We're still too exuberant

[REWahoo]

We're still too exuberant

The man who wrote the book on irrational investing says we haven't learned our lesson. I believe him.

December 17, 2005: 9:00 AM EST
By Geoffrey Colvin, FORTUNE senior editor-at-large


NEW YORK (FORTUNE) - One of the most important lessons you can ever learn about markets is also one of the easiest to forget: Just because prices are more reasonable than they were doesn't mean they're reasonable. I'm sorry to report that it's absolutely the lesson to keep in mind now that the Dow has hit 42-year highs and crept back up near 11,000.

http://money.cnn.com/2005/12/16/markets/colvin_fortune_122605/index.htm

I can envision Greg doing his little "happy gloomy dance" .

 

[HFWR]

Isn't PE10 skewed high because of the bubble?

 

[greg]

Wahoo:

 

[haha]

Isn't PE10 skewed high because of the bubble?

I think you misunderstand how PE/10 is calculated. It is today's Price, divided by the average of 10 trailing years of earnings.

Ha

 

[Gone4Good]

If the S&P 500 were to trade at 15 times its average trailing 10-year earnings, it would be valued at a current PE of 8.8x and just 7.6x next year's expected earnings.  That doesn’t make a whole lot of sense to me, especially when the all-time low PE is somewhere around 6.7x.


Edit for computational error

 

[haha]

I am trying to understand what your point is.

Ha

 

[HFWR]

I think you misunderstand how PE/10 is calculated. It is today's Price, divided by the average of 10 trailing years of earnings.

Ha

Oops, brain fart... Shouldn't post without adequate caffeination!!

Still, it seems counterintuitive. Thought the inflated PEs were from bubble prices, not depressed earnings. Sounds like a research project for tomorrow, when I'm at work.

 

[Gone4Good]

I am trying to understand what your point is.

Ha

Mine?

The suggestion of the article attached to the original post was that the right way to value the market is by comparing the current market price to its trailing 10-year average earnings.  Apparently, the average P/E 10-yr trailing is 15x (don't have all the numbers here to confirm that but it seems high).  The point of the article is that today's market is really overvalued because it trades well above 15x on a trailing 10-yr earnings basis.  

My point was that if the market currently traded at 15x 10-yr avg earnings it would also trade at about 8.8x this year's current earnings and 7.6x next year's expected earnings.  These multiples seem way too low to me making me question the validity of the original suggestion.  

a) Current S&P 500 Price                                     1,267
b) LTM 9/30/05 Earnings                                     74.19
c) Current P/E (a  /b)                                          17.0x

d) Avg 10-yr S&P 500 Earnings                            43.41
e) S&P 500 & 15x 10-yr avg Earnings (d * 15)          651

f) Current PE if S&P 500 traded at 651 (e / b)           8.8x


Edit for computational error

 

[haha]

Oops, brain fart... Shouldn't post without adequate caffeination!!

Still, it seems counterintuitive. Thought the inflated PEs of the 90s were from bubble prices, not depressed earnings. Sounds like a research project for tomorrow, when I'm at work. 

I must be expressing myself poorly. Inflated PEs were from bubble prices. But neither yesterday's prices nor PEs play any part in today's PE-10 as defined by Robert Shiller. Only today's price, and yesterday's (10 years of yesterdays to be exact) average earnings.

There is an additional subtle point. Many ( including Warren Buffet) think that the profit margins and ROIs of the 90s were maximum, and unlikely to be sustained for long.

Ha

 

[HFWR]

No, it's me.........

If earnings were not depressed, then PE10 shouldn't be out of line much with PE; apparently, though my bunion doesn't coincide with the "facts"!!

 

[haha]

Mine?

The suggestion of the article attached to the original post was that the right way to value the market is by comparing the current market price to its trailing 10-year average earnings.  Apparently, the average P/E 10-yr trailing is 15x (don't have all the numbers here to confirm that but it seems high).  The point of the article is that today's market is really overvalued because it trades well above 15x on a trailing 10-yr earnings basis.  

My point was that if the market currently traded at 15x 10-yr avg earnings it would also trade at about 9.7x this year's current earnings and 7.6x next year's expected earnings.  These multiples seem way too low to me making me question the validity of the original suggestion.  

a) Current S&P 500 Price                                     1,267
b) LTM 9/30/05 Earnings                                     67.00
c) Current P/E (a  /b)                                          18.9x

d) Avg 10-yr S&P 500 Earnings                            43.41
e) S&P 500 & 15x 10-yr avg Earnings (d * 15)          651

f) Current PE if S&P 500 traded at 651 (e / b)           9.7x

Thanks for the clear reply. I see what yoiu mean. As to the validity of Shiller's assertion, I have looked at his data, and it is historically valid. Of course that doesn't mean it is now. One possible expanation for the oddity that yoiu mention is that earnings growth and this years earnings have perhaps been unusually strong. How that should be interpreted depends on one's beliefs about capitalism and limits if any to LT growth and profitability.

Ha

 

[Gone4Good]

One possible expanation for the oddity that yoiu mention is that earnings growth and this years earnings have perhaps been unusually strong. How that should be interpreted depends on one's beliefs about capitalism and limits if any to LT growth and profitability.

Agree. His method overstates the PE when earnings are growing rapidly and understates it when earnings are declining. Probably not a bad approach over long cycles. The problem is, though, that this approach would probably have indicated stocks were consistently over valued since the mid to late 80's.

