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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 12:26 PM   #81
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Re: Stock Market Valuations and Entry Point.......

You forgot to add 'In your Humble Opinon' to the end of this statement. No one knows what is going to happen.

It's possible that the bull market has a ways to go yet, that's fair to say
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 12:58 PM   #82
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Re: Stock Market Valuations and Entry Point.......

Donner is sitting on $800k making 4.4% interest
in a gov G fund that is semi-COLA indexed. He
can afford to be a little smug about not investing
in stocks. I can't blame him much.

For the rest of us poor suckers, we will have to
be content with the long term prospect of 6%-8%
market return at current valuations.

I for one plan to go down swinging (if it comes to
that) with my 60/40 coffeehouse. If by some miracle
my IRA ever becomes big enough to buy a COLA
indexed income stream large enough for life support,
I would have to give it serious consideration.

Cheers,

Charlie
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Re: Stock Market Valuations and Entry Point.......
Old 12-30-2004, 07:33 PM   #83
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Re: Stock Market Valuations and Entry Point.......

Nords --

OUCH!

A negative, nitpicking, morale sapping mind number!

A bit harsh there don't you think Nords? Oh well, sticks and stones and all that.

I might admit to being somehing of a mind number on occasion but a morale sapper? Never! Not guilty!

If I have numbed your mind and sapped your morale Nords I do apologize.

As far as shooting at hot air balloons with my ack ack
guns I think you would agree that this Board would be a target rich environment! But your balloon is perfectly safe with me, I assure you.

Have a Happy New Year and a prosperous and healthy 2005.
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 07:31 AM   #84
 
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Re: Stock Market Valuations and Entry Point.......

Hey Donner and all. Happy New Year!
I am looking forward to 2005 with great anticipation.

Donner, it's nice that you have a thick skin. It's needed
here as well as in life its own self. BTW, I hope you have plenty of food for the holidays. With a name like Donner your guests may be watching you closely
if the grub starts to run out

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 07:57 AM   #85
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Re: Stock Market Valuations and Entry Point.......

Hello JG and a Happy New Year to you as well!

We are going to a little dinner party and get together later on this evening. I will take your advice and keep a sharp eye on the other guests. If I detect a lean and hungry look and the knives and forks get a little too close I will definitely edge toward the exit.

Have good one and I will see you all in 2005.

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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 08:54 AM   #86
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
Since nobody has risen to the bait, let me put a little meat on the bones of my argument that the S&P 500 is overvalued at this point vis a vis any reasonable calculation of intrinsic value.

I returned to yesteryear to dredge up the old fashion notion that what the average investor ought to be valuing is a stream of future dividends. I have never been in Missouri but I like their State motto. To get me to invest in anything you gotta show me the money. Earning are nice. Sales revenue is nice. But show me the money. Show me the dividends I am going to get out of this deal. To value that stream you need a holding period and appropriate capitalization rate. So lets examine the elements.

Dividends. S&P reports that the 500 returned $178 billion in dividends in the 12 months ended Sep 30, 2004. That’s up about 16% from the previous 12 month period. (Thank you GW for investor friendly tax reform) We have to make a guesstimate about how that dividend stream is going to grow in the future. Just for fun, lets throw out that last 16% spurt and focus on the preceeding 15 years which reflect an average dividend growth rate of 5.7%. You might argue for a higher growth rate in dividends, but remember we are just having fun here.

Holding Period. You might argue that the S&P 500 is a perpetuity machine. But I personally, am not planning on living in perpetuity. I know some of the posters here are. But not me. Just for some more fun lets assume that the lights go out permanently in 30 years and no sense valuing dividend streams past the grave. So, if you punch that $178 billion of dividends out 30 years at a 5.7% average annual growth rate you get about $939 billion in dividends at the end of the last year of your life. Not bad so far.

Capitalization Rate. Heres where things get a bit tricky. Everybody has a different take on what constitutes a reasonable rate of return. I personally would start with my reasonably attainable long term risk free rate which is now about 4.5%. To that I would add another say 3% to cover inflation which gets us to 7.5%. On top of that I would have to get rewarded for assuming some market risk. Just for some more fun lets say you gotta give me 2.5% for my lost sleep bringing the total up to a nice round 10%.

