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Re: Foolish economic girly-man
Old 09-03-2004, 05:38 PM   #41
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Re: Foolish economic girly-man

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So TH,

If you really believe what you are saying, why do you have anything invested at all?

Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.

I'm not saying it's not going to happen, I'm saying I have no clue, therefore I am invested.

Oh boy. Stick me to the tar baby. :P

I believe its going to happen, I just have no idea when or how. So I do the only thing that makes sense. Diversify broadly and with equities, stick with cheap value stocks that wont take a beating when it does happen, and give me a good dividend in the meanwhile.

But I do have a hunk of cash waiting for dips.

I'm more interested in the california intermediate munis right now than CD's. About the same real return and that income doesnt inflate our joint income level. But I think you still have to own equities. Just be careful of how much and what kind.

John - thats how it works with my dogs too, I get dragged. But we always start at home and end up where I planned. Just not always by the same route...
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Re: Foolish economic girly-man
Old 09-03-2004, 05:45 PM   #42
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Re: Foolish economic girly-man

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Why not get a CD that pays a higher interest rate like ***** and just wait for the correction.
The problem is that ***** thinks he knows when the correction will happen based on the 10-year moving average P/E value. That's nonsense, and we're already 8 years outside of the window when that correction was supposed to happen.

It's true that we're probably way overdue, but it may also be true that some fundamental things have changed in the last 20 years that mean higher P/E values are normal (discount brokers, information via the internet, IRAs and 401-Ks, etc).

So, there's a fair chance that the long-term returns aren't as bad as some would predict based on history. But there's absolutely nothing that would suggest that P/E ratios should continue to grow as much as they have in the last 20 years.

So, ignoring the mess our economy is in, the Gordon equation might have been pessimistic. Unfortunately, our economy has enough really fundamental problems that two wrongs cancel and make Gordon pretty close to right.
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Re: Foolish economic girly-man
Old 09-03-2004, 06:23 PM   #43
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Re: Foolish economic girly-man

For what it's worth, my understanding of the Gordon
Equation is that it forecasts the long range return of
the "market" (or a stock for that matter) based on
the current yield plus the current earnings growth.
Thus if the current yield of TSM is 1.56%, for example,
and the current earnings growth is 6.8% then the
Gordon Equation predicts a long term return of 8.36%.

TH, when you say we are "way above the line right now"
I don't understand what you mean. IMHO by definition,
the "line" for TSM, today, goes through 8.36% . That is,
with today's numbers you can expect a long term average annual return of 8.36% going forward.

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-03-2004, 06:40 PM   #44
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Re: Foolish economic girly-man

On the other hand, if the market had a 50% correction
on Monday, then Gordon would predict a long term
return of 16.7% going forward from Tuesday, assuming
the yield and earnings growth rates in $ do not change.

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-03-2004, 06:44 PM   #45
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Re: Foolish economic girly-man

Charlie, no offense, but your version of Gordon makes no sense to me.

The Gordon equation is really simple. *Too simple.

The basic assumption is that our economy will just keep on growing at about the same rate it always has. * That's about 1.5%/year in real terms. * (Of course, there's no fundamental reason our economy should keep on growing at that rate, and this is the main flaw in Gordon.)

Then you just add that growth rate to the current stock yield adjusted by price to get long-term yield. * You can use either dividends *or* earnings, since some stocks have no dividends.

So, all Gordon is saying is that you get the current yield + the growth of the economy. * *That certainly hasn't been true for the last 20 years as we've had both P/E growth and high returns. * But another way to interpret it is that low P/E values (or high dividends) are good. *Duh *
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Re: Foolish economic girly-man
Old 09-03-2004, 06:58 PM   #46
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Re: Foolish economic girly-man

No offense taken, Wab. I am just regurgitating what
Bernstein and Bogle explained in their books. No more,
No less. It makes perfect sense to me. Duh.,

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-03-2004, 07:11 PM   #47
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Re: Foolish economic girly-man

OK, we'll let Bernstein settle this one then

Four Pillars, p. 54:

DR (Market Returns) = Dividend Yield + Dividend Growth

Again, the long-term dividend growth has been about 1.5% in real terms (and basically grows as the GDP grows).