 

[dusk_to_dawn]

I don't agree with this method of valuing stocks. How would Google be valued if we used 10 years of earnings versus last year's and earnings projections for future periods? How about GM? The market has gone nowhere in the past 5 years. I don't get the feeling we are irrationally exhuberant right now. But what do I know? I have been wrong many times before.

 

[greg]

Oh boy! Tech talk. I'm just taking a break from a book: The author made an interesting point about how tech stoccks are evaluated. Basic points:

--We have determined that technology is good and that rapid growth and progress is wonderful for this country. I basically agree with this point.

--Part of tech and new innovation is rapid discovery and change. Ditto

--The Author's point: We often fail to see the rapid rise and fall of these new technologies as even better ones come along quickly. These technologies are held oftentimes by individual companies. New companies arise with new technology. i.e. the cycles are shorter.

--Therefore: Why would you give these new companies such high PE valuations when their product cycle may only last a few short years?

I thought this macro-perspective was interesting. That we are treating them as real, long-lived companies with expectations that many new products will flow out of them or the old ones will live almost forever. Microsoft is a case on point: It basically has Windows and Office as its revenue driver at this time. Nothing really new or innovative arriving in some time. In fact, soon, newer, more innovative products will probably be arriving--I hope. Probably from somewhere else, maybe from Google this time, maybe not. Microsoft is currently having success with their Xbox, but the original technology or idea isn't theirs. They leveraged into it. They are currently fighting the best innovators to even stay in the game. Short cycle maybe? Technology companies are currently grounded in this rapid cycling phase, IMO. I see more momentum investing then real investing. Perhaps tech is in a bubble?

 

[Spanky]

His prediction may come true as early as 2007 because the speculative component of stock returns must revert to historical level according to this site:
http://passionsaving.com/Robert-Shiller.html

 

[Gone4Good]

His prediction may come true as early as 2007 because the speculative component of stock returns must revert to historical level according to this site:
http://passionsaving.com/Robert-Shiller.html

Huh?

Robert Shiller’s mistake was in giving a precise date by which he expected to see stock prices fall.

He should have learned from Nostradamus - never be too precise and you'll never be wrong.

But in investing timing is everything. If you say "sell" and the market goes up in your face, you are wrong - plain and simple. You can wait until Revelations and claim victory that your stock market prediction was right because stocks fell to zero at the apocalypse. But that doesn't mean diddly to the people investing over the several thousand years before dooms day.

If you keep predicting stocks will fall, you will be right eventually. However, if you predict stocks will rise, you will be right more often.

 

[poyet]

Prediction is very difficult, especially about the future. Niels BOHR

Come on 1995-2002 have been the best years for long or vene ever to make a fortune on trendy bull then bear markets !

 

[Mr._johngalt]

His prediction may come true as early as 2007 because the speculative component of stock returns must revert to historical level according to this site:
http://passionsaving.com/Robert-Shiller.html

He might have to sell The Crystal Cathedral.

JG

 

[HFWR]

Best to ignore evrything on h****'s board...

 

[maddythebeagle]

He might have to sell The Crystal Cathedral.  

 

 

[greg]

But in investing timing is everything. If you say "sell" and the market goes up in your face, you are wrong - plain and simple. You can wait until Revelations and claim victory that your stock market prediction was right because stocks fell to zero at the apocalypse. But that doesn't mean diddly to the people investing over the several thousand years before dooms day.

If you keep predicting stocks will fall, you will be right eventually. However, if you predict stocks will rise, you will be right more often.

YTG: Perhaps, looking at the possible outcomes in your described world time frame, the best choice might be dividend stocks and interest bearing instruments that pay out cash regularly. Then, no matter what happens, you at least get something back in between the beginning and the end. You won't care so much about the end return of all capital because you may be gone anyway. So the goal in such a case would be to find durable payers. I believe this is sort of a Graham & Dodd argument. I like that. You start with a pile of money, you invest it in regular payers, you use the payments to make living in retirement possible and spend less time worried about whether the markets go up or go down. Sounds like a good solution to timing difficulties. And if the markets go up, great because your value/dividend stocks will probably go up too. If they go down, at least you have the dividends to tied you over until they return to fair value or not. You always 'net out' the dividends/interest while you are just waiting. Thank you. Another good reason to continue down the path I've chosen.

 

[Mr._johngalt]

YTG:    you use the payments to make living in retirement possible and spend less time worried about whether the markets go up or go down. 

Or, like me............spending NO time "worried about whether the markets
go up or go down." As long as the checks keep coming...............

JG

 

[Gone4Good]

YTG:   Perhaps, looking at the possible outcomes in your described world time frame, the best choice might be dividend stocks and interest bearing instruments that pay out cash regularly. 

You have no argument from me on that point - and I don't think you will find that I've ever posted anything to the contrary.

I'm a little uncertain, though, how that strategy squares with your stockpile of gold.

 

[Nords]

Perhaps, looking at the possible outcomes in your described world time frame, the best choice might be dividend stocks and interest bearing instruments that pay out cash regularly.

You have no argument from me on that point - and I don't think you will find that I've ever posted anything to the contrary.

Never thought I'd see Greg, YTG, and TH on the same investing page.

It'd really suck if the dividend tax rate returned to "normal" in 2009.

 

[Gone4Good]

Never thought I'd see Greg, YTG, and TH on the same investing page.

'Tis the season for miracles.