Now my old pals Weston and Brigham used to argue that the price you should pay today for this dividend machine is the Net Present Value of the dividend stream plus the net present value of the market price of the asset at the end of the holding period (ie, at the end of 30 years). The NPV of my dividend stream growing at 5.7% with a 10% discount rate is about $3.0 trillion. They define the market price of the asset at the end of the holding period as the Dividend in the final year capitalized at the capitalization rate less the growth rate of the dividends or: P = D/(k-g) where P is the market price; D is the dividend; k is the required capitalization rate; and, g is the growth rate of the dividends. For me P = $939 billion/(.10-.057) = $21.837 trillion. The NPV of that $21.8 trillion 30 years from now discounted at 10% is $1.245 trillion. So, according to W and B, the intrinsic value of the S&P 500 dividend stream to me over my remaining estimated lifetime would be $3.025 trillion plus $1.245 trillion = $4.297 trillion.

Hello Donner,

Why do you add 3% to account for inflation in your SP500 analysis, and ignore the inflation base in the 4.5% long term safe holding? That 4.5% isn't above inflation, is it?

--JB
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 09:20 AM   #87
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
The question is for all those sitting on the sidelines. How do you know when to buy stocks?
When my 55%-60%/40%-45% stock/bond ratio is out of this range, I rebalance.

I've been investing in stocks for 20 years. It seems like people are always saying stocks are overvalued. I can hardly recall a time when the mindset was that the market is undervalued.

This appears to be common with assets that tend to rise. For example, the house I bought in '98 seemed overvalued when purchased, but not when sold.
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 10:26 AM   #88
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Re: Stock Market Valuations and Entry Point.......

Quote:

When my 55%-60%/40%-45% stock/bond ratio is out of this range, I rebalance.

I've been investing in stocks for 20 years. It seems like people are always saying stocks are overvalued. *I can hardly recall a time when the mindset was that the market is undervalued.

This appears to be common with assets that tend to rise. *For example, the house I bought in '98 seemed overvalued when purchased, but not when sold. *
Cutthroat:

The stock mkt. was tremendously under-valued about the time you started investing, compliments of 1966 to 1982 run of stagflation. Nowhere to hide.
I, like, many other hang on by their fingernails investors, have no clear picture where we go from here, but it is a totally different ballgame then it was (value wise), from your starting point.
I hope I can stick around for a while, because it's going to be an interesting ride
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 10:50 AM   #89
 
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Re: Stock Market Valuations and Entry Point.......

Jarhead,

These were not my comments, but I agree with them. The investing picture only looks clear in hindsight and hardly ever clear in the future. And real estate has always looked expensive to me and just keeps getting more so - So, I have quit trusting my instincts and invest accordingly.

It will be an interesting ride. - But, if you run FireCalc and your portfolio survives the Great Depression - Well, that's about as bad as I want to plan for. I really believe that the Stock Market will be higher in 20 years than it is today. I just cannot tell when it's hit bottom, so I'd know when to buy.

And since my financial planning is basically done, I am now planning a Trout excursion to Northern New Mexico for Late February Early March.

Cut-Throat (The Not worried about SWR's)
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 12:42 PM   #90
 
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Re: Stock Market Valuations and Entry Point.......

Quote:

The stock mkt. was tremendously under-valued about the time you started investing, compliments of 1966 to 1982 run of stagflation.
This is obvious in hindsight. At the time I remember people arguing the demise of the US economy -- deficit spending, trade deficits, increased military spending and the 'threat of nuclear war', 'made in Japan', the S&L 'crisis', and the 'crash' of '87.


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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 01:50 PM   #91
 
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Re: Stock Market Valuations and Entry Point.......

Jarhead,


Did you get any good sized steelhead? - I presume that you caught them on flies?

Did you fish the San Juan in New Mexico?
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 04:05 PM   #92
 
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Re: Stock Market Valuations and Entry Point.......

