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Old 08-20-2014, 01:39 PM   #21
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Wow. Nerdy, but i think socrates would back me up.
Or Douglas Adams: "tea and no tea at the same time"
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Old 08-20-2014, 01:41 PM   #22
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I guess not but it helps to be reminded of this stuff.
As far as I know, nobody on this board or elsewhere has ever said that PE10 is useful for anything other than the long term, Shiller, who popularized CAPE (PE10) uses 10 year returns.

Ha
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Old 08-20-2014, 04:46 PM   #23
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I don't get that chart. I thought PE10 usually was less than 30 or so, but that chart has most of the dots higher than 30.
The charts shows PE10 rank on a cumulative bases since 1920. So a PE10 value in 1970 would have 50 years of data to rank against. For 2014 the ranking covers the entire span of 94 years. Just my way of doing things (for other purposes).
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Old 08-21-2014, 07:38 AM   #24
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This is pretty much the exact opposite of Benjamin Graham and other value investors pov. Graham famously said that in the short term, the market is a voting mechanism. In the long term, a weighing mechanism.

Until the last 25 years, the period of investment populism, few people thought that stocks were worth whatever the crowd thought. (What Cullen Roche seems to be calling human perception.) Back then this was commonly professed by those whose well being came from enticing the public to buy stocks and mutual funds come Hell or high water. Now, this seems to be the default view, at least it seems to be so on this board.

We'll see who is right, in the fullness of time.

Ha
I don't think there is a predominant view here. My sense is that people in the accumulation phase have higher equity accumulations, those of us in the witdrawal phase have lower allocations. Just a feeling, though.

I like reading Cullen Roche, which is why I posted the link. It seems to me the Central Banks of the world are committed to minimizing investment market volatility as well as supporting asset pricing levels. How long they can keep this up is an important question. Kind of like bartenders, they want to keep everyone well lubricared, happy but not rowdy, until the sun comes up.

When it comes to specific investing advice, however, I lean more toward Jeremy Grantham. GMO's most recent quarterly update shows their benchmark free fund to have very low allocations to all the asset classes (equity is around 40%) while cash is over 20%.
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Old 08-21-2014, 10:47 AM   #25
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I don't think there is a predominant view here. My sense is that people in the accumulation phase have higher equity accumulations, those of us in the witdrawal phase have lower allocations. Just a feeling, though.

I like reading Cullen Roche, which is why I posted the link. It seems to me the Central Banks of the world are committed to minimizing investment market volatility as well as supporting asset pricing levels. How long they can keep this up is an important question. Kind of like bartenders, they want to keep everyone well lubricared, happy but not rowdy, until the sun comes up.

When it comes to specific investing advice, however, I lean more toward Jeremy Grantham. GMO's most recent quarterly update shows their benchmark free fund to have very low allocations to all the asset classes (equity is around 40%) while cash is over 20%.
Well stated. Just to be clear, what I referred to as the default view didn't specifically address allocations, but rather whether equities have a long term valuation apart from their current quotes, or does the current quote tell the whole story. And a corollary to this, does PE10 tell useful valuation information. If an investor believes in unvarying equity allocations in very different PE10 zones, to me he seems to be rejecting both of the points I mention. And unless I get the lay of this board totally wrong, most people here do believe their that while equity allocation might be sensitive to their age, other resources and the basic attitude that they imagine that they have, it should not be sensitive to ideas of market valuation, because of all the frequently stated objections to "market timing".

When I read the Cullen Roche piece you posted it seemed that was what he was addressing.

Ha
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Old 08-21-2014, 12:23 PM   #26
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... If an investor believes in unvarying equity allocations in very different PE10 zones, to me he seems to be rejecting both of the points I mention. And unless I get the lay of this board totally wrong, most people here do believe their that while equity allocation might be sensitive to their age, other resources and the basic attitude that they imagine that they have, it should not be sensitive to ideas of market valuation, because of all the frequently stated objections to "market timing". ...

Ha
I can only speak for myself, but I disagree with this statement - it's not so black & white for me.

I absolutely believe that PE10 is an indication of the relative 'value' of the market. The trouble I have with it is implementation, at what point do I make an adjustment? IOW, how 'high' is 'high'? When I've looked back, if I pick a number, I might end up getting out too soon, and then would never be able to get back in. And that's a rear-view look - even when the market did drop so that I could get back in, maybe I would be afraid of missing this dip, and get back in too soon? When I've looked at charts, I really think it is a tough call. PE10 was very high in 1997, IIRC. But the big dip was from 2000 highs

And since PE10 is a long term indicator, we don't get enough shots at it for the law of averages to help us out. If it was a monthly indicator, I could probably act on it knowing I might only need to be 'right' a little more than half the time. But at my age, I'm afraid of making a timing mistake.

Of course you don't need to go all-in or all-out, but any sale is a sale, and that money may be working against you for a long time, maybe forever. I've been able to call bubbles before, but I call them too soon - and if I acted on them, I'd be behind. Maybe others can pull this off, I simply don't trust myself.

I don't reject the idea of market valuation at all, I simply don't feel confident I can reliably act on it.

