surprise, that was a very interesting article.    In short,  they said the market may appear overvalued when compared to valuations since the beginning of time (or some very long period)  but the market is fairly valued looking at metrics from 1990 to present.   (Wish they had gone back to 1980 and included 1987 crash)

My problem with current valuations is that income streams are being valued using a zero interest rate.   In this environment you pay a lot of money for a little income.

Truly passive income is certainly expensive these days.

hodedofome

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #30 on: March 22, 2015, 09:38:30 PM »
Here's my analysis based on thousands of hours of research and contemplation:

The market is up, I remain long.

DavidAnnArbor

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #31 on: March 22, 2015, 10:26:40 PM »
The market could go up over the long term, but in the long term we're all dead. In the short/medium term I just hope we don't do a decades long Japan like market dive. Declining demand a feature of secular stagnation is a danger to the US stock market because companies are unable to sell more or gain more profits. Attributes that lead to decrease demand in the economy that leads to secular stagnation are a shrinking labor force, increasing income inequality (very rich people only spend a small fraction of their incomes), and the rise in real interest rates as inflation goes toward zero or below (disinflation/deflation). There are good solutions to prevent secular stagnation.

innerscorecard

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Re: The Market Could Be Either Undervalued or Overvalued Right Now
« Reply #32 on: March 22, 2015, 11:29:02 PM »
The market could go up over the long term, but in the long term we're all dead. In the short/medium term I just hope we don't do a decades long Japan like market dive. Declining demand a feature of secular stagnation is a danger to the US stock market because companies are unable to sell more or gain more profits. Attributes that lead to decrease demand in the economy that leads to secular stagnation are a shrinking labor force, increasing income inequality (very rich people only spend a small fraction of their incomes), and the rise in real interest rates as inflation goes toward zero or below (disinflation/deflation). There are good solutions to prevent secular stagnation.

I think the best defense to this is to invest abroad, without currency hedging.