My oldest daughter used to live right on the San Juan in New Mexico. It didn't look fishy to me, but I was told it
was pretty good in spots. I never did fish it though as
my daughter got married and moved away. I still have
warm feelings for New Mexico however.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-31-2004, 04:35 PM   #93
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
My oldest daughter used to live right on the San Juan in New Mexico. *It didn't look fishy to me, but I was told it
was pretty good in spots. *I never did fish it though as
my daughter got married and moved away. *I still have
warm feelings for New Mexico however.

JG

John,

The best Trout water on the San Juan is from the Navajo Dam downstream about 5 miles. There is about 20,000 Big Trout per River Mile in that Stetch. The best thing is that I can go Trout Fishing to rising trout in February ! - Road Trip - Yeeh Hah!
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 10:59 AM   #94
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Re: Stock Market Valuations and Entry Point.......

Quote:
This is obvious in hindsight. At the time I remember people arguing the demise of the US economy -- deficit spending, trade deficits, increased military spending and the 'threat of nuclear war', 'made in Japan', the S&L 'crisis', and the 'crash' of '87.
I am an advocate of Professor Shiller's P/E10 measure of valuation. It is the best that I have seen so far. [ P/E10 is the current price of the S&P500 index divided by the average of the most recent decade of earnings.]

P/E10 peaked in 1966 around 24. The low in 1982 was below 7. Market multiples went from being close to an all-time high to being close to an all-time low.

We are at P/E10 multiples higher than those of 1929 and 1966. (The all-time maximum was reached in 2000.)

There are credible arguments for stocks to remain at higher than normal valuations for a while. They are not credible when it comes to valuations as high as today's.

Have fun.

John R.
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 12:09 PM   #95
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
There are credible arguments for stocks to remain at higher than normal valuations for a while. They are not credible when it comes to valuations as high as today's.
John,

I was wondering what you are personally doing with this information.

1.) Are you 0% in stocks right now because of these valuations? If not 0% what percent?

2.) If we are roughly at P/E 22 right now, what P/E level would cause you to Increase your Stock Percentage? And do you have a formula for this? In other words. (example - P/E 10 you'd be at 80% Stocks, P/E 15 you'd be at 60% stocks )

3.) Also, do you think it's possible that P/E ratios may be a stock measurment similar to the Dividend number (when in 1958 Stock Dividends fell below bond dividends and never recovered?)
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 04:01 PM   #96
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Re: Stock Market Valuations and Entry Point.......

I use P/E10, which averages ten years of earnings, not the single year P/E ratio.

P/E10 has been around 28 recently. Historically, the typical, mid-range value of P/E10 has been 14 or 15.

P/E10 is most useful for intermediate-term predictions. This is the time frame most important for Safe Withdrawal Rate studies. I know of no satisfactory method of predicting short-term performance. For the long-term, it is OK to use the long-term return of the overall market.

[Keep in mind that there are differences between the accumulation stage and retirement, which involves the distribution stage and may include reductions in capital.]

Roughly speaking, if you are going to buy-and-hold stocks for 25 to 30 years, buying stocks still makes sense. If you are likely to sell stocks within 15 years, you may lose money. You are most likely to lose money when valuations are high, such as they are now.

So far, my research has pointed in two directions. The first is to step aside. Buy TIPS, preferably when they yield 2.5% or more. Add stocks gradually as valuations improve. If valuations fall to bargain levels, buy them hand over fist.

An attractive alternative is to focus on dividend-based strategies. The general idea is to purchase reliable income streams that will last throughout the foreseeable future. The greatest danger during retirement is being compelled to sell stock when prices are low. You do not have this problem with a sound dividend-based strategy. You can usually select stocks with dividends that keep up with inflation.

The details of my research are at the SWR Research Group board at the NoFeeBoards www.nofeeboards.com website.

In terms of personal actions: I have purchased TIPS (at 2.5% interest). Historically, I have almost always invested 100% in stocks. I am now leaving cash in my portfolio. I have recently purchased high dividend stocks. I especially like Merck MRK.

I do not rely on my investments for income. My pension is more than adequate. My portfolio is primarily in the accumulation stage for the benefit of my daughters.

Have fun.

John R.
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 04:16 PM   #97
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Re: Stock Market Valuations and Entry Point.......

