Your opinion of asset prices ?

[flintnational]

Many of us are buy and hold investors. And, we stick to our AA over long periods of time. But, I still try and gauge the value of different assets. If I find something cheap one day I might be a buyer. What is your opinion of asset prices? Please add other assets as you deem appropriate. Hey, we can always use another bitcoin thread.

US stocks - overvalued (maybe 20%)I expect strong earnings to continue for a while

International stocks - fairly valued

US Bonds - overvalued maybe in a bubble

Bitcoin - A game changing technology currently in a classic bubble

Housing - My area, Atlanta, is a strong sellers market but probably fairly priced

 

[Clone]

The ND national guard is ready to go. B52s have been burning a lot of fuel lately. Maybe it is just an exercise to use up their JP4 budget?

 

[braumeister]

I think my opinions are generally undervalued.

 

[flintnational]

I think my opinions are generally undervalued.

Maybe undervalued but the price is right.

 

[Lisa99]

Bitcoin reminds me of the Dutch tulip craze

 

[OldShooter]

To say we are buy and hold investors is also to say, IMO, that we basically believe in the Efficient Market Hypothesis. So no large liquid market is ever significantly over- or under-valued.

Bitcoins have no intrinsic value. Their current behavior is a classic example of the Greater Fool Theory in action.

Local real estate markets may sometime be over- or under-valued because liquidity can be poor and transaction costs are high. Hence they are less susceptible to the arbitrage that helps make the EMH work.

Richard Thaler will argue that human psychology will from time to time distort markets and IMO that is true. But at the same time, he seems to say that the the EMH is the best assumption for investors to make.

There is quite a good video here: Are markets efficient? | Chicago Booth Review Right at the beginning, Fama and Thaler have this exchange:

Fama: [The EMH is] a model, so it’s not completely true. No models are completely true. They are approximations to the world. The question is: “For what purposes are they good approximations?” As far as I’m concerned, they’re good approximations for almost every purpose. I don’t know any investors who shouldn’t act as if markets are efficient. There are all kinds of tests, with respect to the response of prices to specific kinds of information, in which the hypothesis that prices adjust quickly to information looks very good. It’s a model—it’s not entirely always true, but it’s a good working model for most practical uses.

Thaler: For the first part—can you beat the market—we are in virtually complete agreement.
​

 

[Sunset]

To say we are buy and hold investors is also to say, IMO, that we basically believe in the Efficient Market Hypothesis. So no large liquid market is ever significantly over- or under-valued.

.....

Or... we are too afraid of being wrong so we are frozen in action, when/if it finally crashes, we will be too scared to sell at the low. So we stay fully invested except for what is needed to spend.

For about 3 years now, I have thought the market is too high... fortunately it went up while I was too slow to sell.
Even now, should I sell and miss out on the rising tide that is still coming in

 

[Lsbcal]

My opinion is worth exactly what my assets are weighted in the markets.

US stocks - I want them to go up so they are fairly valued
International stocks - I want them to go up so they are fairly valued
US bonds - I want them to go up so they are fairly valued
Bitcoin - this is just a weird one. Probably a speculative disaster in the making. Since I have nothing in this, I want it to blow up as it would be highly entertaining.
Housing - I am a home owner. You can guess my answer from the above.

In case you haven't guessed, I'm currently thinking like Rat in Pearls Before Swine.

 

[flintnational]

To say we are buy and hold investors is also to say, IMO, that we basically believe in the Efficient Market Hypothesis. So no large liquid market is ever significantly over- or under-valued.

Bitcoins have no intrinsic value. Their current behavior is a classic example of the Greater Fool Theory in action.

Local real estate markets may sometime be over- or under-valued because liquidity can be poor and transaction costs are high. Hence they are less susceptible to the arbitrage that helps make the EMH work.

Richard Thaler will argue that human psychology will from time to time distort markets and IMO that is true. But at the same time, he seems to say that the the EMH is the best assumption for investors to make.

There is quite a good video here: Are markets efficient? | Chicago Booth Review Right at the beginning, Fama and Thaler have this exchange:

Fama: [The EMH is] a model, so it’s not completely true. No models are completely true. They are approximations to the world. The question is: “For what purposes are they good approximations?” As far as I’m concerned, they’re good approximations for almost every purpose. I don’t know any investors who shouldn’t act as if markets are efficient. There are all kinds of tests, with respect to the response of prices to specific kinds of information, in which the hypothesis that prices adjust quickly to information looks very good. It’s a model—it’s not entirely always true, but it’s a good working model for most practical uses.

