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Re: Stock Market Valuations and Entry Point.......
Old 01-01-2005, 08:18 PM   #101
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Re: Stock Market Valuations and Entry Point.......

OK, I'm new here and haven't really studied up on all that has gone on before but...

I wish that I had faith in somebody's well thought out intellectual arguements of what the market is going to do. I don't.

Random Walk Down Wall Street and all that stuff.... I worked in Investor Relations for a long time, and I learned that every crack analyst and portfolio manager has their theories that, if they are lucky and their timing is right, make them look smart.... for awhile.

If you can afford the loss or can't afford to stay put then make a call on the market and act accordingly. You might get lucky or you might not.

If you don't need to take risk, don't ,and build your portfolio accordingly. That is of course unless you just wanna have fun worrying about this stuff!!!!

But everyone has their own reasons for thinking their strategy is the right one. And much of it probably has to do with past experience, current financial state, risk tolerance, etc.

In my brief experience with reading this thread it seems like each person is trying to covince the other that for whatever reason, their crystal ball is correct. In my professional experience, that rarely happens. Another smart person may admit you have a good arguement, but will go back to their original line of thinking usually...because it better better matches their current situation.

If I wake up every day and say it is going to rain, eventually it will.

(Going back to ordering the 4 Pillars of Investing so I can keep up with you folks).


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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 03:36 AM   #102
 
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Re: Stock Market Valuations and Entry Point.......

Hi kayelem. Very good post!

I don't believe I have ever read one book on stock
investing (it would bore me to death), and I consider myself very financially well informed. I made my living
mostly in financial management. The point is that I
would not ever try to convince anyone to follow my
path (pre-ER or post-ER). I only tell what happened
and/or how and why I came to a place or position. If someone draws some useful info or even is just
entertained, then that's great. Many folks do try to
convince others here of the wisdom of their plans
and predictions. Not me. I have no idea what's going
to happen, other than I will not buy any stocks.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 11:53 AM   #103
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Re: Stock Market Valuations and Entry Point.......

It seems like each person is trying to convince the other that for whatever reason, their crystal ball is correct. In my professional experience, that rarely happens.

I agree that people rarely change their views because of what they see in a single discussion-board post. But the most important issue on the table in the SWR discussions is not the substance question of which view on investing is correct. The most important question is the process one--What is the range of acceptable discussion on investing questions at the various Retire Early/FIRE boards?

Intercst is the author of the study published at RetireEarlyHomePage.com (the REHP study). Intercst was also the founder of the first board, the Motley Fool board. This board and the others are essentially spin-offs of the Motley Fool board. The result of these two historical facts is that intercst's investing views have come to be perceived by many as the only acceptable views on how to invest for early retirement. That's not healthy. We need to open up the various boards to discussions of a greater number of alternative viewpoints.

My view is that the REHP study is analytically invalid for purposes of determining SWRs because it ignores the effect of changes in valuation levels. The problem that I have faced in engaging in discussions with other community members is that a good number just don't like it that I say that the REHP study is analytically invalid. But I must say that if I am going to describe my own views. My investing approach relies heavily on use of the findings of the Data-Based SWR Tool, an analytical tool that generates SWR findings very much at odds with the findings of the REHP study.

I don't have any illusions that I am ever going to persuade everyone to accept my investing views. I don't even think it would be a healthy development for that to happen. My hope is that we will reach a consensus that intercst's views should he held to the same level of scrutiny as the views put forward by any other community member. If someone had questions about the methodology used by JWR1945 in his research, they would put them forward. Why should it be any different with intercst?
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 12:32 PM   #104
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
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?
Hi Donner,

When you compared the SP500 to a safe investment that generates a 4.5% dividend I assumed that you were referring to US treasuries. In this case, you need to account for inflation in both senarios (treasuries, and stocks). If I remove the 3% bias you added to favor bonds, the market appears to be fairly priced by your own analysis! Do you agree?

I don't know whether or not the market is overvalued. I learned that I'm not very good at predicting how the market (or interest rates) will perform. I am open to others' analyses.


--JB

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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 03:42 PM   #105
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Re: Stock Market Valuations and Entry Point.......

JB-- The way I look at it, the 4.5% I get on the Treasury instruments is a nominal return which if you assume a 3% inflation rate gives you a real return of 1.5%. The current Dividend Yield on the S&P is 1.7% which gives you a negative 1.3% real return based on dividend income alone. So, "capital gains" have got to make up the difference and then some to compensate the investor for assuming the risk.
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 04:06 PM   #106
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Re: Stock Market Valuations and Entry Point.......

Two very interesting articles in the press this weekend which I would recommend for anybody to read.

Lawrence Kudlow is my favorite media economist. He sees the good side of almost every situation. His bottom line message: the economy is cooking on all burners and even better times are coming. See his article in the Washington Times and other papers entitled not atypically " Barreling Ahead into 2005"

The second article is in this week's Barron's. An interview with Jeremy Grantham entitled "Nightmare Time". Grantham is one of the founders of Grantham, Mayo and Van Otterloo which manages about $80 billion in assets. His take: we are in an investment environment unlike any he has ever experienced in his career or any period he has ever heard of. He maintains that ALL asset classes are overpriced right now. He personally has gone to high ground and is bailing out of he U.S. market.

