Bogle "Market Expectations" interview with Morningstar

[Totoro]

He explicitly says he's not predicting, he is saying what a reasonable assumption would look like, and what it implies about your assumptions.

Most of us need at least some scenario planning, and what parameters to use for reasonable scenarios.

He knows prediction is impossible, although invest we must.

e.g. assuming 10% nominal returns in a normal inflation environment has implications on earnings growth and multiples that haven't been shown at any time in the past 100 years. You want to use that, fine says Bogle, but just be aware what you are saying: that the future will be much better than the past. That's all.

 

[NW-Bound]

Just now, I saw an article on the Web about how much money people would have if they invested in Netflix, Amazon, Apple, etc... 10 years ago. I guess that would cause a lot of people to kick themselves for missing out.

When people start to have high expectations, watch out. It does not feel like 1999-early 2000 yet, but it is getting close. When people poo-poo reasonable expectations, I should think about positioning myself closer to the exit.

 

[Lsbcal]

Just now, I saw an article on the Web about how much money people would have if they invested in Netflix, Amazon, Apple, etc... 10 years ago. I guess that would cause a lot of people to kick themselves for missing out.

When people start to have high expectations, watch out. It does not feel like 1999-early 2000 yet, but it is getting close. When people poo-poo reasonable expectations, I should think about positioning myself closer to the exit.

The only decline that l can find that might be relevant now would be one that occurred in 1962. Seems that it came out of nowhere. Other declines we're more predictable. The 1987 decline was avoidable because bonds we're a very good deal then.

 

[OldShooter]

Just now, I saw an article on the Web about how much money people would have if they invested in Netflix, Amazon, Apple, etc... 10 years ago. I guess that would cause a lot of people to kick themselves for missing out. ..

I think that kind of article is worse than useless, because it implies that somehow it was possible 10 years ago to pick the eventual winners.

I'm sure I could find a similar article from a few years ago that was chortling about how much money people had made on AOL, Cisco, and JDS Uniphase.

Everything is clear in the rear view mirror. As Will Rogers said: "If it doesn't go up, don't buy it."

 

[NW-Bound]

The only decline that l can find that might be relevant now would be one that occurred in 1962. Seems that it came out of nowhere. Other declines we're more predictable. The 1987 decline was avoidable because bonds we're a very good deal then.

Having lived through the 2000 and 2008 meltdowns, I can only relate personally to these two. Very predictable, but in hindsight for me.

In 2000, dot-coms were ridiculously priced. I did not own a single one of them, but my beloved tech stocks with high but reasonable P/E were hurt badly too although not to same extent. They sold a lot of equipment to the dot-coms, and their business dried up.

In 2008, not owning a single home builder or bank, I though I would be OK. Nope! The problem was systemic and affected the entire world.

Anyway, we are not there yet, but the way it is going, maybe another 6 months, another year? Heh heh heh... Market timing is exciting (and very tough).

Sign someone who's at 70% stock AA.

 

[Lsbcal]

Having lived through the 2000 and 2008 meltdowns, I can only relate personally to these two. Very predictable, but in hindsight for me.

In 2000, dot-coms were ridiculously priced. I did not own a single one of them, but my beloved tech stocks with high but reasonable P/E were hurt badly too although not to same extent. They sold a lot of equipment to the dot-coms, and their business dried up.

In 2008, not owning a single home builder or bank, I though I would be OK. Nope! The problem was systemic and affected the entire world.

Anyway, we are not there yet, but the way it is going, maybe another 6 months, another year? Heh heh heh... Market timing is exciting (and very tough).

Sign someone who's at 70% stock AA.

Both were predictable declines. This is something I only got into quantifying in 2009 so too late to use.

Both the 2000 and 2008 declines involved yield curve inversions, not just flatish yield curves. In both the PE10 was high, nose bleed high in 2000. In both the unemployment index ticked upwards. And in both we saw a slow rolloff period in the SP500. None of this is currently happening.

 

[OldShooter]

Both were predictable declines.

You can call tops and bottoms?

 

[Lsbcal]

You can call tops and bottoms?

No, did you carefully read what I posted? What I'm saying is that there is available public data that has correlated well with some (not all) market declines. Look at the data and decide if you want to act on it.

I should not have used the word "predictable". In using such data one should be prepared to be wrong or have to endure some further upward market moves. Getting an exact high is probably just luck.

Caveat: not all market declines are covered by such data extremes. An example is the 1962 market decline.

 

[OldShooter]

No, did you carefully read what I posted? ...

