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Old 01-06-2009, 10:30 PM   #21
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Here is one of many interesting metrics. This one is computed by Morningstar and only goes back to 2000. Morningstar.com: Market Valuation Graph

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Old 01-06-2009, 10:47 PM   #22
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Here is one of many interesting metrics. This one is computed by Morningstar and only goes back to 2000. Morningstar.com: Market Valuation Graph

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Very intersting.

Value Line publishes a similar metric with a very long successful history. It is always optimistic, but with an unchanging bias. I'll copy the page next time I am at the Central Library and post about it. It is expressed similarly to the one you posted, as average % gain to full value for their universe.

Where I used to live I could get access to the V.L. Survey more easily and I used this as a very helpful long term sanity check on what i wanted to do. You who live in affluent suburbs have much better investment resources in your libraries than in most big cities.

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Old 01-06-2009, 10:47 PM   #23
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Here is one of many interesting metrics. This one is computed by Morningstar and only goes back to 2000. Morningstar.com: Market Valuation Graph

Audrey
I also found this graph yesterday as I was googling "stock market valuation". The interesting part to me was that, based on those market valuation data, one should have stopped buying equities in late 2002, just after the market bottomed, and should only have started buying equities again in early 2007, right before the market peaked. That's a long time to be sitting on your hands and not investing any new money in the stock market.
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Old 01-06-2009, 10:51 PM   #24
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During the late 90s, the zenith of the bull market, commodity stocks and oil and gas were at extreme lows.
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What you are saying is to look into sectors that are cheap relative to the market. This, sir, I totally agree with. Sector rotation is the game that I try to play.

Yes, I still remember the time when gas at Costco was 99c. It must be in 1999, or early 2000. But I was still drunk from the tech Kool Aid then. Only in 2003 that I realized my folly, and got myself some energy stocks. Nice, nice gains... Got stopped out of them, and now slowly buying back.

Crazy Kramer, despite what we think of him, is right that "there is always a bull market somewhere". But he has not proven to be a reliable detector of that bull market.
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Old 01-06-2009, 11:01 PM   #25
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I just read "How Morningstar Values Stocks". They use a DCF based technique. I am not sure whether they specify the discount rate that they use for any given analysis.

This shuld be fairly robust, but one would need to see how their expectations compared to how it worked out for a longer period. As Firedreamer pointed out, so far it isn't clear that it would have been useful when used as a metric for equity allocation.

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Old 01-08-2009, 07:07 PM   #26
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It's interesting that Ben Stein advocates following the strategy of using 15 year moving average for timing signals. A long time ago I used to follow Doug Fabian, who advocated using a 39 week moving average, selling when the index drops below and buying when it breaks above.

It's been interesting looking at Doug's recent mis steps. He has recently been making more and more exceptions to his own model, and his performance has paid the price. Here are three articles from Mark Hulbert who tracks Doug Fabian's results:

http://www.marketwatch.com/News/Story/sell-signal-fabians-system/story.aspx?guid={78DB13F1-AF34-49A2-928E-C9ED511473CB}


http://www.marketwatch.com/News/Story/wisdom-richard-fabians-system-emerges/story.aspx?guid={68A17EE7-0E91-4593-A96B-B594C61A6E89}

http://www.marketwatch.com/news/story/back-testing-39-week-moving-average/story.aspx?guid={B80A2F29-6BEA-4C30-96F8-415D4399A12E}&dist=msr_5


You can see that even though Hulbert has been following this for 25 years he hasn't quite settled into an opinion about whether this approach works going forward.

At any rate, the devil is in the details, especially one: If you delay your trades for any reason (e.g. you're in the shower when the stock market generates the signal), you're likely to be worse off for the delay. The whole idea of the system is to sell when the market is going down, and buy when it's going up, so delaying worsens your price.

Then there is the whipsaw issue: if the current price crosses the moving average more than multiple (which is normal), then you're either going to have to trade like a fiend or accept that you could miss out. Fabian "solved" this issue by not doing any trades until it moves another 5%, but that is 5% that you end up losing in some cases relative to the buy and holder.

Ben Stein's approach of using the 15 year moving average seems like a good way to minimize the trading hassles, but if you only make trades once every decade or so are you really going to feel confident with how to handle whipsaws when they come? I'll stick with buy and hold.
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Old 01-08-2009, 08:50 PM   #27
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Doesn't seem like a safe approach for someone who is living off their portfolio. Increasing your equity exposure to 85% when the market goes down 50% surely will get you well positioned for a recovery, but if things go further south you'll have few options besides jumping out of a window. Kinda like "double or nothing".
This certainly occurred to me as I was rebalancing during this most recent free fall. I felt pretty smart rebalancing when the market was off ~35% . . . for about 1 day. Then it fell another 20% and I was struggling with the decision of whether to rebalance again. But after rebalancing once, my fixed income portfolio already started to look a little lean when compared against my possible short-term needs. So I decided to wait.

Using the methodology of the article, if one were to rebalanced to 70% after the first 30% decline and then rebalanced to 80% after the decline reached 50%, the typical 10yr fixed income bucket (60/40 portfolio with a 4% withdrawal rate) would be reduced to just over 3 years. Probably a smart move for someone who plans on working for a long while, but a huge leap of faith for a retiree.
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Old 01-08-2009, 10:30 PM   #28
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Using the methodology of the article, if one were to rebalanced to 70% after the first 30% decline and then rebalanced to 80% after the decline reached 50%, the typical 10yr fixed income bucket (60/40 portfolio with a 4% withdrawal rate) would be reduced to just over 3 years. Probably a smart move for someone who plans on working for a long while, but a huge leap of faith for a retiree.
A retiree should have more than 40% in fixed income to begin with. They should also draw up their own overbalancing tables if they do it at all.
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Old 01-08-2009, 11:23 PM   #29
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A retiree should have more than 40% in fixed income to begin with. They should also draw up their own overbalancing tables if they do it at all.
No, not every retiree needs to have x amount in fixed. Thats wrong.
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