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Mauldin column feedback
Old 09-01-2007, 07:49 PM   #1
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Mauldin column feedback

Anybody see Mauldin's column this week ? Link below. Talks about last 20 year equity boom as the result of decrease in dividend yields and increase in multiple. Then we'll see regress-to-mean stuff forward.

I don't get it. I don't see where the dividend yield drop matters. And I don't see current PE's all that lofty.

Appreciate any thoughts.......

Thoughts from the Frontline
So, if stocks were yielding 6% in 1982, and are now yielding 1.8%, should we expect to repeat the 13.9% of the past quarter-century? Of course not. On average, 5% a year came from capital gains attributable to multiple expansion - over and above what growing earnings and dividends contributed. Take that away, and we're at 9%. After all, that's what we'd have earned if dividend yields still matched the average yield of the quarter century. But, even that's too aggressive. Dividend yields are 2% lower than their average during this span and 4% lower than the starting yield of 1982. Take 2-4% away, and we should expect 5-7% from our stocks in the years ahead.
Over the past century, dividends have provided over two-thirds of the real returns earned in US stocks. Today, they hover well under 2%, while nominal bond yields are in the 5% range. Simple arithmetic points to 5% returns for bonds and 5-7% for stocks - if their respective yields don't rise in the years ahead! Rising yields and shrinking P/E ratios would mean capital losses which would reduce returns below these levels, much as falling yields and rising multiples fueled the wonderful returns of the past 25 years.
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Old 09-01-2007, 08:17 PM   #2
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Sounds like a tinfoil-helmeted PS to me...
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Old 09-01-2007, 09:05 PM   #3
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You know; once you've pulled the trigger and the bullet is out of the barrel you don't think about these things too much.

I used to read all these type of articles and worry before ER. I've been ER for over a year and they have less impact on me.

There will be an economic crisis in my remaining lifetime - about 35 years I'm guessing. What I fear the most is not living life most.

Sometimes I think hell is the next to last 1 second of your consience when you realise what your life could have been and what you missed. On the other side of the coin; heaven in the last second of life when you see all the good in your life.

That is what ...
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Old 09-01-2007, 09:11 PM   #4
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We have discussed this in detail before. Unfortunately, I don't have a link to the thread handy, but you can find it with the search function. Basically the real return on a broad index of stocks (e.g. the S&P 500) is estimated to be

dividend yield + real economic growth + percentage change in PE multiple

The current forward yield (next year's estimated dividend divided by today's price) of the S&P is about 2%, so if real growth were to average 3%, and PE multiples remain constant (since they are currently roughly in line with their long-term average), we would be looking at real (after inflation) stock returns going forward of about 5% versus the historical number of about 7% over the past 80 years. But who knows - real growth might be higher.
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Old 09-01-2007, 09:43 PM   #5
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The main insight of this article by Arnott and West is not that they are guessing at what the S&P will return going forward, but that there are significant flaws in a normal cap weighted index, and consequently to investing in a way designed to mimic that index.

This occurred to me years ago, and it is one reson I won't touch a cap weighted index. Think about it-it is designed to invest more in more highly capitalized stocks. If there were evidence that higher capitalized stocks gave better returns, there might be some justification for this. But there is not. As Arnott points out, many high cap stocks will in the fullness of time turn out to have been overpriced, and they will fall to redress this.

True, he is trying to sell his patented baby- but it is probably better- at least at this point before it gets beaten to death.

Ha
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Old 09-01-2007, 09:50 PM   #6
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C'mon, hah, we all know cap-weighted funds were invented for the fund managers convenience, not for the benefit of the retail investor.
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Old 09-01-2007, 10:03 PM   #7
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Here are the 10 largest cap stocks in the S&P 500 which comprise about 20% of the index - not exactly a bad group of stocks to own going forward, IMO

10 Largest Companies


There is some evidence that they gave higher returns in the past - that is why they are in the top 10 today.

About 20 years ago some folks were pushing the idea that an equally-weighted S&P 500 would outperform a cap-weighted one. The idea never really seemed to catch on - probably for a couple of reasons.

(1) It didn't outperform on a risk-adjusted basis

(2) It is hard (impossible?) for large pools of money (e.g pension funds) to hold equally weighted indexes

It does seem that some of those types of ideas are resurfacing again
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Old 09-01-2007, 10:13 PM   #8
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We're not talking about what one might find at some given point in time, but about a general approach.

Ha
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Old 09-02-2007, 07:18 AM   #9
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Here's a good breakdown of Investment Return + Speculative Return from Jack Bogle:



and



Personally, I think Arnott is just repackaging small and value tilts, and unfortunately, the dividend weighted indexes exclude a lot of non-dividend paying stocks. IIRC Fama said that only 22% of public companies actually pay a dividend. That excludes a whole lot of value stocks.

Journal of Indexes recently ran an article where Gus Sauter, Jeremy Siegel, and Rob Arnott "duke" it out:

Fundamental Indexing Smackdown

- Alec
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