Well, I assumed that "Both were predictable declines." meant that they were predictable by you.

Agreed, however, there are patterns that, when backtested, correlate with past market events.

 

[NW-Bound]

Stock market does not repeat, but like history it does rhyme.

I am trying hard to discern the cadence here, and been looking for a déjà vu syndrome.

 

[OldShooter]

... I am trying hard to discern the cadence here, and been looking for a déjà vu syndrome.

My first serious investment effort, about 45 years ago (yikes!) was using Fourier transforms to analyze stock price series. It sounded like such a good idea, too.

I have come to believe that trying to predict the market is very similar to the centuries-long quest of the alchemists to turn base metals into gold. The prospect is so attractive that it lures legions into lives of futility and frustration. Trying to predict the market by chartist techiques is simply a subset of the effort.

And, worse, if a system were ever identified and became widely known it would immediately be mooted by people trading to take advantage of it.

I saw an article a month or so ago that attempted to correlate market action with eclipses. That one made as much sense as any other I have heard of.

 

[NW-Bound]

I do not think it's possible to predict a bitty 10% correction. These come as randomly as Brownian movement, or when an electron jumps to a new energy level. These corrections do not scare or excite me anyway. Because there's no way I would know exactly, I could not jump all-in or all-out. So, if I "rebalanced" 10% of portfolio and somehow happened to time it perfectly, I would gain 10% of 10% of portfolio, and that's a measly 1% extra.

It's the cataclysmic economic events, such as the recent dot-com mania and the housing bubble that I failed to make money off. In hindsight, it was clear as day that these silly things could not go on forever. I should have asked myself how I could take advantage of it, or at least avoid getting hurt. Most did not know how. A few smart ones did.

Anyway, there's nothing like the above happening right now, but I am watching. Just in case...

 

[Lsbcal]

The things I look at are only very rarely indicate to sell. Have not done any selling since I started monitoring these parameters (once per month) in 2009. So this has been almost buy-hold. For me, it is more of an insurance plan then a way to beat the market and also a way to keep my emotions out of the investment process.

 

[audreyh1]

I do not think it's possible to predict a bitty 10% correction. These come as randomly as Brownian movement, or when an electron jumps to a new energy level. These corrections do not scare or excite me anyway. Because there's no way I would know exactly, I could not jump all-in or all-out. So, if I "rebalanced" 10% of portfolio and somehow happened to time it perfectly, I would gain 10% of 10% of portfolio, and that's a measly 1% extra.

It's the cataclysmic economic events, such as the recent dot-com mania and the housing bubble that I failed to make money off. In hindsight, it was clear as day that these silly things could not go on forever. I should have asked myself how I could take advantage of it, or at least avoid getting hurt. Most did not know how. A few smart ones did.

Anyway, there's nothing like the above happening right now, but I am watching. Just in case...

It's amazing how long the manias can go on.

But in the case of 2008, did you really understand that subprime mortgages were being packaged in tranches so they could be sold worldwide as A quality mortgage-backed bonds, rated as such by the ratings agencies? A lot of very, very smart people didn't see this. The Federal Reserve didn't see this! It almost brought down our financial system. I think we noticed houses going for crazy prices and an awful number of people getting "liar loans", but we didn't see how pervasively questionable paper had spread through the financial system, and that's what caused the crisis.

I think looking back things seem very clear, but they are much muddier when they are happening.

 

[NW-Bound]

...I think looking back things seem very clear, but they are much muddier when they are happening.

Perhaps things are muddy because it's human nature to be in denial that things are really that bad, or so many people can be so dumb. I am not talking about just the recent housing bubble and the banking shenanigan. Throughout history, ridiculous things have happened, and now looking back we scratch our head asking how people let it be that way.

That's one reason I always question the "wisdom of the crowd". That phrase implies that the average Joe and Jane are wise, and of course we know that is not true. It's often more like "group think".

 

[BeachOrCity]

One easy way to predict long term average market returns is to just add inflation and gdp. If inflation averages 1.5 and gdp averages 2.5 that is 4. Even more pessimistic than Bogle. (Edit. Well i guess more like 6 when you include dividends so maybe the same). These leaves out market valuations and currency as well as increasing CORP profits. But none of these things can grow indefinitely while gdp and inflation can.

Read his in a buffet book years ago. Stuck with me.

Above is what I think of as a bottom line baseline.