Thaler: For the first part—can you beat the market—we are in virtually complete agreement.
​

I agree with you and Thaler. And at least one of you has a Noble prize! I guess I was getting at the short term variations described by behavioral finance. The OP is just a thought experiment. I agree that the EMH precludes investors from doing much with asset price assumptions. As we have seen in the past, individual assumptions about markets tend to be wrong.

I could be swayed on my other asset value assumptions (They were just WAGs). But, I am sticking by my prediction that Bitcoin will end badly.

 

[flintnational]

My opinion is worth exactly what my assets are weighted in the markets.

US stocks - I want them to go up so they are fairly valued
International stocks - I want them to go up so they are fairly valued
US bonds - I want them to go up so they are fairly valued
Bitcoin - this is just a weird one. Probably a speculative disaster in the making. Since I have nothing in this, I want it to blow up as it would be highly entertaining.
Housing - I am a home owner. You can guess my answer from the above.

In case you haven't guessed, I'm currently thinking like Rat in Pearls Before Swine.

I like the way you think. We are both long the stock market and short bitcoin. But, I may consider a strategic investment in tulips.

 

[OldShooter]

Or... we are too afraid of being wrong so we are frozen in action, when/if it finally crashes, we will be too scared to sell at the low. So we stay fully invested except for what is needed to spend. ...

Well, I prefer to think of it as wisdom rather than fear. This approach has served me well during all bumps in the road starting in 1987.

Re what is needed to spend, we have at least five years of spending in fixed income assets, so I can ride out anything that history has previously shown us without selling equities. I don't worry a bit about sequence of returns and I worry very little about AA.

Life is very good, actually. We have been phenomenally lucky.

 

[OldShooter]

I agree with you and Thaler. And at least one of you has a Noble prize! I guess I was getting at the short term variations described by behavioral finance. ...

FWIW Thaler is a principal in a mutual fund company that, as far as I can tell, has been unable to turn behavioral finance theories into actual money. One problem may be that, like momentum, these things are so fleeting that it is impossible to trade significant money based on them. In that case, the little guy may actually have an advantage.

I could be swayed on my other asset value assumptions (They were just WAGs). But, I am sticking by my prediction that Bitcoin will end badly.

Bitcoin is a tulip bulb or an East Indian trading company. IOW, this time is not different.

 

[pb4uski]

Stocks/international stocks/bonds.... it doesn't much matter to me whether they are over or undervalued to me... I'm not smart enough to know... but I am confident that if I consistently rebalance to my 42/18/35 target AA that I will do fine.

Bit coin... reminds me of dot.com... it was the "in" thing and then imploded.

 

[HadEnuff]

the important question is not whether assets are over or under valued. The important question to be answered is "when will the investing masses decide the market is over or under valued".
And the answer is "Who the F knows?" ergo: we remain invested, to whatever degree we can tolerate.

 

[RobbieB]

I'm not selling stocks or real estate and I'm not buying bitcoin.

 

[NW-Bound]

If EMH applies to stocks and bonds, why does it not apply to bitcoins?

Why are we afraid to put some of our money into this "asset class"?

Are we not supposed to buy whatever the market says is "good", and not try to make judgement?

 

[audreyh1]

Markets aren't efficient - not in the short term anyway. We see crazy highs and lows all the time with extremely sudden changes in direction. Momentum seems to play a huge role and then like monster wave prices can suddenly collapse.

Crude oil price history chart

 

[HawkeyeNFO]

The ND national guard is ready to go. B52s have been burning a lot of fuel lately. Maybe it is just an exercise to use up their JP4 budget?

JP-4? If they have any left from last century, it's probably no good anymore. Nobody has used that stuff for a looong time.

 

[Totoro]

If EMH applies to stocks and bonds, why does it not apply to bitcoins?

Why are we afraid to put some of our money into this "asset class"?

Are we not supposed to buy whatever the market says is "good", and not try to make judgement?

For the same reason we don't buy Venezuelan Bolivar, you can't trust the stability of the system backing it. For the same reason I don't buy gold: companies produce something so in general you are paid to wait, cash and commodities cost money, so in general you are paying for waiting.

