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Re: 4% of what?
Old 03-29-2005, 02:56 PM   #141
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Re: 4% of what?

Nice story, Yakers. Your Dad must have been a very kind person.

Mikey
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Re: Put simply, markets revert to the mRe: 4% of w
Old 03-29-2005, 06:38 PM   #142
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Re: Put simply, markets revert to the mRe: 4% of w

Quote:
Hi Petey

Peteyperson wrote: Put simply, markets revert to the mean.

I remember circa 2002 just when the index fund boards were in the beginning of the big shuffle that took them from TMF to NFB and here, and ultimately to raddr's. *Anyway there was, I thought, a great exchange/debate (that spilled over a bit) between raddr, *****, datasnooper, ataloss, others I'm sure about mean revision and the usefulness of market metrics.

I might be in the minority but I did follow the debate and I didn't think that mean revision was a certainty, at least not in a way that implies utility to the individual investor.hix9
To me it is very odd to attempt to decide an issue like whether ir not there is mean reversion in market returns by listening to, reading, or partaking in debates. Time might be better spent bringing one's understanding of statistics to a higher level.

Debate is for issues with no certain answer-ANWR drilling, death with dignity, is there a god.

Analysis is how you decide whether returns are mean reverting.

Mikey


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Re: 4% of what?
Old 03-29-2005, 06:49 PM   #143
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Re: 4% of what?

Mikey,

The debates refererred to included analyses, and pointers to analyses.

Bpp
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Re: Put simply, markets revert to the mRe: 4% of w
Old 03-29-2005, 06:54 PM   #144
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Re: Put simply, markets revert to the mRe: 4% of w

Quote:

To me it is very odd to attempt to decide an issue like whether ir not there is mean reversion in market returns by listening to, reading, or partaking in debates. *Time might be better spent bringing one's understanding of statistics to a higher level.

Debate is for issues with no certain answer-ANWR drilling, death with dignity, is there a god.

Analysis is how you decide whether returns are mean reverting.

Mikey


Try this, Mikey.

Some good papers here.

http://www.altruistfa.com/readingroo...rsiontotheMean

Petey

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Re: 4% of what?
Old 03-29-2005, 11:52 PM   #145
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Re: 4% of what?

Thanks, Petey. Talking up mean reversion to me is preaching to the choir. From looking at graphs in Elroy Dimson, and also Andrew Smithers, I am convinced. I read some of the references you gave. If I hadn't already been convinced, I would be now.

To the extent that data can be used for anything in these low frequency time series, it supports mean reversion.

Like Smithers points out- at our present juncture it has both good and bad implications. Good, because investments made today at worst will likely show a positive return after no more than 14 years.

Bad, because investments made today will very likely show very poor returns in the intermediate term.

Some people will argue about anything. But I think that the above has more chance of working out than most things in life, so it's good enough for me.

Mikey
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Re: 4% of what?
Old 03-30-2005, 03:42 AM   #146
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Re: 4% of what?

Mean reversion and the break even in stocks at 15 years - at least for the 'major' economies are part of my sub conscious 'rules of thumb'. As Bernstein points out they will 'probably work' - heh, heh, - until they don't.

In the meantime - dividends.
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Re: 4% of what?
Old 03-30-2005, 04:55 AM   #147
 
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Re: 4% of what?

Quote:
Peteyperson wrote: Put simply, markets revert to the mean.
I don't think anyone here doubts that markets will probably revert to the mean. This does not however negate that 4% is a HSWR. Both are based on past history.

The only problem with revert to mean. Is that no one knows when it will happen, how it will happen etc. Those that wait for the revert to mean could miss it by a week.
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Re: 4% of what?
Old 03-30-2005, 06:13 AM   #148
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Re: 4% of what?

So I thought I was so smart and emailed my DH the link Petey gave on reversion to the mean. I just got this reply:

Yes, I agree madam. In fact, the principle of reversion to the mean is one
leg upon which my entire financial philosophy and methodology is built.