It'd be wonderful if we could add recent dividend growth and recent earnings growth together to figure out long-term returns, but I just don't see the rationale.
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Re: Foolish economic girly-man
Old 09-03-2004, 07:33 PM   #48
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Re: Foolish economic girly-man

Wab, I am making the assumption that the dividend
growth rate and the earnings growth rate, on the
long run, are equal. Do you have a problem with
that? Of course, all of this assumes a constant P/E,
which may or not be a good assumption for the
future.

Cheers,

Charlie


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Re: Foolish economic girly-man
Old 09-03-2004, 07:44 PM   #49
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Re: Foolish economic girly-man

P.S. Look on page 60 of Bernstein's "4 Pillars....".
The graphs of earnings growth and diviidend growth
look pretty similar to me.

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-03-2004, 07:59 PM   #50
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Re: Foolish economic girly-man

Quote:
You can lose a lot of money waiting for "the right time".
Only if you are short.

Mikey
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Re: Foolish economic girly-man
Old 09-03-2004, 08:08 PM   #51
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Re: Foolish economic girly-man

Charlie, I re-read that section of Bernstein, and I'm convinced that the Gordon Equation is useless, that Bernstein is confused, and that we're both confused

Berstein states in several places that Gordon is only useful for predicting long-term returns. He gives an example based on long-term dividend and growth averages.

He then gives examples using current dividend rates and recent growth to predict future returns, but he insists that you can't use Gordon to predict short-term (e.g., annual) returns, so I have no idea why he's feeding short-term numbers into the equation.

Where you and I differ is that you use short-term values for both terms, and I use a long-term growth term to extrapolate current yields to predicted long-term, but frankly none of them seem very useful or accurate.

We all concede that Gordon doesn't consider P/E growth and that it can't predict changes in dividend (or earnings, or economic) growth, so ... what were we discussing?
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Re: Foolish economic girly-man
Old 09-03-2004, 08:22 PM   #52
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Re: Foolish economic girly-man

Quote:
On the other hand, if the market had a 50% correction on Monday, then Gordon would predict a long term return of 16.7% going forward from Tuesday, assuming the yield *and earnings growth rates in $ do not change. *
I think you may be overlooking a few things. It might be best to use some sort of smoothed growth rate, so it reflects more than just the current time year.

But accepting the figures you put forth, prior to the correction you have 1.56% dividend yield and 6.8% "growth". What we are talking about is economic or corporate growth. So after the correction of 50%, ignoring whatever negative effects a 50% correction would like have on economic growth rates, we would have a yield of 1.56%/0.50 or 3.12%. We would then add the growth rate of 6.8%, and get a new Total Return expecation for a buy and hold investor of 9.92%. Not too bad, but remember that we are talking about nominal returns, and to get a growth rate of 6.8% over any long period, we would have to assume inflation of at least 3.8 to 4% pa. I don't have the latest figures, but I think long TIPs are around 2.25% real. Add back the 4% inflation, and we have TIPs at 6.25% nominal.

This is an equity premium considerably less than the historic average. This speaks loud and clear to me- the market could deline by 50% and still not be a bargain.

So invest if you want, but it is more speculating than investing. I must admit that this speculation has worked extremely well for a long time. Probably so well for so long, that deep in the bones many people may not be able to accept what logic tells them.

But The Shadow Knows.

Mikey
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Re: Foolish economic girly-man
Old 09-03-2004, 09:16 PM   #53
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Re: Foolish economic girly-man

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... we have TIPs at 6.25% nominal.

This is an equity premium considerably less than the historic average. This speaks loud and clear to me- the market could deline by 50% and still not be a bargain.
Shh, Mikey, you just gave away the fact that TIPS are a bargain

I whole-heartedly agree with you on the inadequate equity risk premium, but to be fair, with 10-year treasuries at 4.3%, any expected growth in stocks north of 8% would justify valuations.

Which is why I think stocks are pretty fairly valued if you only consider today's environment: low interest rates and high earnings growth. Unfortunately, I don't think either one of them will be sustained very long, and stocks will tank when either leg gets kicked out.
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Re: Foolish economic girly-man
Old 09-03-2004, 09:35 PM   #54
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Re: Foolish economic girly-man

Mikey, I think you are probably right about using a
"smoothed" earnings growth rate as a proxy for
dividend growth rate.

