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Something for the bulls
Old 11-01-2013, 02:49 PM   #1
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Something for the bulls

Sean Darby Warns Against Relying On CAPE - Business Insider

Jeffries analyst criticizes CAPE (PE10).

Ha
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Old 11-01-2013, 04:07 PM   #2
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Sean Darby Warns Against Relying On CAPE - Business Insider Jeffries analyst criticizes CAPE (PE10). Ha
"There are a number of reasons that investors should be careful relying solely on one valuation model to determine whether the equity market is under or overvalued," said Darby.
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Old 11-02-2013, 01:49 PM   #3
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That graph illustrates why I'm afraid to act on something like PE10 - if we are saying that the current PE10 indicates that we should consider lightning up on equities, then I look back to when we were at this level back around 1995-96.

Then I look at a graph of SPY, even w/o divs accounted for, and for any SPY I might have sold in 1995-96, I would have never had a chance to get back in at that price, let alone lower. And it looks about flat from around 2003 to where he point to "Before the Financial Crisis" around 2007. So if I got out in 2003, I'd have missed a lot of the run up.

While I'd agree that the higher this number goes, the more likelihood we have of being nearer a peak. I just don't feel confident that I can use that info to know when to get out, because I don't know whether I can ever get in below that or not. To me, it looks riskier than just holding through a downturn. But that is just my opinion, or feeling really - who can know?

I don't think that makes me a Bull, it just means I don't know what to think!

SPDR S&P 500 ETF Chart - Yahoo! Finance

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Old 11-02-2013, 02:04 PM   #4
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That article sounds like it's saying "this time it's different"
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Old 11-02-2013, 02:07 PM   #5
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I think "holding through the downturn" is quite risky, for a retired person who depends on his portfolio, although I do understand the point that you are making. Holding through the downturn implies there the downturn is of a length that it can be held through. But imagine we were in Japan holding stocks in 1989. If we held, we would still be well underwater, and we may never recover, even if we were able to live that long. Exiting when one thinks that valuations are stretched requires judgment and exposes us a different risk- that of possibly making less money, for time at least, and paying more tax, than we might have if we had held.

The other question: is PE10 an effective measure of valuation, for those who are willing to leave the market to others from time to time? Here is another guy's idea of a valid valuation measure that gives a more nearly neutral picture at present than PE 10, at least judging by the past ranges of this measure.(PE of median S&P stock.)

Is the Stock Market Expensive? Mebane Faber Research Stock Market and Investing Blog
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Old 11-02-2013, 03:18 PM   #6
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Valuation of the equities market is one thing. It's valuation relative to the other alternatives is also a consideration of a portfolio mixture. This facet has abnormally high relevance in this time of low interest rates.
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Old 11-02-2013, 03:30 PM   #7
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Valuation of the equities market is one thing. It's valuation relative to the other alternatives is also a consideration of a portfolio mixture. This facet has abnormally high relevance in this time of low interest rates.
+1
Bonds IMO have gone from the return-free risk level (to steal Buffet's phrase), to merely highly overvalued level.
Real Estate in many markets is getting back to 2007 levels
cash is a guaranteed loser to inflation.


Now if you are almost positive that market is going to drop > %10% in the next 3 to 4 years. Then I suppose losing 5% (due to inflation) for keeping cash is better than the alternative. I am just not positive that market won't be up 30-40% in the same time frame.
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Old 11-02-2013, 03:37 PM   #8
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IMO this is all bull talk. (Not BS, but the patter of late bull runs) Maybe correct, but I have seen it many times before- last time 2007.

I believe that relatively short duration bonds should do well enough; at least well enough to not bother me.

It is impossible to be certain that stocks will decrease by whatever %, over whatever time. But IMO this is not a reasonable hurdle.

In any case, I cannot sell out completely or even nearly completely for tax reasons, but I do and lave lightened up within my tax parameters. 3/4 of my portfolio is taxable.

Ha
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Old 11-02-2013, 04:49 PM   #9
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"patter of late bull runs", :-) I like it..

You maybe right and I completely missed getting out in 2007.

The last time I was sure the market was overvalued was late 99 and 2000. Not only were internet stocks at crazy valuation, but so were regular stocks like GE and KO. Just as importantly bonds offered a respectable return TIPs and iBonds were both offering well over 3% real returns. CA Munis were 5% for 10 year bonds and 5.5-6.0% for 30 year. So it was pretty easy for me to say lets sell tech stocks and buy bonds, cause bonds provided almost enough income to support a 4% SWR with little risk.