Quote:
2.) If we are roughly at P/E 22 right now, what P/E level would cause you to Increase your Stock Percentage? And do you have a formula for this? In other words. (example - P/E 10 you'd be at 80% Stocks, P/E 15 you'd be at 60% stocks )
The corresponding level for today's P/E10 is 28.

Looking at historical results in isolation, if you change allocations gradually, which is best, you should have a 0% stock allocation whenever P/E10 exceeds 24. You should keep it down to 20% when P/E10 is between 21 and 24.

If you choose to change allocations abruptly, again looking at historical results in isolation, you should be out of stocks whenever P/E10 is above 21. Considering that P/E10 has stayed above 21 throughout the entire bubble period on up to today, it makes sense to change that threshold from 21 to 22.

Yes, I have included some simple formulas and confidence limits in my investigations in addition to tabulated results.

Have fun.

John R.
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 04:43 PM   #98
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Re: Stock Market Valuations and Entry Point.......

Quote:
3.) Also, do you think it's possible that P/E ratios may be a stock measurment similar to the Dividend number (when in 1958 Stock Dividends fell below bond dividends and never recovered?)
Our best theoretical justifications for stock prices are based on the dividends that a company returns to its share holders. Exceptions such as a company's being acquired before producing dividends can be handled in a straightforward manner.]

I have found the earnings yield based on ten years of earnings (this is 100% / [P/E10] ) to be a superior atlernative to dividends. From a theoretical standpoint, dividends must come out of earnings and using ten years of earnings smooths out year-to-year variations. Using the earnings yield in this way avoids the problem of surprise dividend cuts.

Notice that I am talking in terms of absolute valuation measures, not a relative comparison such as the old stock-bond comparisons of long ago. The relative attractiveness of alternative investments do come into play, but later on.

There are many differences between stocks and bonds beyond their yields. For example, price to earnings ratios (including P/E as well as P/E10) automatically include an inflation adjustment. This is because earnings follow inflation. Bond yields do not.

I consistently advise people not focus too much on numbers in isolation. That can be a trap. Look for cause-and-effect relationships. Make sensitivity studies. Use the numbers to improve your understanding and then apply judgement.

Have fun.

John R.
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 06:01 PM   #99
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Re: Stock Market Valuations and Entry Point.......

JB-- Happy New Year! Looks like we all made it to 2005 ok.

You are right about the inflation factor. My fixed income return doesn't cover it. I have some partial protection in that the investment instrument I have access to will provide an increasing nominal interest rate as long term rates rise

This is the individual investors conundrum right now. Protect against market risk related to manic market valuations or try to protect against inflation risk by relying on common stocks.

Quick story: Had a finance prof in grad school once, Douglas Bellmore, who was an old Wall Sreeter and a great teacher. First question to the class, first day in class: "Why should people invest in common stocks?" I raise my hand with the answer:" Because common stocks are a hedge against inflation." This is in the fall of 1970. His reply: "I know you are a first year student and you don't know any better, otherwise I would flunk you for the class for that answer!" Fortunately for me he was chuckling when he chastised me. His point: stocks suffer from inflation just like everything else.

I don't bet on common stocks to save me from inflation. I think there is some notion that companies will have the pricing power to pass costs along to consumers. I don't count on that. I think it is more likely that rising raw material and energy costs will have to be eaten by a lot of companies as they face increasing competition from China and emerging economies. And I agree with Bill Gross that a financed based economy is going to have a hard time adjusting to a higher interest rate environment, which is on the way. Even those companies that do have some pricing power will face a wounded consumer and an economy moving uphill. Any way you look at it, inflation is bad for earnings, bad for profits and bad for common stocks.

But to your question, I think it's reasonable to build an inflation factor into a required rate of return for equity investments. Equities have to make the case that their return to the investor is sufficiently attractive to woo us away from risk free alternatives. In an inflationary environment that is a tough nut to crack for many industries. But if they If they can't cover that nut then what's the point?
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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 07:23 PM   #100
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Re: Stock Market Valuations and Entry Point.......

What each of you are talking about is risk. You may find the following link interesting:

http://www.riskgrades.com
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