So no need to denounce the EMH for this one, although I am always up for a good bashing of any strong form of the EMH.

 

[flintnational]

IMO, there are two broad forces tugging at markets, EMH and behavioral finance. Human behavior accounts for the short term ups and downs. EMH accounts for the long term trends. To paraphrase Graham, "In the short term the market is a voting machine and in the long term the market is a weighing machine".

But, as an investor, history has shown it is hard to profit from this knowledge. So, most of us choose to stay the course and ignore the short term changes. The old saw applies, "The market can stay irrational longer than you can stay solvent".

If correct, this would imply that you can hold an opinion of the current price of assets, (are they being influenced by short term behavioral finance issues) just don't act upon your opinion. You might be wrong.

 

[John Galt III]

In disgust with one of my stable value funds due its lowly 1.4 % annual return and its high 0.7 % annual costs, I went crazy and just moved several thousand shekels from it into Dodge and Cox bond fund ( about 4% annual return with 0.4% annual costs), which immediately started to drop, of course, but with any luck will recover nicely, as it has been so far, in recent few years. My best fund lately has been Vanguard stock index with a microscopic 0.04 percent annual cost. I plan to just leave that one alone for as long as I can stand it, before some profit-taking.

 

[NW-Bound]

For the same reason we don't buy Venezuelan Bolivar, you can't trust the stability of the system backing it...

If we have to rely on something else to see when EMH applies and when it doesn't, then it is not that absolute, is it? How do we use it with a blindfold on?

I don't remember where I read this, but it was said that even when the market is efficient, the price of an asset can still vary from 0.5x to 2x of what its fair value is. That's huge, and that's the entire market. Individual stock prices or bitcoins can vary a lot more.

... The old saw applies, "The market can stay irrational longer than you can stay solvent".

If correct, this would imply that you can hold an opinion of the current price of assets, (are they being influenced by short term behavioral finance issues) just don't act upon your opinion. You might be wrong.

About how to act on market valuations, of course one should never go all in or all out. Rather, he should use Kelly criterion. That is to cut back on AA of an asset when the valuation is high, and to increase it when it is cheap.

 

[NW-Bound]

... To paraphrase Graham, "In the short term the market is a voting machine and in the long term the market is a weighing machine"...

And that's why Bogle, Buffett, and many others have said that stock prices in the decades ahead will have low single-digit gains and cannot sustain the rise of recent years.

 

[OldShooter]

IMO, there are two broad forces tugging at markets, EMH and behavioral finance. Human behavior accounts for the short term ups and downs. EMH accounts for the long term trends. To paraphrase Graham, "In the short term the market is a voting machine and in the long term the market is a weighing machine".

But, as an investor, history has shown it is hard to profit from this knowledge. So, most of us choose to stay the course and ignore the short term changes. The old saw applies, "The market can stay irrational longer than you can stay solvent".

If correct, this would imply that you can hold an opinion of the current price of assets, (are they being influenced by short term behavioral finance issues) just don't act upon your opinion. You might be wrong.

Well reasoned. Well said. Bravo! (Now where is that "applause" emoticon?)

... Are we not supposed to buy whatever the market says is "good", and not try to make judgement?

Who told you that? We are supposed to buy the whole market, which diversifies away all the noise and leaves us with only the long-term market trend and the market volatility, neither of which can be diversified away.

If we have to rely on something else to see when EMH applies and when it doesn't, then it is not that absolute, is it? How do we use it with a blindfold on? ...

We buy the whole market exactly because we can't "use" the fact that the EMH is often disrupted by behavioral factors. Over the long haul and over the whole market, though, the behavioral factors average to zero.

 

[Chuckanut]

If EMH applies to stocks and bonds, why does it not apply to bitcoins?

Why are we afraid to put some of our money into this "asset class"?

Are we not supposed to buy whatever the market says is "good", and not try to make judgement?

Forgive me if you already have heard this joke about Bitcoins:

Son: Dad, I want to buy a bitcoin. Can you loan me $12,573?

Dad: You want $13,863 to buy one Bitcoin? Where do you think I can come up with $10,482 for a Bitcoin? You must be crazy to think I have $14,384 to give you right now for a Bitcoin!