The 1-1.5% yield of short term bond funds doesn't provide enough income for me to live on without dipping into my principal something I'm loath to do in my 50s.

Now I know you aren't suggesting making a radical change.

I also have been lightened up. I made my first short sale (NFLX) yesterday in many years and my IRA has a 10-15% in cash secured puts,which will probably expire worthless. Still it would be much easier to sell stocks if there was a reasonable alternative.
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Old 11-02-2013, 05:53 PM   #10
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"patter of late bull runs", :-) I like it..

You maybe right and I completely missed getting out in 2007.

The last time I was sure the market was overvalued was late 99 and 2000. Not only were internet stocks at crazy valuation, but so were regular stocks like GE and KO. Just as importantly bonds offered a respectable return TIPs and iBonds were both offering well over 3% real returns. CA Munis were 5% for 10 year bonds and 5.5-6.0% for 30 year. So it was pretty easy for me to say lets sell tech stocks and buy bonds, cause bonds provided almost enough income to support a 4% SWR with little risk.

The 1-1.5% yield of short term bond funds doesn't provide enough income for me to live on without dipping into my principal something I'm loath to do in my 50s.

Now I know you aren't suggesting making a radical change.

I also have been lightened up. I made my first short sale (NFLX) yesterday in many years and my IRA has a 10-15% in cash secured puts,which will probably expire worthless. Still it would be much easier to sell stocks if there was a reasonable alternative.
Agree with all this. To be sure I am not suggesting a radical change, or indeed any suggested activity at all-just a discussion.

One thing about the low rates on fixed income, isn't it the same if you have 50% equities and 50 fixed all the time,(at whatever rate) vs. have 100% equities 1/2 time and 0% the other half? I actually would more likely do 80% equities and 20% fixed when it looked positive, and 20/80 the other times.

Ha
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Old 11-02-2013, 06:29 PM   #11
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Crap. Now you folks are driving me nuts. If.....the market goes up a "hair" more.....I am likely to sell a few things. Iffffff we head back to the UK in a couple of years I need some more cash anyway. At this time....selling to cash seems to work well for us to top up our cash supply.
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Old 11-02-2013, 08:28 PM   #12
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I think "holding through the downturn" is quite risky, for a retired person who depends on his portfolio, although I do understand the point that you are making.
But is it really so risky, at a conservative WR? Most of the WR would be covered by divs, not much selling going on. But then....

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Holding through the downturn implies there the downturn is of a length that it can be held through. But imagine we were in Japan holding stocks in 1989. If we held, we would still be well underwater, and we may never recover, even if we were able to live that long.
True, but then every situation like that can probably be countered by an opposite situation. And in a prolonged downturn, it's still a bit of a trick to know when to get back in, and (as others have mentioned) to make more than the divs you would have got.

I feel like I'm stuck in a cross of two old TV shows, "Let's Make a Deal" and "The Twilight Zone"! Rod Serling is asking me to pick what's behind Door #1 or Door #3? But in life, you may never know how your other pick turned out.

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Old 11-04-2013, 12:33 AM   #13
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I actually would more likely do 80% equities and 20% fixed when it looked positive, and 20/80 the other times.
I believe this is formally called Tactical Asset Allocation. See: Tactical asset allocation - Wikipedia, the free encyclopedia.

In a way, our typical investor who shortens his bond duration is similarly reacting to what he perceives as a "return-free risk" as described by Buffett. Within his bond AA, he is shifting to what he sees as a better-valued or safer asset.

I myself see nothing wrong with Tactical Asset Allocation. I would have no problem adjusting my AA drastically if I see a risk, and I have done that in the past.

But at the present time, if we talk about equities, I see nothing that convinces me to cut way back. But on the other hand, Buffett is sitting on $49B of cash, and he seems to not being able to find good buys.
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Old 11-04-2013, 01:51 PM   #14
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IMO this is all bull talk. (Not BS, but the patter of late bull runs) Maybe correct, but I have seen it many times before- last time 2007.

