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Calling PollyAnna
Old 09-24-2004, 02:16 PM   #1
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Calling PollyAnna

Here is a recent quote from Andrew Smithers, one of my favorite Cassandras (you may remember, Cassandra was right):

I have encountered two different and equally invalid approaches to forecasting future returns. One is to assume that dividends per share rise in line with GDP and the other is to assume that returns from any level of the stock market will equal the long-term average. The assumption that dividends per share will rise in line with GDP is held in the teeth of hard evidence to the contrary and in the absence of any theoretical reason why they should. Over the past 100 years, the real dividends per share have risen in the US by 0.6% p.a. and in the UK by 0.4% p.a., which in each case is far less than GDP. Another approach assumes that equities will give high returns because they have done so over the very long-term. This would only be justified if returns followed a random walk – an idea which is, in academia at least, more than 30 years out of date. Bad forecasts are very dangerous, because the power of compound interest is so strong. If, for example, a portfolio fails to grow in value while the liabilities that it is designed to match grow at 7% p.a., there will after 5 years be a shortfall equivalent to 40% of the initial value. As many funds start with deficits and returns could easily be negative, the potential problem for pension funds is far worse than the current estimated level of deficits suggests. Stock markets today are thus much more risky than they have been in the past. Expectations of equity returns are irrationally high. If, as must be probable, they fail to meet these expectations, pension deficits will balloon and the value of companies will fall in a vicious self-reinforcing circle. When this occurs investors, including pension funds, will probably panic. When markets start to look bad investors are usually advised not to panic. They would be better advised to panic now rather than later. -Andrew Smithers


You can get the whole depressing story at
http://www.smithers.co.uk/newsdyn.ph...mime=&pgndx=61

Mikey
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Re: Calling PollyAnna
Old 09-24-2004, 02:51 PM   #2
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Re: Calling PollyAnna

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Here is a recent quote from Andrew Smithers. . .
Let me paraphrase: All current theories have some potential flaws. Therefore assume the predictions derived from them are all wrong.

Without any proof, Mr. Smithers asserts that stocks will produce inadequate income in the future. He further asserts that this will create a financial crisis. Therefore, panic now.

He may be right. Who knows? But even if I were convinced, I'm not sure what I could do with this kind of prophesy.
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Re: Calling PollyAnna
Old 09-24-2004, 06:28 PM   #3
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Re: Calling PollyAnna

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Without any proof, Mr. Smithers asserts that stocks will produce inadequate income in the future.
As he states himself, there is no "proof" concerning the future; there are only probabilities. I am not going to attempt to reprise the data on his pages; but it is convincig to me that the over a period of ten years or so, the major US averages will not deliver returns commensurate with their risks.

As to what you might be able to do with this, I really don't know. Maybe nothing. But the situation suggests a pretty clear strategy to me.

Mikey
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Re: Calling PollyAnna
Old 09-24-2004, 07:01 PM   #4
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Re: Calling PollyAnna

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As to what you might be able to do with this, I really don't know. Maybe nothing. But the situation suggests a pretty clear strategy to me.

Mikey
My glasses may be foggy... but what's the clear strategy? Over weight intl and under weight US? More commodities & bonds?

Just curious.

-Jay
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Re: Calling PollyAnna
Old 09-24-2004, 07:18 PM   #5
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Re: Calling PollyAnna

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it is convincig to me that the over a period of ten years or so, the major US averages will not deliver returns commensurate with their risks.
Mikey, was there something in this paper that convinced you? * *Could you explain it to me? * Maybe I missed it, but I simply could not follow how this guy got from "returns have been high for a long time" to "that means they must be poor for the next 10 years."

And isn't that pretty much what the "Gordon Equation" says? It looked like this guy was dis'ing Gordon, but he seems to agree with the conclusion. Maybe somebody should point him to our exhaustive treatment of Gordon on this site
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Re: Calling PollyAnna
Old 09-24-2004, 09:56 PM   #6
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Re: Calling PollyAnna

I do agree, and I think its actionable. Simply dont own a preponderance of overpriced equities. Or long term investments in indexes that simply must come back to their mean at some point.

This is like paying $2M for an 800sq foot house on a 1500 sq foot lot in LA. It might be the going rate, but grow a brain... :

But then wasnt Polyanna's curse to not only be right, but for nobody to believe her?
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Re: Calling PollyAnna
Old 09-24-2004, 11:54 PM   #7
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Re: Calling PollyAnna

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But then wasnt Polyanna's curse to not only be right, but for nobody to believe her?
Very perceptive.
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Re: Calling PollyAnna
Old 09-25-2004, 12:31 AM   #8
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Re: Calling PollyAnna

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And isn't that pretty much what the "Gordon Equation" says? * It looked like this guy was dis'ing Gordon, but he seems to agree with the conclusion. * Maybe somebody should point him to our exhaustive treatment of Gordon on this site *
Well, I think that any valid treatments of the valuation problem will necessarily have much in common. They may approach from different directions, but will arrive at the same destination.

