Grantham Speaks to Current Fair Value

[haha]

Grantham: Stocks Still Above Fair Value « The Guru Investor

I feel like we are somehwat caught between a rock and a hard place. There is a binary inflation/deflation problem which makes it nerve wracking to just refuse to play with equities. At the same time, few things seem to be in bargain territory, unless you define bargain as any amount less than it once was.

Ha

 

[MasterBlaster]

The article doesn't say how "fair value" is determined. Is it a PE indicator or a PE10 indicator ?

 

[haha]

The article doesn't say how "fair value" is determined. Is it a PE indicator or a PE10 indicator ?

I am not sure that he explicitly explains his methodology; his forecasts are part of what he sells. He does have what the Bogle/Bernstein philosophy would deem impossible- a very good long term forecasting record.

Here is a recent letter


https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDqLlslDnruR3zwRaw6g6aB5jq0v8Y6sYttu4QGiSm%2fXH5UHyLmeHD2MrrK90s%2fw4NSoDtnKPMJk345pvc7TkLSc0hcAzg4TiY%3d

 

[IndependentlyPoor]

The link requires a password, don't know if it is free registration or not, but you can get to the April letterr from the home page.

Thanks for the heads up.

 

[haha]

The link requires a password, don't know if it is free registration or not, but you can get to the April letterr from the home page.

Thanks for the heads up.

I didn't realize. I registerd some time ago; at that time at least it was free.

Ha

 

[Pete]

I think it's fair to say that since the 80's we've been in a stock mania. It would be natural that the market is overvalued in total. I still think there is value in some companies that will grow with Asian growth.

 

[ESRwannabe]

I haven't read the article yet, but I believe that "high quality" stocks are at reasonable prices. In a relative sense, compared to most of the past decade, I would say they are pretty cheap.

I bought more shares of JNJ last week and PG just yesterday. I am basically looking at the top 20 stocks in the VIG etf and buying more shares as I get the money. My goal of $10k from divs, from my taxable brokerage account, by the time I am 40 (six years) looks to be assured. Based on my current portfolio and reasonable div growth estimates, I'll have around $5k in divs. This is from div growth only. This is assuming I invest no more money and do not even re-invest the dividends. Neither will be true of course. My immediate yearly goal is to increase divs by $1k per year.

 

[wildcat]

I have tendency to use short-term market valuation references when observing current market conditions. As in, the market looks like a pretty good deal but only when compared to the most recent market highs & data from a few months ago.

I like to look @ Value Line's current 3-5 forecast for returns along with where they list the forecasted market low (hence highest return) and market high (hence lowest return). Always interesting to be reminded that despite the little drop we have witnessed recently we are still quite close to the market high.

Grantham's is always a good read. With so many things at play, why not think back to where we came from or at least 1/2 way there?

Hopefully those tobacco companies keep plugging away

 

[haha]

think back to where we came from or at least 1/2 way there?

Hopefully those tobacco companies keep plugging away

Light up a Lucky! It's lightup time!

Light up a Lucky! - 1950s commercial on Flickr - Photo Sharing!

 

[Pete]

I am basically looking at the top 20 stocks in the VIG etf and buying more shares as I get the money.

I too love dividends. The VIG has a yield of 2.14, the top 20 stocks produce something between 2.5 and 3 percent. This is something I can get in a 5 year CD with no risk. Therefore I must get growth in these stocks too.

I initially believed we were in an inflationary environment with all the printing money going on, and failed to see the effects of the collapse in credit. Dividends and their stocks have been a great hedge against inflation but have done poorly in the past in deflationary environments.

I am betting on deflation for the moment and will take my "risk free" returns in laddered CD's. If inflation returns I hope to reap the rewards of higher interest rates and will look at dividend yields again at that time.

 

[ESRwannabe]

I too love dividends. The VIG has a yield of 2.14, the top 20 stocks produce something between 2.5 and 3 percent. This is something I can get in a 5 year CD with no risk. Therefore I must get growth in these stocks too.

I initially believed we were in an inflationary environment with all the printing money going on, and failed to see the effects of the collapse in credit. Dividends and their stocks have been a great hedge against inflation but have done poorly in the past in deflationary environments.

I am betting on deflation for the moment and will take my "risk free" returns in laddered CD's. If inflation returns I hope to reap the rewards of higher interest rates and will look at dividend yields again at that time.

I use funds in my retirement accounts. Taxable is the only place I have individual stocks. I am trying to build up supplemental income from stock divs. I consider the taxable account somewhat as one big emergency fund. I've got as much cash as I can stand. So, new money goes into stocks to build up the income. Basically this is my "left over" money that I am investing, although maybe it will turn into ESR money ten years from now. I have retirement savings taken care of before any money gets to the "left over" money pot.

My total yield is 3.52% right now, but I do have some in MO and PM which are high yielders, which drives it up a little bit. Current stocks are: CVX, JNJ, PG, KO, MO, PM.

I have gotten CVX, JNJ, and PG up to where they should bring in $1k or more each within five years, based on reasonable div growth estimates and assuming no more money is invested into them, including dividends. I almost have KO there. It is projected to be around $840 a year in divs, five years from now.

