Are Stocks Too High? Or Not? Or Who Knows?

[Dd852]

There's been a lot written recently about the dizzying heights of the market

Robert Shiller wrote this over the weekend in the NYT, which seemed unsettling.

I read an excellent response today, here

The bottom line, as usual, "... it would be very rash for anybody who is not certain that they can wait out the market to invest more than they can afford to lose. And past performance is not only not a guarantee it may not be an indicator of future results."

So keep enough liquid and cash-like that you can wait out bumps and crashes; don't get stampeded into selling into a bottom but hang on as long as you can; stay diversified; stay calm and disciplined.

 

[Dd852]

One more from the NYT today about "when", cough, to invest if you have money to put in. The answer today is put it in when you have it, as long as your portfolio is well diversified and you can wait before needing the money.

 

[Donzo]

i can't imagine being all in (equities) or all out....ever. It's all about balance and your risk tolerance. We could have a correction tomorrow (about due?) or we could keep climbing to 18,000 DOW. But the economy is growing albeit slowly.
I keep at least a year of cash and another in near cash, just in case

 

[W2R]

There's been a lot written recently about the dizzying heights of the market

Robert Shiller wrote this over the weekend in the NYT, which seemed unsettling.

I read an excellent response today, here

The bottom line, as usual, "... it would be very rash for anybody who is not certain that they can wait out the market to invest more than they can afford to lose. And past performance is not only not a guarantee it may not be an indicator of future results."

So keep enough liquid and cash-like that you can wait out bumps and crashes; don't get stampeded into selling into a bottom but hang on as long as you can; stay diversified; stay calm and disciplined.

Sounds like good advice to me.

 

[Lsbcal]

Thanks for posting the link to the Shiller article.

There was one bad market decline that occurred under similar benign interest rate conditions as now. That decline basically started in May 1962 (Kennedy years). The PE10 got up to similar 21.5 back then but was actually higher based on ranking back to 1920 (95% rank versus today's 90%). That decline was short and sharp, about 5 month. It was not accompanied by a recession.

 

[eta2020]

The answer is "who knows?"

 

[ejman]

The answer is "who knows?"

The Shadow knows...

 

[M Paquette]

Noone knows.

But if you're nice maybe he'll slip you some tips...

 

[explanade]

Would the market have crashed in 2008 if not for Lehman, Bear Stearns, etc.?

Or did the market run up because of MBS, the housing bubble, but not the earnings of companies outside the housing sector and finance?

In the current market, housing prices have spiked up but apparently the banking sector is nowhere near as high as back then?

 

[jerome len]

If you can live, long term, off of stock dividends and bond interest, why worry?

 

[Midpack]

Looking at market indexes alone doesn't seem useful. "Dizzying heights?" Indexes can't provide positive long term returns unless they continue to reach new record highs (and inevitably retrench periodically) over and over, otherwise why would anyone invest in equities?

S&P 500 P/E thru yesterday...same AA here, still sleeping at night. Having 1-3 years worth in cash equivalents is a permanent part of our plan.

 

[MichaelB]

Cullen Roche at Pragmatic Capitalism write this

am going to be blunt – I have no idea if any of this is true. I don’t know what the “value” of stocks are today. And I don’t think anyone else really does. And I think trying to put a value on them through these sorts of metrics is just a big waste of time that leads some people to believe they’ve been able to pinpoint the “value” of stocks at present when the reality is that they’ve simply tried to calculate, with precision, something that is very imprecise (human perception). Therefore, if “value” is just another dynamic and evolving concept based largely on human perception then calculating it at any given time is likely to mislead you more than it’s likely to help you.

More Thoughts on the CAPE and Valulations | PRAGMATIC CAPITALISM

 

[explanade]

My portfolio hit an all-time high in early July, then dropped about 2% in early August and yesterday hit a new all-time high.

So who knows, when it was peaking around the end of June, early July, there were many bullish prognostications on CNBC.

Then earlier this month, there wasn't much bullish talk.

Last week it was down or so, then may have had a good day on Friday and Schiller issues this warning over the weekend and the markets have been mostly up this week.

One year the major indices are up 20% or more. So you would think it can't continue to appreciate at this rate, with GDP only so-so and Europe really slogging along, Asia also so-so.

 

[haha]

Cullen Roche at Pragmatic Capitalism write this
More Thoughts on the CAPE and Valulations | PRAGMATIC CAPITALISM

This is pretty much the exact opposite of Benjamin Graham and other value investors pov. Graham famously said that in the short term, the market is a voting mechanism. In the long term, a weighing mechanism.