LOVE YOU,

Mr. XXXX (You are Martha, aren't you?)

I guess this means he agrees with you all.
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Re: 4% of what?
Old 03-30-2005, 10:04 AM   #149
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Re: 4% of what?

Quote:

I don't think anyone here doubts that markets will probably revert to the mean. This does not however negate that 4% is a HSWR. Both are based on past history.

The only problem with revert to mean. Is that no one knows when it will happen, how it will happen etc. Those that wait for the revert to mean could miss it by a week.
I have to say that I think use of "reversion to the mean" as a stock investment indicator is pure horse puckey.

There is no causal reason that reversion to the mean has to take place. There is no underlying mathematical principle that dictates this has to be true. It tends to be true simply because noisy data will always have a mean and the noise will usually cause the data to cross that mean from time to time. But the mean is not static either. It changes each time new data is accumulated. No mathematical principle has to be violated for the mean to grow or the noise to diminish. Observed "reversion to the mean" may not happen for many years and that "reversion" could happen at a time when the mean is even higher than it is today.

And so what if we do revert to the mean? P/E is higher today than it may be tomorrow. That has been even more true for the past 3 or 4 years than it is today and I still make more money invested in the market than if I had simply got out because of reversion to the mean fears. It is possible for P/E to come down without costing me a cent. You may believe that's not likely, but if your argument is based on "reversion to the mean", you don't have a valid analytical argument.

The mean changes every year. It is not constant with time. Each year a new P/E is calculated and the mean of all years is re-computed. The mean calculated this year is different than the one calculated last year. If you go back to 1871 and calculate the mean each year (based only on the years preceding the year in question) you can plot the running mean of the P/E or performance yield or . . . . I did this and posted the results a few years ago on intrcst's previous web site (not the one he runs today). The result was interesting because if clearly showed a positive slope for the metrics I looked at.

So variations in stock market prices will cause future stock performance to rise and fall. The rising and falling performance metric is likely to cross the running mean. That has always been true. It likely always will be.


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Re: 4% of what?
Old 03-30-2005, 04:41 PM   #150
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Re: 4% of what?

hi mikey

To me it is very odd to attempt to decide an issue like whether ir not there is mean reversion in market returns by listening to, reading, or partaking in debates. Time might be better spent bringing one's understanding of statistics to a higher level.

Not sure I understand you here.

The exchange/debate was not a typical silly message board filibuster that went nowhere. Not all debates preclude learning, if that is your implication.

It was various 'sides' (probably too strong a word) all already with a high understanding of statistics, presenting their analysis, and trying to decide who had the higher understanding and who could actually prove what.

I think I followed it in order to bring my own level of understanding higher as you say. Anyway, wish I had a link but I think it burned out.

hix9
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Re: 4% of what?
Old 03-30-2005, 06:33 PM   #151
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Re: 4% of what?

hi sg

I have to say that I think use of "reversion to the mean" as a stock investment indicator is pure horse puckey.... Observed "reversion to the mean" may not happen for many years and that "reversion" could happen at a time when the mean is even higher than it is today.

If you need any consolation that you are not alone in the view that mean reversion might not be a certainty useful to investors, there is always SSRN:
http://papers.ssrn.com/sol3/papers.c...ract_id=683182

You have to read the paper to determine if you agree with their approach but here are a couple quotes to spark interest:

"Perhaps most interesting, however, is that the nonstationarity of the E/P ratio suggests that this valuation measure can remain below its mean for an extended period of time, and that its reciprocal, the market P/E, can stay above trend for extended periods - and possibly forever, at least theoretically. The P/E ratio's shift from a stationary to a nonstationary series ca. 1960 implies that it no longer has a mean to which it must revert."

...

"It is clear from examining the graph that the general negative relation between starting P/E ratios and 10-year real returns abruptly truncates at P/E ratios greater than 21. Ten-year returns starting from very high P/E ratios have never been severely negative. Although the overall trend of the P/E and stock return relation is negative, the lowest 10-year real returns are earned starting from market P/E ratios between 12 and 20. Significant declines in the value of U.S. equities starting from high levels of the market P/E ratio are rare."

hix9
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Re: 4% of what?
Old 03-30-2005, 10:29 PM   #152
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Re: 4% of what?

