Yahoo "Finance Quiz"

So, if I may summarize a bit ***** and JWR -

When you guys look at FIRECalc and the past 125 years of data.

Are you Saying in effect ?

This time it's different!

A simple yes or no will suffice.

[hocus]

Are you saying in effect it's different this time?

Is there someone else who would like to handle this one? I feel that the question is a serious enough one that it merits a response. But I have answered it so many times that I feel that, when I say the words, they are not heard.

[haha]

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Are you Saying in effect, this time it's different?

I will try to answer this in a way that I think is in keeping with what ***** and JWR 1945 have posted. They are saying that. Furthermore, they are saying that it is different already, in the present, in a meaningful way, since valuations as stated by either PE10 or Tobin's Q, are much higher than anytime previous to today, excepting the late 20th century.

So they don't have to posit that the future paths will differ. They only have to state that we are starting, right now in the present, at an unprecedented valuation.

By the way, I think that this is a non-trivial observation.

Mikey

[cute fuzzy bunny]

For what its worth, I agree. I think stocks are very expensive.

I dont need no stinkin' formulas, tools or charts. I think they're expensive because at these prices I dont want to own them. Neither does Buffett, so I feel marginally comforted that I may not be a moron.

When we went into the long 2000-2002 slide, at the bottom I was just starting to feel like I might be comfortable with the prices. If I remember right, so was Buffett. Now we're run up 20-50% from those levels.

Come to think of it...I'll bet nobody here can say they've ever seen me and Buffett in the same place at the same time...now have they?

MMM...see's candy and DQ burgers!

[cute fuzzy bunny]

I've heard rumor and fact that he's cut back on many holdings and is hanging on to a hell of a lot of cash. Not to mention Buffetts cost basis on many of his stocks is so low that any sales at this point would clobber him with capital gains. Oh yeah...and why sell when you already have a ridiculous amount of cash and nothing to buy?

I guess I dont understand the confusion. Step away from the funny accounting, the talking heads and the guys who arent rich enough from their learnings that they havent eschewed writing books to tell us "how it really is".

Valuations by the most elementary metrics (and probably most reasonable) are higher than they've ever been. By far.

So for those who say "is it different this time", I say "perhaps a little because we may be later in our economic civilizations 'curve', but probably not, in which case anyone with a majority holding in anything other than high dividend value stocks better grab onto their equipment because the rollercoaster 'tick tick tick tick' may be about to stop..."

Seems straightforward to me. Some folks like the 'hang on for dear life through thick and thin' approach. Over the long haul I think that may work best. Some folks that seem pretty smart to me are all in cash, all in short term corp bonds, or all in TIPS. I think the 'hang on for dear life' is a great strategy during normal times. The last 6 years have been anything but. I think there are some times when you look at astronomical valuations and the "EJECT" button starts flashing. I think the same investor that buys in the day after a major crash or when things are in the dumps is just as smart.

Like I've said before. If I bought and held indexes and never let common sense intrude, I'd be right about where I started 10 years ago, and still be getting up every morning at 6, scraping the face, strapping on the noose, and getting back into the car to go to work.

:P

[wabmester]

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Valuations by the most elementary metrics (and probably most reasonable) are higher than they've ever been. *By far.

I'm not a big believer in the stock market for reasons other than valuations, but I have to ask -- what the @#?$! are you talking about?

The "most elementary metric" I know is the P/E ratio. The forward P/E for the total US market is something like 17 right now. Not anywhere near "higher than it's ever been." So, what metrics are you talking about?

And not only is the forward P/E a pretty reasonable number right now, but you have to look at it in the context of bond yields (since stocks and bonds compete). In that context, it doesn't look merely reasonable -- it looks pretty damn good.

[wabmester]

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This time it's different

Maybe I'm stating the obvious, but it's different every time! * FIREcalc results are a function of a very specific sequence of events. * Stocks could have had the same annualized returns with a much different sequence that could have easily wiped out anybody withdrawing 4%. * It's not just volatility that matters, it's the length of the up and down cycles.

The odds that we'll repeat a historic sequence approach zero pretty quickly for any reasonable period length. * *So, you better believe it is different this time. * Whether that'll be good or bad is yet to be seen.

[hocus]

I will try to answer this in a way that I think is in keeping with what ***** and JWR 1945 have posted....