Until the last 25 years, the period of investment populism, few people thought that stocks were worth whatever the crowd thought. (What Cullen Roche seems to be calling human perception.) Back then this was commonly professed by those whose well being came from enticing the public to buy stocks and mutual funds come Hell or high water. Now, this seems to be the default view, at least it seems to be so on this board.

We'll see who is right, in the fullness of time.

Ha

 

[Lsbcal]

The next 12 month's returns have zero correlation with the previous 12 month's returns:

 

[haha]

The next 12 month's returns have zero correlation with the previous 12 month's returns:

Has someone asserted otherwise?

ha

 

[Lsbcal]

Another plot, next 12 month return versus PE10 rank for each month (since 1920). Current PE10 rank for July 2014 about 90%.

.

 

[Lsbcal]

Has someone asserted otherwise?

ha

I guess not but it helps to be reminded of this stuff.

 

[sengsational]

Another plot, next 12 month return versus PE10 rank for each month (since 1920). Current PE10 rank for July 2014 about 90%.
.

I don't get that chart. I thought PE10 usually was less than 30 or so, but that chart has most of the dots higher than 30.

 

[dallas27]

Here's the right answer. Because the future is unknown, prices are simultaneously too high and too low, depending on the future outcome. Schrodenger's cat paradox applies, therefore the current stock prices exist as a duality that cannot be defined until a result is available to inspect in hindsight.

Wow. Nerdy, but i think socrates would back me up.



Sent from my iPhone using Early Retirement Forum

 

[sengsational]

Wow. Nerdy, but i think socrates would back me up.

Or Douglas Adams: "tea and no tea at the same time"

 

[haha]

I guess not but it helps to be reminded of this stuff.

As far as I know, nobody on this board or elsewhere has ever said that PE10 is useful for anything other than the long term, Shiller, who popularized CAPE (PE10) uses 10 year returns.

Ha

 

[Lsbcal]

I don't get that chart. I thought PE10 usually was less than 30 or so, but that chart has most of the dots higher than 30.

The charts shows PE10 rank on a cumulative bases since 1920. So a PE10 value in 1970 would have 50 years of data to rank against. For 2014 the ranking covers the entire span of 94 years. Just my way of doing things (for other purposes).

 

[MichaelB]

This is pretty much the exact opposite of Benjamin Graham and other value investors pov. Graham famously said that in the short term, the market is a voting mechanism. In the long term, a weighing mechanism.

Until the last 25 years, the period of investment populism, few people thought that stocks were worth whatever the crowd thought. (What Cullen Roche seems to be calling human perception.) Back then this was commonly professed by those whose well being came from enticing the public to buy stocks and mutual funds come Hell or high water. Now, this seems to be the default view, at least it seems to be so on this board.

We'll see who is right, in the fullness of time.

Ha

I don't think there is a predominant view here. My sense is that people in the accumulation phase have higher equity accumulations, those of us in the witdrawal phase have lower allocations. Just a feeling, though.

I like reading Cullen Roche, which is why I posted the link. It seems to me the Central Banks of the world are committed to minimizing investment market volatility as well as supporting asset pricing levels. How long they can keep this up is an important question. Kind of like bartenders, they want to keep everyone well lubricared, happy but not rowdy, until the sun comes up.

When it comes to specific investing advice, however, I lean more toward Jeremy Grantham. GMO's most recent quarterly update shows their benchmark free fund to have very low allocations to all the asset classes (equity is around 40%) while cash is over 20%.

 

[haha]

I don't think there is a predominant view here. My sense is that people in the accumulation phase have higher equity accumulations, those of us in the witdrawal phase have lower allocations. Just a feeling, though.

I like reading Cullen Roche, which is why I posted the link. It seems to me the Central Banks of the world are committed to minimizing investment market volatility as well as supporting asset pricing levels. How long they can keep this up is an important question. Kind of like bartenders, they want to keep everyone well lubricared, happy but not rowdy, until the sun comes up.

When it comes to specific investing advice, however, I lean more toward Jeremy Grantham. GMO's most recent quarterly update shows their benchmark free fund to have very low allocations to all the asset classes (equity is around 40%) while cash is over 20%.

Well stated. Just to be clear, what I referred to as the default view didn't specifically address allocations, but rather whether equities have a long term valuation apart from their current quotes, or does the current quote tell the whole story. And a corollary to this, does PE10 tell useful valuation information. If an investor believes in unvarying equity allocations in very different PE10 zones, to me he seems to be rejecting both of the points I mention. And unless I get the lay of this board totally wrong, most people here do believe their that while equity allocation might be sensitive to their age, other resources and the basic attitude that they imagine that they have, it should not be sensitive to ideas of market valuation, because of all the frequently stated objections to "market timing".

When I read the Cullen Roche piece you posted it seemed that was what he was addressing.

Ha