Can both Kudlow and Grantham be right? I think yes.
I think you can have a booming? economy and an overpriced stock market at the same time. In fact that is what you would expect intuitively, isn't it?
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 04:17 PM   #107
 
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Re: Stock Market Valuations and Entry Point.......

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Can both Kudlow and Grantham be right? I think yes.
I think you can have a booming? economy and an overpriced stock market at the same time. In fact that is what you would expect intuitively, isn't it?

Hey Donner,

If you're not in the Market then you gotta hope they're right. Right?
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 04:50 PM   #108
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Re: Stock Market Valuations and Entry Point.......

Happy New Year Cut!

Well, I sure hope Larry Kudlow is right and I think he is.
We are in for a pretty good year in 2005 as far as the economy goes. I don't go looking for disasters -- I think the Germans have a word for it -- schadenfreud -- which means taking pleasure at the misfortune of others. I am not into that.

Way I look at it the current $11.5 Trillion S&P market cap is composed of three layers:

1. Intrinsic Value: Based on the numbers related to the dividend yield. Around $5 or $6 Trillion depending on your required rate of return and projected dividend growth.

2. Permanent Premium to Intrinsic Value: The market is always going to sell at some premium to intrinsic value.
Americans are a congenitally optimistic bunch. Investors view uncertaincy as a good thing. They are willing to pay to see what's behind the curtain. Its the reason Las Vegas rose in the middle of the desert. This premium will always be a part of market pricing as long as Americans have anything to do with it. Question is what is a reasonable premium for natural optimism? I'll venture a maximum of about 50% to inrinsic value. That would be an extra $2 or $3 Trillion of market cap.

3. Manic Value: When you get above intrinsic value plus a reasonable price to pay for the rosy future scenario you get into what Greenspan calls irrational exuberance. There is no rhyme or reason to it. This is the kind of "laissez le bon temps roulez" party on mentality that Grantham and others (including me) are just not willing to pay for. I figure it at about $3 or $ 4 Trillion of the current $11.5 Trillion market cap.

When we get that 3rd layer trimmed back some I will get back into equities.




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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 05:01 PM   #109
 
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Re: Stock Market Valuations and Entry Point.......

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When we get that 3rd layer trimmed back some I will get back into equities.
I just took some money off the table by rebalancing last week. I really did not think this past year would have been a postive one. I fully expected to be shifting money into stocks, rather than the other way around.

But, what do I know, next week I'm planning my Spring Fishing trips.
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 05:15 PM   #110
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Re: Stock Market Valuations and Entry Point.......

Cut--

That's what makes a horse race! Just don't turn your back on this market and be prepared to move nimbly when the time comes. Meanwhile enjoy those capital gains and planning those trips. Sounds like a nice balance to me.

Donner
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Re: Stock Market Valuations and Entry Point.......
Old 01-02-2005, 07:27 PM   #111
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Re: Stock Market Valuations and Entry Point.......

Hey Donner, I think trying to "move nimbly" is a
loser's game. You have to be right 2 times ....
getting out and getting back in. IMHO, it is a
better strategy to stick to your allocation and
rebalance each year. This forces you to sell high
and buy low. I know this sounds "trite" but it
works for me.

Cheers,

Charlie
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Re: Stock Market Valuations and Entry Point.......
Old 01-04-2005, 05:30 PM   #112
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Re: Stock Market Valuations and Entry Point.......

Charlie--

I have never been able to move nimbly either.
It's amazing how your emotions can get in the way of your decision making. Nobody likes to admit they are wrong and the tendency is to stick with a position even in the face of a a big loss.

I like the idea of a disciplined rebalancing program.
I just wonder how many people stick with it after a big loss or a big gain. Tough to get out of the big losers. Even tougher to get out of the big winners.
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Re: Stock Market Valuations and Entry Point.......
Old 01-04-2005, 05:42 PM   #113
 
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Re: Stock Market Valuations and Entry Point.......

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I just wonder how many people stick with it after a big loss or a big gain. Tough to get out of the big losers. Even tougher to get out of the big winners.
Hey Donner,

I know it's not hard for me to get out of the Big Winners, I've been doing it for years -

The tough part is to keep pouring money into the losers. - I think Berstein said "it felt like you were pouring it down a Rathole"
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Re: Stock Market Valuations and Entry Point.......
Old 01-04-2005, 05:56 PM   #114
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Re: Stock Market Valuations and Entry Point.......

If the last 2 days are any clue, we may get a chance
to "buy low" this year.

Cheers,

Charlie
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Re: Stock Market Valuations and Entry Point.......
Old 01-04-2005, 06:06 PM   #115
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Re: Stock Market Valuations and Entry Point.......

I've found that if I get up really, really early in the morning and make my decisions before I drink any coffee, they're better. I dont have enough going on upstairs to consider anything other than the most basic information and instinct.

I still think investing is something best managed with good education and very little excessive thinking or study. One look at the people on any investment news tv channel convinces me of this.

According to ECRI's leading economic indicators, we're going to sputter along more or less sideways until about march and then drop to a recessionary posture through about mid october and then rise again.

My plan is to ease up on the gas (stocks) a little bit next month when I have time to rebalance my funds. I'm already conservative enough to not make me sweat a drop too much.

Then theres the matter of the 200-220k i'll be netting from the sale of my wifes old house sometime in the next few months.

As Buffett says "drops in the stock market are good news if you're buying". Since it looks like I wont have to sell anything indefinitely, I'm hoping for a solid drop this year. Real solid.
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