Thanks, Mikey. That was extremely well done. I appreciate it.

[Michael]

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The forward P/E for the total US market is something like 17 right now...So, what metrics are you talking about?

Since earnings fluctuate so much, and estimates can be inaccurate, some people prefer to use 10 year averaged earnings in calculating valuations. By this measure, valuations are very high. This method evens out the cyclical fluctuations in earings. For example, earnings were about $50 in Y2K, then they dropped to $26 in 2002, and are now back above $50. There are various other valuation measures that people use, such as dividend yield, that also show much higher valuations than the historic norm.

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This time it's different. *According to legendary investor Sir John Templeton, those four words are the most dangerous in the English language.

I didn't say this. I just wanted to make sure that we were discussing it.

I find it very fortunate that we have people on this forum that claim to have more insight and are smarter than the legendary investors.

[wabmester]

Oh, brother. * Cut-Throat, I didn't see anybody claim anything about relative intelligence. * This seems to be your default argument for just about everything. * It's called "appeal to authority," and it's considered a desperate and mendacious technique to those who prefer logic. * And thank you for giving me the opportunity to use "mendacious."

Not only did you appeal to authority for your argument, but you took the quote out of context. * A lot of things are different this time, and a lot of things will be different in the future. * *Templeton was probably talking in the context of a bubble, in which people were coming up with new metrics to unroot valuations from tradtional measures. * Is somebody doing that here?

[wabmester]

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some people prefer to use 10 year averaged earnings in calculating valuations

Yes, some people prefer to use moving averages. Some like 10 years, some like 15, and some like 20. But that doesn't mean there's any validity to that technique. FWIW, it's a favorite of day traders, too.

I briefly read the original Shiller paper in which he tried to convince the reader that the market was overvalued using a 10-year trailing average. I think that was in 1996. Whoops

[sgeeeee]

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Yes, some people prefer to use moving averages. * Some like 10 years, some like 15, and some like 20. * But that doesn't mean there's any validity to that technique. . .

Yes. This is a very important point. The valuation that really matters to the investor is {current price}/{future earnings} because when you buy an investment you buy the right to share future earnings. You don't share past earnings. When people use any backward looking PE metrics it is because we don't really know and don't tend to trust forward projections of earnings. The backward looking measures are good indicators of {current price}/{future earnings} only if you assume that tomorrow will be pretty similar to yesterday. That holds true sometimes, but fails when we are in the midst of radical financial change (like today).

[hocus]

I briefly read the original Shiller paper in which he tried to convince the reader that the market was overvalued using a 10-year trailing average. I think that was in 1996. Whoops.

Here’s a link to the Shiller study.

http://www.econ.yale.edu/~shiller/data/peratio.html

Juicy Quote: "If real stock prices were a random walk, they should be unforecastable, and there should really be no relation here between y and x. There certainly appears to be a distinct negative relation here."

The “Whoops” prediction: "The January 1996 value for the ratio shown on the horizontal axis is 29.72, shown on the figure with a vertical line. Looking at the diagram, it is hard to come away without a feeling that the market is quite likely to decline substantially in value over the succeeding ten years; it appears that long run investors should stay out of the market for the next decade."

The paper was posted on July 21. 1996. The guy still has two years to bring this one home. Patience!

[cute fuzzy bunny]

Against past earnings, and current earnings, stocks are extremely expensive. Last time I checked, we know what those earnings are and were. Price against future earnings. Yep, we dont know what those are.

Against the mean price gradient, the dow, s&p and nasdaq are well above the mean. Of course if you believe that RTM is a silly invalid statistic that just happens to continuously occur, then you wont go for that either.

Morningstar's DCF, discounted future cash flow, also says stocks are overvalued. Unless I'm mistaken, DCF is the method Bernstein uses to determine fair price.

So are we saying that we're comfortable in guessing the future with regards to price against future earnings, all of these other well accepted theories or methods are corrupt, and that Buffetts a moron?

All I see in looking at our recent history, is a ridiculous 3 year run-up taking stock prices way above any supportable value proposition. A 2 year run down that still didnt take us back to mean, a 9 month run up in the last year, and a little tiny dip in the most recent month or two.

If a home in my area cost $200k to build, and its sitting on a parcel of land that I can buy for $50k, the price runs up to 500k, back down to 300k, up to 350k, and back down to 325k, the home is still overvalued by at least 75k.