-ERD50
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Old 08-21-2014, 12:27 PM   #27
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Ha, I also disagree with your interpretation of what the board thinks about PE10. At the very least, what you write has almost nothing to do with what I personally think. I guess it would be safer for you to describe what YOU think of PE10, rather than to tell us what we think. We can do that ourselves.
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Old 08-21-2014, 12:37 PM   #28
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I'm thinking 20 years from now stocks will be much higher (maybe doubled or quadrupled). The current value has little importance.
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Old 08-21-2014, 02:24 PM   #29
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I don't really like PE10, though I suppose it is interesting.

My view of the market is that it will always reach a higher price, eventually. Even if it takes many years to finally get there. But I have much less confidence that the market will go lower, nor how much, in the near to medium future. I'm happy to buy during a bear market, but chances are I won't have the cash because I won't have sold during the peak.
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Old 08-21-2014, 02:33 PM   #30
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The next 12 month's returns have zero correlation with the previous 12 month's returns:

I think we'd start to see some effect if the X-axis was an absolute percent below last market peak , on a monthly basis, instead of a relative percent below twelve months ago. That's kind of randomizing things.

Similarly, a longer period than "next year" might capture the following gains a little better.

So if the market is down 30% from its last peak, what's the probability that it will have a gain after twelve months, or a loss?
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Old 08-21-2014, 02:39 PM   #31
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This is one of those herd threads. Ignore all of it. Go back and read Buffet's letter to shareholders regarding farm property he bought many years ago, and how he never listens to day to day valuation conversations.

Pick an AA you can sleep with at night. LBYM. Don't panic when the rest of the world says the sky is falling. Save 20x, 30x, 40x, 50x retirement expenses (depending on the level of comfort only you can decide). Watch the pot, but stay the course. Take up navel lint picking before listening to forecasts, "experts", the crowd, etc. (they're always, but always, wrong). Have plans B, C, D and remain totally flexible. And remember, chances are higher you'll be dead before you run out of money. In fact, with SS, you won't run out of money. You just may not like how much money you have.
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Old 08-21-2014, 06:26 PM   #32
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I think we'd start to see some effect if the X-axis was an absolute percent below last market peak , on a monthly basis, instead of a relative percent below twelve months ago. That's kind of randomizing things.

Similarly, a longer period than "next year" might capture the following gains a little better.

So if the market is down 30% from its last peak, what's the probability that it will have a gain after twelve months, or a loss?
You can see what happens if one just looks back over 12 months and the loss from that point was -30% (or worse). In that chart it looks like a definite buy opportunity. But if you were following that logic in late 1930 (an out of sample period for sure), the next year's result for late 1931 would be a bitter pill.

Because of this sort of thing, I'm sort of wary about drawing any trading rules from this stuff.

You could be right that looking at sufficiently long look-back period (maybe 5 years) and plotting drawdowns versus forward results would show some interesting correlations. But could you bet on that with your retirement money?
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Old 08-21-2014, 06:32 PM   #33
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I'm thinking 20 years from now stocks will be much higher (maybe doubled or quadrupled). The current value has little importance.
But if you are in your 60's maybe it is more important? As we get towards old age (or are in it) I think the timing argument changes a bit. Of course, many would say to reduce equities and buy those (lousy yielding) bonds or cash.
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Old 08-21-2014, 10:22 PM   #34
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Shillers says given alternatives, you have to be in the market but "don't go overboard."

Get a financial advisor to help with the AA given your situation:

Robert Shiller: Here's how to invest now
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Old 08-21-2014, 11:25 PM   #35
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reminds me of that old engineer joke: the optimist says the glass is half full, the pessimist says the glass is half empty, and the engineer says the glass is the wrong size.
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Old 08-22-2014, 04:14 AM   #36
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CNBC, still trying to reduce investing to sound bites based on active investing "principles," mostly useless (of worse) drivel. And the masses looking for silver bullets gobble it up...
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Old 08-22-2014, 03:36 PM   #37
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Barry Ritholtz's blog "The Big Picture" (here) has a number of entries on CAPE and will post more over the weekend. He is pretty even handed on most topics so it should be informative.

Total return 20 years from now, or investing like Buffet, is of more interest to my children, who are early accumulators, then to me or anyone in ER or just plain R. As pointed out earlier, in the withdrawal phase, portfolio survival is the key, so volatility is just as important as return. If anyone doubts this just open a Monte Carlo calculator, hold the average rate of return constant, increase the average volatility, and watch as the success rate falls.

The late Peter Bernstein was widely recognized as an expert on risk, and he said that low returns were the result of high volatility, not low annual returns. A high CAPE, by itself, isn't reason to take any portfolio action, but it definitely should motivate us to be absolutely clear on how much volatility we are prepared to take on.
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Old 08-22-2014, 05:00 PM   #38
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I can only speak for myself, but I disagree with this statement - it's not so black & white for me.

I absolutely believe that PE10 is an indication of the relative 'value' of the market. The trouble I have with it is implementation, at what point do I make an adjustment? ....

I don't reject the idea of market valuation at all, I simply don't feel confident I can reliably act on it.

-ERD50
We are all familiar with the age adjusted asset allocation models. What if we adjusted our age by some factor of the PE 10? Then during annual asset allocation rebalancing instead of choosing your age precisely you would select your age adjusted by some pe10 Factor. If PE 10 was high, you would make yourself older, if PE 10 was low, you would make yourself younger, and otherwise you would choose your actual age based allocation.
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