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Stock Market Valuations and Entry Point...........
Old 12-20-2004, 03:18 PM   #1
 
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Stock Market Valuations and Entry Point...........

Almost every financial page that I have read for the last 5 years has indicated that the Stock Market is overvalued. It probably was overvalued, because the Market has not really appreciated since 2001. No big surprises here!

The question is for all those sitting on the sidelines. How do you know when to buy stocks? - Clearly there is no euphoria, as almost no one is talking about how great the stock market is.

Could we move sideways for 10-15 years? Sure! But we could also move slowly up defying historical valuations (i.e. the bottom P.E. ratio could be 20 instead of 10)

If history does not repeat itself, maybe it won't as far as valuations go.

So the question for the Hocuses, How do you know when to buy, before your lifetime ends? And the bigger question - What if you're wrong?
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Re: Stock Market Valuations and Entry Point.......
Old 12-20-2004, 04:43 PM   #2
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Re: Stock Market Valuations and Entry Point.......

Quote:
So the question for the Hocuses, How do you know when to buy, before your lifetime ends? And the bigger question - What if you're wrong?
I wanted to try to give my answer to this, but I admit to being turned off by the identification of caution with *****, whatever he or that is. To me, ***** has an unfortunate way of expressing himself, but he is not necessarily wrong because of that. In fact, he may be right in spite of that.

I will say one thing- there are lots of measurable things which don't seem to agree with the assessment that there is no euphoria. Euphoria is a strong word-maybe excessive optimism is more what I am referring to.

As to when would you buy, I see it like when will you buy a beef tenderloin? You buy it when it seems to offer value. If it never does, don't buy it. It is quite easy to survive without owning US stocks. One's goal is enhanced purchasing power over time, not ownership of stocks.

Mikey
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Re: Stock Market Valuations and Entry Point.......
Old 12-20-2004, 06:17 PM   #3
 
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Re: Stock Market Valuations and Entry Point.......

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As to when would you buy, I see it like when will you buy a beef tenderloin? You buy it when it seems to offer value. If it never does, don't buy it.
Well, yeah Mikey, but my question was - When do stocks have value for you? What is your measuring stick?

Beef tenderloin always has had value for me!
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Re: Stock Market Valuations and Entry Point.......
Old 12-20-2004, 08:34 PM   #4
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Re: Stock Market Valuations and Entry Point.......

Well, stocks have value for me when they are the
only way I see to achieve my financial goal. Even
at today's P/E and low dividend yields, the Gordon
Equation predicts a long term return of about 7%
nominal per year. Long term bonds should return
about 5% over the long term at today's yield. With
my financial resources I can't get there from here
without a substantial commitment to equities.

Cheers,

Charlie

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Re: Stock Market Valuations and Entry Point.......
Old 12-20-2004, 11:48 PM   #5
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Re: Stock Market Valuations and Entry Point.......

Quote:
Well, stocks have value for me when they are the only way I see to achieve my financial goal. *Even at today's P/E and low dividend yields, the Gordon Equation predicts a long term return of about 7% nominal per year. *Long term bonds should return about 5% over the long term at today's yield. With my financial resources I can't get there from here without a substantial commitment to equities.
I have to say I am puzzled by this. In no way am I criticizing your choices, but didn't you say you were 71 years old? And that you operate a laundromat? You worked *a pretty full career, so you must have OK good social security, as well as what your wife draws on your record. I believe you own a home, and you and your wife can live well on $40,000. Your SS and laundromat must cover that, and then some.

Another thing is that there is a logical problem with saying "I will buy stocks because it's the only way I can get where I want to go" Stocks can't be the "only way", if they may well not even be "a way". Whatever the Gordon equation might predict going forward from here, it might be totally swamped by volatility. And not just short term volatility.

Imploding bubbles take a long time to deflate, and there is at least a good chance that what we now have is an imploding bubble, notwithstanding the recent rally in the NASDAQ, and even more recently the S&P.

After the crash of 1929, it took until the Battle of Midway before any lasting climb started in the NYSE.

More recently, the Nikkei peaked in 1989. More than 15 years later, it is still trying to build a base. While the Nikkei was more overvalued in '89 than the S&P in 2000, the opposite is true of the 1929 crash and ensuing implosion.

None of my reasoning is based on bad things about to happen. I ignore the war. I ignore the dollar. I ignore the huge twin US deficits. I ignore China's rapid industrialization. I ignore the existence of nuclear weapons in terrorist friendly nations. I ignore Palestine; I ignore Israel.