[haha]

This thread enhances my faith in markets. If a well educated highly motivated group like those that post here can have so many differing ideas, that would often lead to very different actions at the same time and in the same space- then it will usually be easy to find buyers or sellers at more or less the current price.

This is a happy thought for me, and I hope for you.

Mikey

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This is a happy thought for me, and I hope for you.

Mikey,

Yup, I'm with you! *- I really like it when everyone is saying that the stock market is not the place to be.

Wab,

My only point, argument, *was in people's ability to predict the future. I don't believe they can! Maybe it is mendacious (And yes Wabmester I had to look it up). I was only pointing out that this whole thread centered around someone's ability to time the market (predict the future) * - I have already admitted that I cannot and I do subscribe to the Berstein philosophy of the Chimpanzees in Italian Suits throwing darts at the dartboard.

I've given up on picking stocks, timing the market and have looked myself in the mirror and admit that I have been my own worst enemy. So please excuse me of being mendacious, but I am not signing on to anyone that can predict the future markets and am not buying the 'We have discovered the holy grail of investing' idea.

I also admit that I think the sun will come up tomorrow and that is only based on past history, and someday I might be wrong and the Sun will not come up and I'll be F**ked

[cute fuzzy bunny]

I dont think "doom and gloom" is in the cards. I do think a 10-20% drop in stocks in the next year would hardly be a surprise though.

I also dont think this has to fall into the "market timing" or "stock picking" unless you simply have an unforgiving eye or insist on a black and white analysis.

There are some asset classes that wont take as big a beating from rising interest rates, and they arent hideously overpriced.

However, if the bulk of my portfolio was in REITS, growth stocks and emerging market stocks, I'd be strapping on my protective head gear in anticipation...

Short term corporate bonds, high dividend value stocks...I dont think you have as much to worry about.

[wabmester]

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Against past earnings, and current earnings, stocks are extremely expensive.

Please define "extremely expensive." My impression is that the market's current (i.e., trailing) P/E isn't that bad right now. Basically, the indices are priced like they were at the start of the year, but earnings have gone up significantly this year, therefore the trailing P/E looks much better today than it did just a few months ago. And it looks a helluva lot better than it did in 2000.

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Last time I checked, we know what those earnings are and were. *Price against future earnings. *Yep, we dont know what those are.

So you're saying that future earnings are unknown, that companies are guiding higher than they'll hit? That would be a first. It's simply not how the game is played. I seem to recall that you were upper-middle management, so I'm sure you know how the earnings game works. You can take those estimates of future earnings to the bank (and add a little extra for the unsurprsing upside surprise).

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Against the mean price gradient, the dow, s&p and nasdaq are well above the mean. *Of course if you believe that RTM is a silly invalid statistic that just happens to continuously occur, then you wont go for that either.

So now we're back to moving averages and RTM. Who knows, maybe you're right. To me that seems too simplistic, and if you want to be logically consistent, you should stay out of the market until RTM happens.

And in case anybody is unclear on the concept, RTM doesn't simply mean we'll eventually return to the mean P/E. It basically means that for all of those wonderful above average years we've had for the last 20 years or so, we'll see an equal magnitude of bad times ahead. That would be very very bad for folks like us.

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Morningstar's DCF, discounted future cash flow, also says stocks are overvalued. *Unless I'm mistaken, DCF is the method Bernstein uses to determine fair price.

I have no idea what their proprietary model is, but you can be pretty certain it's not what the Bernstein Authority uses.

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So are we saying that we're comfortable in guessing the future with regards to price against future earnings, all of these other well accepted theories or methods are corrupt, and that Buffetts a moron?

You can also be *very* certain that the Buffett Authority wouldn't be telling you if he thought it was a good time to buy stocks. Perhaps he'll tell you after the fact, but unless you think the guy's a fool, don't assume you can infer his actions from his words.

[wabmester]

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This thread enhances my faith in markets. If a well educated highly motivated group like those that post here can have so many differing ideas, that would often lead to very different actions at the same time and in the same space- then it will usually be easy to find buyers or sellers at more or less the current price. This is a happy thought for me, and I hope for you.

That's basically the Efficient Market Hypothesis in a nutshell. The current price is always the correct price, and if it ever gets out of wack, somebody out there will exploit the difference and prices will magically recallibrate.