Let's consider an example:

Suppose a stock was priced at $100 today, and the
dividend is $1.50 and the earnings growth is predicted
to be $6.80 per year. This would translate to 8.3%
annual return per Gordon (accepting earnings growth
is a proxy for dividend growth),

Now if the stock price dropped to $50 tomorrow but
the dividend remained at $1.50 and the earnings
growth remained at $6.80, I think the predicted return
per Gordon would be 16.6%. Of course it is not likely
that the stock would drop 50% unless something was happening to change the earnings growth.

Wab, personally I think Gordon is better at predicting
the total market in the aggregate than an individual
stock. Bogle in his book "Bogle on Mutual Funds"
on page 249 shows a chart of actual vs. forecast returns
for 10 year periods from 1948 to 1992. The Gordon
prediction was not perfect but not bad either. Bogle
claims the correlation between actual vs fcst was .77.
The std deviation between actual and fcst was 3% on
a mean return of 11% per year.

I may be making a mistake in using the current TSM
dividend yield and earnings growth rate to predict
the long term return. However, Bernstein uses
earnings growth rate instead of dividend growth
rate in his example on page 52. I think using the
current dividend yield is accurate, but Mikey is
probably right that we should use a "smoothed"
earnings growth rate or dividend growth rate. I
don't know where to get that number so I just
use the current number published by Vanguard.

You may be right that Gordon is full of s---t
but it is fun talking about it.

Thanks to both of you.

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-03-2004, 11:00 PM   #55
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Re: Foolish economic girly-man

Chuck - where ya getting those earnings growth numbers? Those are WAY higher than anything I've seen. I think the morningstar example was using a 1.25% annual earnings growth percentage as the 'expected' number going forward.
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Re: Foolish economic girly-man
Old 09-03-2004, 11:09 PM   #56
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Re: Foolish economic girly-man

Charlie, I did some random reading, and I still think you're abusing Gordon twice:

1) The growth rate is assumed to be constant, so a snapshot of growth is pretty useless.

2) Earnings growth is not a good proxy for dividend growth. * You're basically double-counting since part of that earnings will be used to pay dividends and part will be reinvested for growth.

So, you can use one form or the other. * For dividends, it's:

returns = dividend/price + dividend_growth

and for earnings, it's simply:

returns = earnings/price

Pretty good reference here:

http://www.investopedia.com/articles/04/012104.asp
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Re: Foolish economic girly-man
Old 09-03-2004, 11:11 PM   #57
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Re: Foolish economic girly-man

Quote:
I think the morningstar example was using a 1.25% annual earnings growth percentage as the 'expected' number going forward.
Morningstar was using "real" growth. Chuck was using nominal.
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Re: Foolish economic girly-man
Old 09-04-2004, 08:41 AM   #58
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Re: Foolish economic girly-man


TH, check the "holdings" tab on Vanguard's TSM.
It shows an earnings growth rate of 6.8%.

Wab, the slopes of the earnings growth and dividend
growth charts look about the same to me on P 60 of "4 Pillars...". Bernstein says that the compound annual dividend growth rate is about 4.5% while Bogle uses 6% for the 25 year period prior to 1992. Thanks for
your link. I will check it out. Maybe 6.8% is too high,
but it is not out of the ballpark of reasonableness.

BTW, the quants at Vanguard's Asset Allocation
Fund project a long term annual return for Index
500 to be 9.9%, 5.8% for long bonds and 2.4%
for cash. Check out the "news" tab on AA if you
have time.

Cheers,

Charlie
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Re: Foolish economic girly-man
Old 09-04-2004, 10:02 AM   #59
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Re: Foolish economic girly-man

Charlie, let me know when this horse is dead *

Vanguard is giving you the 5-year average for nominal earnings growth of *TSM. * *Would you believe me if I told you that the 5-year average for *dividend* growth of the same was close to zero?

I could only find dividends for the S&P 500 from 1998-2002 to compare, here are the nominal dividend growth numbers:

1998: 4.51%
1999: 3.02%
2000: -2.58%
2001: -3.37%
2002: 0.4%

5-year average: 0.4%

Granted, this is not exactly the same period as Vanguard is looking at, but it's got to be pretty close. *Dividends have simply not grown as fast as earnings.
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Re: Foolish economic girly-man
Old 09-04-2004, 10:45 AM   #60
 
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Re: Foolish economic girly-man

You people are clearly not 'foolish economic girly-men'.
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