If the world looked like peaches and cream, the markets are still overvalued. If Greenspan can keep interst rates down, maybe they will stay overvalued. But I think the longest of long shots is that a strong lasting advance will start from today's levels.

IMO, the strongest play is the one that allows you to keep playing.

Mikey
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Re: Stock Market Valuations and Entry Point.......
Old 12-20-2004, 11:57 PM   #6
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Re: Stock Market Valuations and Entry Point.......

Quote:
Well, yeah Mikey, but my question was - When do stocks have value for you? *What is your measuring stick?
Whole books and good ones are written on this topic. If you are seriously interested, any of Robert Shiller's books are good.(I think his newest book is about things other than stock markets) Valuing Wall Street, by Andrew Smithers and Stephen Wright is another good choice. I just checked my shelf- Irrational Exuberance is probably the one you want if you prefer Shiller.
Quote:
Beef tenderloin always has had value for me!
See, I am too poor for beef tenderloin. I do buy porterhouse, and bone out the tenderloin. $8.99 a pound instead of $14.99, and I like the strip that is left too.

Mikey
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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 02:38 AM   #7
 
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Re: Stock Market Valuations and Entry Point.......

I think Robert Schiller should just stay in the Crystal Cathedral and keep away from prognostication about
stocks.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 04:35 AM   #8
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Re: Stock Market Valuations and Entry Point.......

How do you know when to buy?

I view stocks as being comprised of two very different elements. They are in part pieces of paper reflecting ownership in a business enterprise. They are in part gambling chips.

The part that reflects business enterprises is fairly predictable. This is not so if you are looking at a single stock because the underlying business might do extremely well or extremely poorly. But when you are looking at an index, you have good, bad, and medium businesses all mixed in. It's a reasonably safe bet to assume that U.S. businesses will produce profits in the future somewhat in the way they have in the past.

What about the gambling part? That is the part that causes prices to rise dramatically in bull markets and to fall dramactically in bear markets. This part is highly unpredictable in the short term, but largely predictable in the long term. In the long term, stocks can't go down, down, down forever or up, up, up forever. They ultimately must come to reflect the value of the underlying businesses. Things can get stretched to the extreme in either direction, but ultimately they must snap back.

My aim is to buy stocks when their values are such that the long-term payoff is high enough to provide an income stream strong enough to support my Retire Early plan. You don't need to wait until valuations are at the exact medium level. At a medium level, stocks are a highly attractive asset class, so they can be attractive enough even at valuations higher than medium level. There comes a time, however, when valuations are so high that this asset class cannot reasonably be expected to provide the long-term financial support needed for your plan to work.

And the bigger question - What if you're wrong?

Is the payoff to the house from a slot machine predictable? Not in the short-term. If you are talking about 10 pulls of the lever, the house can lose. But the house can hardly lose if you are talking about 10 million pulls of the lever. The odds favor the house and over time the house is going to win.

The same is true of the investor who takes valuation levels into account in purchasing stocks. He is going to "win" in the long term. The part that is uncertain is when. If it takes 40 years for him to win, and he dies after 35, that's not much of a win in a real-world sense.

What SWR analysis tells you is how long it will take to win in the event that stocks perform in the future as they have in the past. It is of course possible that they will not. If stocks do something that they have never done before, the numbers generated by an SWR analysis do not apply. SWR analysis is always rooted in the assumption that the future will be something like the past.

My question is--If you are not going to base your planning on an assumptuion that stocks will perform in the future somewhat in the way in which they have performed in the past, what the heck are you going to base it on? I can't come up with any other guidepost that makes better sense than SWR analysis.

That said, I think it makes perfect sense in the application phase to adjust the numbers to reflect personal taste. An optimist might want to go with a number higher than the number generated by an SWR analysis, and a pessimist might want to go with something lower.
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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 05:34 AM   #9
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Re: Stock Market Valuations and Entry Point.......

Hmmm - sort of in the Chuck-Lyn camp with hats off to De Gaul, the Norwegian widow, Yogi, and Bogle.

Age 61 - eleven years into ER.

Income: 60% defined non cola pension
40% dividend DRIP stocks

Reserve:85% of total portfolio - roughly 75% balanced
index(~60/40), 10% REIT Index. SEC yield
2.5% plus. Maybe take SS at 62.

When to buy stocks I'm both buying and selling.