As to any apparent conflict with the Gordon equation, I don't see it. He is merely saying that the real dividend growth rate is not identical with the growth of GDP. Because of various leakages it is much less. Two examples of leakage would be that portion of GDP growth which comes from wholly new enterprises, and cash siphoned off via options. This is an empirically derived relationship. See for example Elroy Dimson, Triumph of the Optimists. I believe that the Gordon equation only describes a relationship, rather than specifying the values involved.

As to your other question, it is not only this paper that I find convincing. It after all is quite short and only touches on things Smithers has treated much more fully elsewhere. Also, I need to say that I have no academic interest in these things, only a practical one. Since I only have to arrive at my own decision and I don't have to sell this decision to anyone else, once I thick something is pretty much a dead cert, I don't really go over the same evidence again. This gives me a degree of steadfastness that will be helpful if my working hypotheses are correct, but as you might imagine it could be negative if I am wrong. I just don't think it is possible to be wrong about this issue. I could be very wrong if I actively made large negative bets. As far as the opportunity costs of not investing in large cap US stocks at this time, I think they are very small.

This doesn't say that clever market timing might not make someone quite a bit of money being long at these, or any other levels. I think in a different thread TH mentioned all the money he made, and the fun he had, buying the dips in the Cubes in the late 90s. That just isn't a game I am comfortable with. Particularly once momentum has been decisively cut off as it now has been.

Mikey
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Re: Calling PollyAnna
Old 09-25-2004, 01:50 AM   #9
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Re: Calling PollyAnna

There is no "proof" concerning the future; there are only probabilities.

I like that way of saying it. No one can say with certainty how stocks will perform in one year, in five years, in 10 years, or in 30 years. But an informed investor has a whole heck of a lot better chance of being proven correct in his assessments when he goes 30 years out than when he goes one year out. In the short term, there are so many factors at play in determining stock performance that price moves are essentially random. The probability that valuation will play a dominant role becomes stronger and stronger the farther out you go.

Can anyone prove that a slot machine is going to make money for the owner? In the short term, certainly not. There have been many cases in which someone who pulled the lever 10 or 20 times walked away with a nice piece of the house's money. But the house can count on probalities to assert themselves if they can only persuade the player to stay at the table long enough.

A lot of stock investors are confident today that it is not possible to lose at the stock game because they are felling flush from the wins accumulated during the greatest bull market in history. However, the probabilities do not favor expectations that stocks will provide outsized gains over the course of a 30-year time-period for those who purchase at today's prices. Anything can happen. But it's not something that an investor informed as to what the historical stock-return data says would expect to see happen.

Stocks will in all likelihood provide a positive return over the next 30 years. They will likely provide a return greater than the return available from TIPS. But the return obtained from stocks will be far more volatile than the return obtained from TIPs. That means that today's retiree cannot take out 4 percent per year from a high-percentage stock portfolio with confidence of not going bust. A 2.5 percent take-out is "100 percent safe" for an 80 percent S&P portfolio at today's valuation levels, presuming that you do not obtain a returns sequence worse than any we have seen in the past. A 4 percent take-out is "50 percent safe."

With TIPS you obtain greater safety at the price of giving up some potential for long-term growth. The reality is that there are trade-offs required in making investment decisions. There is no one magical investment class that is always and everywhere the best for the long term. For some, buying stocks is a good deal, even at today's valuations. For others, TIPS offer the better deal. Each investor needs to take into account his particular circumstances and goals in making a decision. There should be no controversy on the question of whether we should be able to provide at this board accurate information for the use of investors making such decisions.
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Re: Calling PollyAnna
Old 09-25-2004, 11:53 AM   #10
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Re: Calling PollyAnna

Damn geese keep flying over my house.
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Re: Calling PollyAnna
Old 09-25-2004, 01:39 PM   #11
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Re: Calling PollyAnna

The non stop honking is what I really hate...

I'm beginning to think they have some kind of automation or computerized system to generate the honking.

At a minimum, they appear to have a database of structured honking so they can simply cut and paste sections of honking.

Over. And over. And over.

Actually you want to see something really, really funny?

Go here:
http://radioworldwide.gospelcom.net/essaygenerator/

And plug in something like "The great SWR debate" or "The new SWR tool".

Doesnt that look strangely familiar?
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Re: Calling PollyAnna
Old 09-25-2004, 01:45 PM   #12
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Re: Calling PollyAnna

Uh oh, and I see the primary goose has logged out and then logged back in again under its other pseudonym.

Brace yourselves for further honking and droppings...
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Re: Calling PollyAnna
Old 09-25-2004, 05:04 PM   #13
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Re: Calling PollyAnna

TH -
Loved the website!
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Re: Calling PollyAnna
Old 09-25-2004, 09:43 PM   #14
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Re: Calling PollyAnna

Fun huh?

The secondary goose thought better of posting and went away.

Just in case someone has no clue what i'm talking about, the honker logs in as three different people to honk with.
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