 

[audreyh1]

Perhaps things are muddy because it's human nature to be in denial that things are really that bad, or so many people can be so dumb. I am not talking about just the recent housing bubble and the banking shenanigan. Throughout history, ridiculous things have happened, and now looking back we scratch our head asking how people let it be that way.

That's one reason I always question the "wisdom of the crowd". That phrase implies that the average Joe and Jane are wise, and of course we know that is not true. It's often more like "group think".

Yes, there must be some denial, but I think it's that people really can't see at the time. The bundling of subprime mortgages into higher quality tranches wasn't unknown. The ratings seemed a bit suspicious. But it was the huge volume of the practice and the unreliability of the models (deemed perfect at the time of course) that labeled them "A" that was hidden until the SHTF.

It was kind of like the 1998 Long Term Capital Management blow-up that almost caused a global credit crisis on top of the Asian 1997 currency crisis. But on a far larger scale. https://www.thebalance.com/long-term-capital-crisis-3306240

God, reading that article makes me realize we'll never learn!!! Yep, 2008 was 1998 all over again, but on a larger scale!!!!

 

[NW-Bound]

Yes, there must be some denial, but I think it's that people really can't see at the time...

God, reading that article makes me realize we'll never learn!!! Yep, 2008 was 1998 all over again, but on a larger scale!!!!

It's rather that people do not want to see. Not when they are sitting on such huge paper gains. Everybody wins. Everybody can live off their investments. Nobody has to work. We just sell stocks, houses, gold, whatever between ourselves, and somehow that generates the products that we consume.

No, people will never learn. To be a successful investor, the most important thing is to conquer greed and fear. It is a lot harder than we care to admit.

In the housing mania, my mother had a friend visiting from Maryland. This friend was buying a home in a hot subdivision north of Phoenix as an investment, and expected to flip it for a quick buck. Some people before her of course did that and made easy money. Fast forward to the end of the story: she was stuck with the home, let it go into foreclosure, and lost her downpayment.

At that time, I recall my mother telling me that we were not smart enough to get in on this, and let people from out-of-state scoop up all the hot deals. The local media justified this mania, saying that people were moving to AZ en masse, and there would be a shortage of housing, hence these houses would be needed.

Well, in 2010 after the housing market crashed, I helped my daughter buy her 1st home. She got it for 38% of the price the previous owner paid in 2007. She just sold it recently as she got married and no longer lived in it. The selling price was 88% of the price in 2007. She was happy and grateful to us for getting her that home.

 

[OldShooter]

... In hindsight, it was clear as day that these silly things could not go on forever. I should have asked myself how I could take advantage of it, or at least avoid getting hurt. Most did not know how. A few smart ones did. ...

With respect, I would alter that last sentence slighly, to: "A few lucky ones did."

My metaphorical view of this landscape is thousands of monkeys pounding on keyboards and randomly making forecasts that they then hawk to customers in an attempt to make a living. On any given day, upon any given event, some of the monkeys will have made predictions that look like genius. They are then feted and lauded for being "smart ones," but in fact they are still monkeys and their next prediction is no more likely to be correct than any other monkey's prediction. So, ... "smart ones?" No. Just "lucky ones."

But just for fun, let's hypothesize that somewhere in the troop of monkeys is a "smart one." Why would you expect him to be offering his expertise to us retail investors or, for that matter to any investors, for a few bananas when he can make himself as rich as he cares to with little effort?

Bottom line: I don't believe in smart monkeys, but in the unlikely event that there is such a thing I do not expect to meet him or her. (This is just another way to state the belief that market timing is impossible.)

... God, reading that article makes me realize we'll never learn!!! Yep, 2008 was 1998 all over again, but on a larger scale!!!!

Yes. As someone wisely pointed out, the most expensive four words in investment history are "This time it's different."

 

[Running_Man]

It's amazing how long the manias can go on.

But in the case of 2008, did you really understand that subprime mortgages were being packaged in tranches so they could be sold worldwide as A quality mortgage-backed bonds, rated as such by the ratings agencies? A lot of very, very smart people didn't see this. The Federal Reserve didn't see this! It almost brought down our financial system. I think we noticed houses going for crazy prices and an awful number of people getting "liar loans", but we didn't see how pervasively questionable paper had spread through the financial system, and that's what caused the crisis.

I think looking back things seem very clear, but they are much muddier when they are happening.