I have pretty much given up on trying to discuss these complex things. I read the paper referenced above. Honestly, I can't really evaluate it, at least not without putting more effort in than I think it merits.

The authors choose not PE10, or peak earnings PE, but your standard 12 month PE. Well, there are known problems with this measure. That is why it was rejected by Campbell and Shiller.

Two other things caught my eye, but not enough to really analyse them, or try to make a critique. I'll just mention them briefly. They mention the PE21 breakover, such that although high PEs are associated with low future returns, very high PEs (>21) are associated with normal returns. I know there may all kinds of hoop-jumping expanations for this oddity, but my guess is that they are bogus. It's like saying up to a threshold, the more HIV in your blood the worse off you are. But if you have a hell of a lot of it in there, cool, you'll be fine.

The other problem I have is related- How often have there been PEs over 21, unless PEs were artificially raised by severely depressed earnings? Very seldom, and most instances during the bubble, which in my opinion is still an unresolved chapter in financial history.

So take your pick. As is often the case, people have placed their bets. All we can do is wait for the race to be run.

Mikey
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Re: 4% of what?
Old 03-31-2005, 03:42 AM   #153
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Re: 4% of what?

"reversion to the mean" amounts to an academic
exercise for most people; nothing more.
(Not that there's anything wrong with that ).

Guessing and predicting can be fun.
I enjoy it a lot, but it is of little help in working
out any meaningful financial plans.

JG
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Re: 4% of what?
Old 03-31-2005, 03:53 AM   #154
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Re: 4% of what?

Bad company=good stock, good company=bad stock.

I don't care about academic's, I just use mean revision.
Sometimes it's a long wait.(think Japan, gold)

And, and to make life interesting: per Warren Buffett - sometimes a wet cigar - is a wet cigar.
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Re: 4% of what?
Old 03-31-2005, 04:19 AM   #155
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Re: 4% of what?

hi mikey

I have pretty much given up on trying to discuss these complex things.

i think i enjoy reading these types of discussions but i have given up (or more accurately never started) trying to apply any of the conclusions so i suppose it is not always time well spent.

hix9
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Re: 4% of what?
Old 03-31-2005, 05:08 AM   #156
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Re: 4% of what?

This is the bubblegum/dryer sheet forum.

However - sometimes you get a link to something you can use.

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Re: 4% of what?
Old 03-31-2005, 11:22 AM   #157
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Re: 4% of what?

I think it's a hoot that most posters jump on the 4% and totally miss the 'of what' part.

Like the famous analogy of blindfolded men feeling parts of the elephant and making decisions/guesses

Blindfolded or not - you don't want to touch the 'wrong' part.

Heh, heh, heh, heh.

Vanguard Balanced Index - 2.53% current yield
Vanguard Wellesley - 3.60% current yield.

Psst - the Norwegian widow doesn't use no blindfold.
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Re: 4% of what?
Old 03-31-2005, 11:39 AM   #158
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Re: 4% of what?

Quote:
Mikey,
I think most of what we end up discussing here are investment aprroaches. Your approach is similar to Buffett's as you are always looking for value, and investing is something you enjoy.
That doesn't mean that folks that invest in Vanguard's Retirement strategy funds and let her ride are wrong or are even betting that the market won't take a dive soon. What they are saying is that they don't have the confidence or want the hassle of trying to figure out which way the market will go or when it will drop.
Cut-Throat, that is very well put. You are good at pointing things out without stepping on someone's feet. I am trying to get better at that, but it's a slow slog for me
Quote:
So the index folks always have their bet placed that over a 30-40 year period stocks will overall increase their value from today. They just have no clue when and hence are always invested. Again, this doesn't mean that they think stocks are cheap now or that stocks won't plunge by 70% in the next ten years. It just means that they'd rather go fishing and not have to worry if they should be calling their broker when they get off the stream.