Ha
AAII Sentiment Survey: Equiy Allocations Reach Highest in 6 Years | Wall St. Cheat Sheet

Your 2007 reference seems spot on. Higher equity ownership being a reliable contrary indicator.

Lots of "smart" investment managers, if you believe there is such a thing, are also very cautious.

But I'm in the same boat as you, Ha, with large unrealized gains in taxable accounts. Thinking of doing something to cushion against a decline, like I just sent in option writing paperwork today, but holding several years worth of expenses in cash and preparing to grit my teeth will probably be my main defense.
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Old 11-04-2013, 02:00 PM   #15
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To quote a railroad "baron" from back at the turn of the 20th century: "Fortunes have been made by selling too soon"..........
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Old 11-04-2013, 02:43 PM   #16
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This entire discussion sounds like market timing to me. If you're a retiree and you've done your homework, you shouldn't have a problem with a downturn. Any downturn.
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Old 11-04-2013, 02:48 PM   #17
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To quote a railroad "baron" from back at the turn of the 20th century: "Fortunes have been made by selling too soon"..........
No, I lost a (small) fortune selling too soon. In early 2009 to be exact. I will never do anything like that again.

Fear and greed fool us into thinking we can outsmart Mr. Market when all studies show just the opposite. The time to create your investment philosophy is before either a bear or a bull market, not during it. After you creating it, you stick to it. Regardless. History shows doing anything else will be your undoing.
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Old 11-04-2013, 04:59 PM   #18
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Fear and greed fool us into thinking we can outsmart Mr. Market when all studies show just the opposite. The time to create your investment philosophy is before either a bear or a bull market, not during it. After you creating it, you stick to it. Regardless. History shows doing anything else will be your undoing.
I'm not sure I agree, totally. Even William Bernstein, in Intelligent Asset Allocator (sorry, I don't have the book here, so please feel free to correct), in 1999, looked at the level of the market in predicting future returns, and could see the market offered lousy return probabilities over the next decade.
I do agree that adjusting your investment philosophy during a bull or bear market, becoming more conservative after it has gone down, or more aggressive after going up, what studies show most people do, is death to your returns.
I think this discussion is trying to point out is that we are in one of those overvalued times. If you think the market is always properly valued, I don't think you've been paying attention the last 15 years.
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Old 11-04-2013, 06:52 PM   #19
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Fear and greed fool us into thinking we can outsmart Mr. Market when all studies show just the opposite. The time to create your investment philosophy is before either a bear or a bull market, not during it. After you creating it, you stick to it. Regardless. History shows doing anything else will be your undoing.
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I'm not sure I agree, totally. Even William Bernstein, in Intelligent Asset Allocator (sorry, I don't have the book here, so please feel free to correct), in 1999, looked at the level of the market in predicting future returns, and could see the market offered lousy return probabilities over the next decade.
I do agree that adjusting your investment philosophy during a bull or bear market, becoming more conservative after it has gone down, or more aggressive after going up, what studies show most people do, is death to your returns.
I think this discussion is trying to point out is that we are in one of those overvalued times. If you think the market is always properly valued, I don't think you've been paying attention the last 15 years.
I recall Bernstein referencing something to the effect of future possible lower returns, but my personal investing philosophy isn't based on predicting the future. Nor is it based on whether the market is or is not properly valued at any given point in time. I don't time the or make decisions based on what it is doing or not doing. Then again, I guess you could call me an exceptionally passive, extremely long-term focused index investor.
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Old 11-04-2013, 09:44 PM   #20
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This entire discussion sounds like market timing to me. If you're a retiree and you've done your homework, you shouldn't have a problem with a downturn. Any downturn.
I'm close to the high wire on my stock allocation, but I allow myself to cheat +/- 3% based on valuations. Other than cash and short bonds, I don't much like risk returns on most bonds, other than floating, which I've already maxed.

So if the market keeps zooming, I'll probably sell some to cash, which I've reduced 10% over the last 18 months, part by buys and part by the stock rocket.

Nothing wrong with keeping to a straight allocation model, however. I got nervous in 2000 and '06, partly because I was nearing 50 in the latter but more the housing boom. I was surprised it took until '08 for the crash to ensue and was glad I just changed my allocation to include more bonds, along with readjusting in late '06 and '07. I think the market now is fully valued, but not comparable to '99 and '07, but I keep expecting a 5-10% adjustment anytime.
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