One didn’t need to understand the subprime mortgages in total, some very respected financial experts were warning that these were not sustainable and would lead to disaster
The very thing that happened was outlined here in March 16 th of 2007
http://www.early-retirement.org/forums/f28/will-subprime-foreclosures-spread-26416.html

Re: Will Subprime Foreclosures Spread?
The subprime market is bad, bad bad for the economy. If you think it is being overblown think of who believes the economy is in for serious problems : Allan Greenspan and Jim Rodgers, who today came out and said that the subprime will be the biggest disaster to ever hit the US.

GM has already taken in 1 Billion to assist in carrying their subprime loans. The rules of valuation are such that writedowns that should be taken aren't being taken. WHich is one of the sources of the problem on these in the first place. In many cases they are carried at full market value until they default, when time comes to foreclose on the underlying asset the house has fallen in value and creates huge losses, which are not reserved for.

Which is why valuing banks on book value is a very hazardous idea in my opinion.

I never thought it was that hard to follow, but the belief in the FED was greater than believing common sense and the nonsensical valuations given to housing. For beliefs such as this and trying to warn people of the historic overvaluation, ridicule and mocking was primarily the response instead of reasoned argument

The continual counterpoint was not that the sub prime packages were overvalued it was the FED would drop money from helicopters and home prices would never be allowed to decline, not that the investments were horrible. But a mania can last longer than common sense and makes common sense appear foolish. The fear of missing an uptick or being called a market timer allows for severe overvaluations to continue in the name of “I am a long term index investor” and I own all assets for the long term in my portfolio.

All a nefarious bank had to do was to create assets that an index fund would take, it was only when it was realized the index wasn’t actually of any value that every thing fell apart

 

[NW-Bound]

With respect, I would alter that last sentence slighly, to: "A few lucky ones did."

My metaphorical view of this landscape is thousands of monkeys pounding on keyboards and randomly making forecasts that they then hawk to customers in an attempt to make a living. On any given day, upon any given event, some of the monkeys will have made predictions that look like genius. They are then feted and lauded for being "smart ones," but in fact they are still monkeys and their next prediction is no more likely to be correct than any other monkey's prediction. So, ... "smart ones?" No. Just "lucky ones."...

I read "The Big Short" by Michael Lewis. He told the story of some smart ones. Buffett loaned money to some distressed bankers at really advantageous terms.

The above men were no lucky monkeys. Nobody could predict the mania, but as it evolved, they knew what to do. No prediction here, only reaction to events as they unfold.

It is true that these people would not publish newsletters to tell people how they make money. So, if one wants to make money when the occasion arises, on a much smaller scale of course, he has to learn himself.

True, it is not easy, but attributing everything to dart throwing and monkey business is not getting us anywhere. We have a niece who after trying hard got admitted to a medical school. Imagine if I told her that she was just a lucky monkey.

 

[OldShooter]

I read "The Big Short" by Michael Lewis. He told the story of some smart ones. Buffett loaned money to some distressed bankers at really advantageous terms.

Yes. Good book. I don't equate Buffett's taking advantage of a situation to calling tops and bottoms, but YMMV.

... attributing everything to dart throwing and monkey business is not getting us anywhere. ...

Agreed. But that does not lead to a conclusion that it is possible to do anything else. One may want something else but there are lots of things we want that we can never have.

Or, looked at another way, the place that the futility of market timing gets us to is asset allocation and buy-and-hold investing.

 

[NW-Bound]

No, I never said one could call the tops and bottoms. Buffett did not call the tops or bottoms. He only recognized when the potential rewards exceeded the risks, and vice versa.

It is not that hard to recognize the signs of danger, when everybody brags about how much money he has made in this or that asset class. It is just caution that will tell us to shift away from something, and look for bargain elsewhere instead of following the crowd and piling in.

About not being able to do anything else, I beg to differ. Again, it is hard to fight greed and fear, and a lot easier to follow the crowd.

It is true that people do dumb things and it cost them a lot more than having a strict AA and/or buy-and-hold. But in the rare event that things are really getting out-of-whack, if we say we should never trust our judgment, then we will close our eyes and ears and not recognize the silliness going on.

Some time before the banking melt-down, not a Bogle follower but I recall reading him lamenting that the financial sector dominated the S&P, more than what he liked to see and what made sense. The financial services are the lubricant to aid other sectors, not the end in itself to create wealth. But as he could not contradict his own doctrine about strict indexing, he did not offer any recourse for the individual investors. Short the banking sector? That's heresy!

Again, my point is that once in a while, craziness occurs. If we keep saying we are too dumb to form our own judgment and to recognize it and will never try, then of course it is a self-fulfilling prophecy.