I want to get KO up to $1k divs and then I will probably move onto PEP, WMT, or MCD next. I'm just going to keep getting each one to $1k and then go after another stock. Goal is to have $10k div income in five years. Yearly goal is to add $1k projected div income each year. Once I get to $10k income I will re-evaluate. I don't particularly want to have more than 10 stocks. So, at that point I will probably only buy funds from then on.

 

[MichaelB]

I am not sure that he explicitly explains his methodology; his forecasts are part of what he sells. He does have what the Bogle/Bernstein philosophy would deem impossible- a very good long term forecasting record.

Here is a recent letter


https://www.gmo.com/America/CMSAtta...2MrrK90s/w4NSoDtnKPMJk345pvc7TkLSc0hcAzg4TiY=

Hi Ha

I read an interview recently where the GMO value methodology was described. IIRC they base it on Shiller PE10 historical average, their own forecast GDP and assumptions on total profit margin as a % of GDP. I'll look for the article, but it is pretty straightforward.

 

[MichaelB]

The methodology GMO uses to forecast is described here http://www.advisorperspectives.com/newsletters10/pdfs/Jeremy_Grantham_Guarantees_Gold_will_Crash.pdf

Grantham combines his PE forecasts with those for other variables to arrive at projected return for an asset class, as in this example for the S&P 500, for the seven years beginning 4/30/10:

(note – table here in article)

Long-term PE ratios have averaged 14 and they are currently 22.7. Grantham expects them to go to 15, and that translates to a 5.7% reduction in projected return. Similarly, profit margins have averaged 4.5%. They are currently 5.8% and Grantham generously expects them to increase to 6%, giving rise to a 0.4% increase in total return. Sales growth per share has been 1.8% and is now 1.9%; he expects it to increase to 3.6%, contributing 3.8% to total return. Including the dividend yield of 2.3% produces a total
return of 0.3%.

There’s a table I left out – I don’t know how to post tables – but in general I found the article useful in understanding GMO’s methodology.

 

[haha]

The methodology GMO uses to forecast is described here http://www.advisorperspectives.com/newsletters10/pdfs/Jeremy_Grantham_Guarantees_Gold_will_Crash.pdf

There’s a table I left out – I don’t know how to post tables – but in general I found the article useful in understanding GMO’s methodology.

Good article!

 

[HFWR]

Light up a Lucky! It's lightup time!

Light up a Lucky! - 1950s commercial on Flickr - Photo Sharing!

LSMFT - [-]loose straps mean flabby titties[/-] Lucky Strike means fine tobacco!

 

[haha]

LSMFT - [-]loose straps mean flabby titties[/-] Lucky Strike means fine tobacco!

I love old tobacco ads. Remember Johhy Roventini and "Call for Philip Mooorrreees!"

Philip Morris 'I Love Lucy' : Free Download & Streaming : Internet Archive

 

[HFWR]

Take a puff... It's springtime!

Come to where the flavor is...

A silly millimeter longer...

 

[haha]

Take a puff... It's springtime!

Come to where the flavor is...

A silly millimeter longer...

Don't call it silly. I'll add any millimeter I can.

I seem to have performed an auto-hijacking.

Ha

 

[LARS]

Grantham: Stocks Still Above Fair Value « The Guru Investor

I feel like we are somehwat caught between a rock and a hard place. There is a binary inflation/deflation problem which makes it nerve wracking to just refuse to play with equities. At the same time, few things seem to be in bargain territory, unless you define bargain as any amount less than it once was.

Ha

Haha,

I, too, share your dilemma on the current equities markets given the yin and yang of inflation/deflation.

All though it will be an anathema to many here, IMHO the current equity market is one to “rent” and not “own”. From what I can tell we are banded in a range of 9,500 to 10,500 and there is money to made working the cycles. There are a number of high dividend stocks that provide some downside protection, but still provide the volatility to make a quick profit.

That having been said there are opportunities (not many) to add to long term positions if you are careful.

Like the sergeant on Hill Street Blues used to say: “Be careful out there…”

 

[Gone4Good]

From what I can tell we are banded in a range of 9,500 to 10,500 and there is money to made working the cycles.

What's special about 9,500-10,500?

 

[M Paquette]

What's special about 9,500-10,500?

It's roughly the current trading range for the Dow Jones Industrial Average. A trading range implies that the value of the index or stock will stay within that range, until at some point it breaks out of that range.

In other words, it is special, until it isn't.

I like looking at patterns in charts. Sometimes I see teacups, or a head and shoulders, or a ducky...

 

[LARS]

It's roughly the current trading range for the Dow Jones Industrial Average. A trading range implies that the value of the index or stock will stay within that range, until at some point it breaks out of that range.

In other words, it is special, until it isn't.

I like looking at patterns in charts. Sometimes I see teacups, or a head and shoulders, or a ducky...

Exactly. And thus far, it has provided a nice wash, rinse and repeat cycle if you're paying attention. Will it continue... that's the million dollar question with each trade.

YMMV...

 

[Gone4Good]

In other words, it is special, until it isn't.

That's what I thought.