Looking at JWR's data over at NFB - I'm holding my nose and looking for dividend stock buys with 'livable div plus div growth' - as low as 2.5% in some cases - memories of higher dividend days make this somewhat painful. Ben Graham/Buffett metrics quasi apply here.

Selling - with the march of age and the trusty pie chart(ala Vanguard, Bogle) - taking a hard look at shifting to Target Retirement Series next year - wherein the computers slowly reallocate for you.

Lastly - in a concession to biology, I'm looking at 'strange stuff' from reading Raddr's site - commodities, timberland, etc. Mad money only.

My old buddy - Southern Peru Copper from the the 80's and very early nineties is my canary here.

I look at dividends/interest as real money and portfolio fluctuation as market fluation - at least in theory. Emotions are impossible to totally quell - hence the reliance on Vanguard's impersonal computers to do the rebalancing.

Hmmm - given the size of the two pots( stocks/IRA) - probably a net seller. Put me in the high valuations camp.

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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 07:13 AM   #10
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Re: Stock Market Valuations and Entry Point.......

Hi Mikey,

Give me a break on the age at least ... I am 70.

The laundry has not done well since the last recession.
I am trying to beef up the gross income so it will bring
a better price on the market in a year or so. Currently
it just barely covers payments on a home equity loan
that will be paid off in 4 years. So as it stands now
I need about $20-30k per year from investments plus
about $20k per year from SS to be comfortable.

When I dump the laundry I will be debt free. This
will allow me to reduce my equity exposure quite
a bit and sail away peacefully into the sunset.

Cheers,

Charlie
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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 01:47 PM   #11
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Re: Stock Market Valuations and Entry Point.......

Quote:
I think Robert Schiller should just stay in the Crystal Cathedral and keep away from prognostication about
stocks.

JG
I react various ways to JG but this was pure Diet Pepsi out the nose. I usually don't have to worry about not drinking around the computer with most of the board postings, maybe I'll need a new keyboard. Way to go JG!
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Re: Stock Market Valuations and Entry Point.......
Old 12-21-2004, 05:03 PM   #12
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Re: Stock Market Valuations and Entry Point.......

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Hi Mikey,Give me a break on the age at least ... I am 70. *
You are right! I apologize. I'm 63, and don't nobody better call me 64!
Quote:
The laundry has not done well since the last recession.
Sorry to hear that. It sounded so good to me. An income generator that was independent of stock market valuations, and presumably reasonably proof against the inroads of inflation.
Quote:
I am trying to beef up the gross income so it will bring a better price on the market in a year or so. *Currently it just barely covers payments on a home equity loan that will be paid off in 4 years. *So as it stands now I need about $20-30k per year from investments plus about $20k per year from SS to be comfortable. *
When I dump the laundry I will be debt free. *This
will allow me to reduce my equity exposure quite
a bit and sail away peacefully into the sunset. *
Charley, thanks for the very clear explanation. I see what you are heading for now. Good luck with it! By the way, were there neighborhood changes or other factors you can pinpoint that changed the profitability of your laundromat?

Mikey
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 09:25 AM   #13
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Re: Stock Market Valuations and Entry Point.......

Mikey, I pioneered my location about 35 years ago.
At that time, there was only one other laundromat
within 1 mile of me. It was a great business until
about 6 years ago when a huge laundry moved in
1 block away. Now there are 7 competitors within
1 mile. My business held its own until 2002 when
the recession and major street repairs in 2003
took their toll. This year receipts have started a slow recovery and I am hopeful that I will be able to sell for a fair price within a year or so.

Normally, laundromats are fairly recession resistant.
At least mine was until the last one. As far as being
inflation resistant, it is very difficult to raise prices in
a saturated location.

On another thread there was some discussion about
using low cost immigrant labor. I say thank God for
the immigrants ........ they comprise about 98% of my
business. I finally saw the light about 3 months ago
and fired my previous help who was hurting my
business with her unreliability and uncaring approach
and hired a Mexican immigrant. He is an outstanding
worker, conscientious to a fault, friendly with the
customers and speaks their language! My laundry
is now the cleanest in the area and I am hopeful
once again.

Cheers,

Charlie
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 09:35 AM   #14
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Re: Stock Market Valuations and Entry Point.......

Amen, Charlie!
We hire lots of local hispanic workers and they are a great inspiration in terms of their talent, work ethic, diligence and great attitude.

May be the salvation of our good ole American dream, or at least a strong support under it.