Neither approach is wrong!
Again, well said. I think stocks will do well also. I just think (hope) that I can continue to do somewhat better or somewhat safer than buy and hold.

I was idly thinking about this as a Bayesian problem. What we tend to argue on this board is "what is the proper reference group or base case?" Buy and hold indexers implicitly or explicitly believe in the broadest reference group, while timers or stock pickers believe in identifiable, reliable sub-categories.

Gives food for thought anyway. Thanks for a wise post.

Mikey
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Re: 4% of what?
Old 03-31-2005, 02:45 PM   #159
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Re: 4% of what?

Quote:
I have pretty much given up on trying to discuss these complex things. I read the paper referenced above. Honestly, I can't really evaluate it, at least not without putting more effort in than I think it merits.

The authors choose not PE10, or peak earnings PE, but your standard 12 month PE. Well, there are known problems with this measure. That is why it was rejected by Campbell and Shiller.

Two other things caught my *eye, but not enough to really analyse them, or try to make a critique. I'll just mention them briefly. They mention the PE21 breakover, such that although high PEs are associated with low future returns, very high PEs (>21) are associated with normal returns. I know there may all kinds of hoop-jumping expanations for this oddity, but my guess is that they are bogus. It's like saying up to a threshold, the more HIV in your blood the worse off you are. But if you have a hell of a lot of it in there, cool, you'll be fine.

The other problem I have is related- How often have there been PEs over 21, unless PEs were artificially raised by severely depressed earnings? *Very seldom, and most instances during the bubble, which in my opinion is still an unresolved chapter in financial history.

So take your pick. As is often the case, people have placed their bets. All we can do is wait for the race to be run.

Mikey

Mikey,

I have seen similar reasoning from Siegel in papers prior to his recent book. In the case of Siegel he made the point that even buying the nifty-fifty stocks decades ago at their peak would have worked out fine over history even when their collective PE was high and some stocks had PEs over 80! The reason is because whilst the market fell 40% in 73-4 and the most highly valued lost 80% odd, you were then able to reinvest higher dividend payments to buy many more shares of the ones that fell the most and this compensated for the original high price.

There are several problems with this analysis. Firstly as Siegel seems to commonly do, it ignores the reality of taxes on dividend payments. This makes any findings inaccurate and possibly completely wrong. Secondly, one has to be able to cope with a bad decade, then a massive decline in the nifty-fifty, then reinvest for another decade plus to be able to get the average return even ignoring fees and taxes. This may work for someone at the start of a 20-year accumulation phase but it absolutely will not work for someone living off their investments. You'll be living off the dividends not reinvesting them so large capital declines cannot be recovered from using the S&P 500 historical real growth rate of 1.8%. Just not gonna happen. So this is pretty irresponsible to put forward the idea that buying at high prices - even above PE 21 - works. The truth is it only works in specific circumstances, exposes the investor to high risks to capital value over reasonable investor timelines and prevents the ability to later live off investments. Just ask the year 2000 retiree how they feel with the S&P 500 flat 5+ years later ignore fees, taxes and inflation! Theory and practice are two entirely different things.

The paper is BS. Demonstrates a lack of intelligent insight, and just takes numbers on their face value.

Petey
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Re: 4% of what?
Old 03-31-2005, 02:49 PM   #160
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Re: 4% of what?

Quote:
"reversion to the mean" amounts to an academic
exercise for most people; nothing more.
(Not that there's anything wrong with that *).

Guessing and predicting can be fun. *
I enjoy it a lot, but it is of little help in working
out any meaningful financial plans.

JG

Not necessarily.

Appreciation of valuations would presently have one placing more int'l and EM and less in the US which has been on a tear and sits rich in valuation as a result. That is to say, reversion-to-the-mean is likely to happen and likely to be more costly for those invested in the broad US market. If one rebalances to set allocations that can also wring out some of the excess but it is far from academic. It can be used both for risk control and to generate excess returns through tactical allocation.

Petey

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