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Financial Sound Bites...
Old 04-17-2012, 08:00 PM   #1
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Financial Sound Bites...

For those "numbers/charts are fun" types, or even those that are "numbers/charts is hard" types, you might find this site interesting:

dshort - Advisor Perspectives

I think this is a clearing house for ideas for advisors, so grain of salt folks...

However, there are chart snippets with observations about macro data. I find many of them to be fascinating. I found this one to be very interesting:

Estimating Future Returns: New Update

If you go to the first link and scroll around, basically you can click each of the articles and in a few paragraphs and one or two charts they present a macro-economic/investing observation and conclusions.

While I'm not sure of the investing value, the mental stimulation/entertainment value is high for me.....


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Old 04-18-2012, 09:21 AM   #2
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The article on Estimating Future Returns is interesting indeed, and I suspect the conclusions won't surprise many here. For those who value using Shiller PE to predict returns (see italics below if not?), these authors go a few steps further. Their forecast for inflation adjusted (real returns) using 3 additional valuation indicators in addition to Shiller PE are shown in the table below.

A thought provoking read, but no one has ever predicted the future, maybe the best we can hope for is narrowing the uncertainty...
This study contributes substantially to research on smoothed earnings and Shiller PE by adding three new valuation indicators: the Q-ratio, total market capitalization to GNP, and deviations from the long-term price trends. The Q-Ratio measures how expensive stocks are relative to the replacement value of corporate assets. Market capitalization to GNP accounts for the aggregate value of U.S. publicly traded business as a porportion of the size of the economy. In 2001, Warren Buffett wrote an article in Fortune where he states, "The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment." Lastly, deviations from the long-term trend of the S&P inflation adjusted price series indicate how 'stretched' values are above or below their long-term averages.

These three measures take on further gravity when we consider that they are derived from four distinct facets of financial markets: Shiller PE focuses on the earnings statement; Q-ratio focuses on the balance sheet; market cap to GNP focuses on corporate value as a proportion of the size of the economy; and deviation from price trend focuses on a technical price series. Taken together, they capture a wide swath of information about markets.

We analyzed the power of each of these 'valuation' measures to explain inflation-adjusted stock returns including reinvested dividends over subsequent multi-year periods. Our analysis provides compelling evidence that future returns will be lower when starting valuations are high, and that returns will be higher in periods where starting valuations are low.
Traditional investment planning does not account for whether markets are cheap or expensive. An investor who visited a traditional Investment Advisor at the peak of the technology bubble in early 2000 would, in practice, be advised to allocate the same proportion of his wealth to stocks as an investor who visited an Advisor near the bottom of the markets in early 2009. This despite the fact that the first investor would have had a valuation-based expected return on his stock portfolio from January 2000 of negative 2% per year, while the second investor would expect inflation-adjusted compound annual returns of 6.5%. For an investor with $1,000,000 to invest, this would represent a difference of more than $1.26 million in cumulative wealth over a decade.
And in conclusion, no surprise...
Investors would do much better to heed the results of robust statistical analyses of actual market history, and play to the relative odds. This analysis suggests that markets are currently expensive, and asserts a very high probability of low returns to stocks (and possibly other asset classes) in the future. Remember, any returns earned above the average are necessarily earned at someone else's expense, so it will likely be necessary to do something radically different than everyone else to capture excess returns going forward.
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No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
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