Wish our city would send more outsourcing their way -- instead of our full-time, full-benefits COLA-pensioned, unionized lawn- cutters or leaf blowers etc.

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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 02:50 PM   #15
 
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Re: Stock Market Valuations and Entry Point.......

Quote:
On another thread there was some discussion about
using low cost immigrant labor. *I say thank God for
the immigrants ........ they comprise about 98% of my
business.
Cheers
Charlie
I agree, I think the immigrants are one of the main solutions of the economic conditions of the U.S in the Future. With our low birth rate, we have to have more people to pay into the Social Security system. Immigration could make up for this.

Also, now that most of the U.S. unions have been busted, and pensions almost eliminated and the middle class almost exterminated we need a huge population of poor workers to continue to drive the U.S. economy.

We have plenty of minimum wage jobs in the U.S. now, we just need plenty of needy folks to come in and hold down 2 or 3 of them! All we need now is to get rid of that minimum wage crap and those pesky child labor laws, and then we'll really be able to compete in the world!

Maybe, we can pay for those tax cuts after all! - This is U.S.A. that we just voted for - right?
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Old 12-22-2004, 04:03 PM   #16
 
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Re: Stock Market Valuations and Entry Point.......

Jeez, Cut-Throat, most of the stuff you blow off
with sarcasm I embrace. No surprise there. Anyway,
if we could build a wall on both borders (north and south), I would support that. All illegals should be sent
packing at once. After that, I am sure the people who
are left will take the jobs left behind.

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 04:55 PM   #17
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Re: Stock Market Valuations and Entry Point.......

Quote:
Also, now that most of the U.S. unions have been busted, and pensions almost eliminated and the middle class almost exterminated we need a huge population of poor workers to continue to drive the U.S. economy.
I must admit, at first I started to chuckle about this statement, then I realized it was serious...who shall we blame for all the raging injustice in this country? Could it be the reality of global competition? Maybe its all the evil rich guys who milk the capitalist system on the way to ER
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 05:07 PM   #18
 
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Re: Stock Market Valuations and Entry Point.......

Hi Rock! Yeah, I was amused by that post also, but
I knew he was serious. Cut-Throat is more fun when
he sticks to fishing commentary

JG
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 06:03 PM   #19
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Re: Stock Market Valuations and Entry Point.......

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Amen, Charlie!
We hire lots of local hispanic workers and they are a great inspiration in terms of their talent, work ethic, diligence and great attitude.

May be the salvation of our good ole American dream, or at least a strong support under it.

Wish our city would send more outsourcing their way -- instead of our full-time, full-benefits COLA-pensioned, unionized lawn- cutters or leaf blowers etc.

I don't want to derail the thread too much, but I agree with the essence of the foregoing that there is way too much of a sense of entitlement on the part of American workers. They want a big paycheck, low hours, fully-paid for healthcare and a retirement pension. Unfortunately, the reality is that economic success is built on a solid foundation of high-quality productivity, not simply showing up for work.

As for stock market valuations, numerous experts have stated that the stock market is overvalued. Many of these experts turned out to be correct in 2001, when the dot-bomb implosion hit the American economy full force. It is well-known that Buffett refused to participate in the tech market, since he couldn't understand the valuations assigned to tech stocks. Turns out that he too was correct, and was doubly-correct by investing in "value" stocks with long-term track records of profitability and brick-and-mortar operations.

Today stock prices are dictated by a whole host of factors too numerous to list here. There are a wide range of indicators that assign different values to various aspects of publicly-traded companies. Notwithstanding these factors, the best one that I know of is a long-term track record of profitability, coupled with a degree of stability in such profitability. I understand that such characteristics don't make for an exciting stock that will double or triple in a year, or even five years, but slow and steady usually wins the race. In terms of acquiring such stocks, they are often whacked in any market sell-off. For example, when the economy took a nose dive in 2001, I started buying value stocks, and a few growth stocks that were probably on the verge of becoming value plays. Today, I'm up 50%+ on several of these, whereas many of the high flying stocks of the dot-com era still haven't recovered even half of their value from that time.
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Re: Stock Market Valuations and Entry Point.......
Old 12-22-2004, 06:39 PM   #20
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Re: Stock Market Valuations and Entry Point.......

Regarding the hispanics wanting to enter the US, I purpose we do an exchange program...since so many liberals want to leave, I say we do an exchange program on a one to one basis with Mexcio....the liberals leave, and the Mexicans come in.

Billy
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