Professor Shiller's Online Links

Research on Safe Withdrawal Rates

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JWR1945
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Professor Shiller's Online Links

Post by JWR1945 » Wed Apr 21, 2004 7:04 am

There are many references to Yale Professor Robert Shiller's research. He is the one who came up with the 1871-present series of numbers (S&P500 prices, dividends, etc.) that are used in Historical Sequence calculators. He is the one who rigorously proved the value of P/E10 for making stock market predictions.

Here is the link to his site.
Home page:
http://www.econ.yale.edu/~shiller/

List of Online Papers
http://www.econ.yale.edu/~shiller/online.htm

Here are the two papers which introduce P/E10. The first is more readable. The second is more thorough.

Original Paper by Shiller
http://www.econ.yale.edu/~shiller/data/peratio.html

Federal Reserve Paper by Shiller and Campbell
http://www.econ.yale.edu/~shiller/online/jpmalt.pdf

Have fun.

John R.

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ElSupremo
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Post by ElSupremo » Wed Apr 21, 2004 7:41 am

Greetings John :)

Thanks for the links! I'm making an effort to understand this stuff. It may never come to anything but at least I may be able to someday offer an opinion on these issues. Whatever they may be. And whatever board they may be on. ;)
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Post by Mike » Thu Apr 22, 2004 9:17 am

I'm making an effort to understand this stuff.

Me too. I find it helpful to fire up Excel, run the simulations, and make some of the charts for myself. This helps me a great deal in understanding how they are constructed, and how to interpret them. I obviously have much to learn, but I have found that math is surprisingly interesting when you do a little bit of it every day in bite sized chunks. It turns out to be actually quite fun to puzzle out its mysteries.

JWR1945
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Post by JWR1945 » Thu Apr 22, 2004 12:51 pm

Mike,
Be sure to read page 8 of the Federal Reserve Paper by Shiller and Campbell. It addresses demographics in the section about The Baby Boom and the Demand for Stock.
http://www.econ.yale.edu/~shiller/online/jpmalt.pdf

They make an excellent point. For stocks to continue to grow at above average rates, it is necessary for the price to (ten-year) earnings multiple to continue to grow. It is not enough that valuations remain high. Multiples have to get bigger and bigger.

Have fun.

John R.

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Post by Mike » Thu Apr 22, 2004 2:22 pm

It is quite interesting, although he seems to think the main boomer effect is one of attitude towards valuation caused by the boomers not having been directly exposed to the Great Depression. I am thinking more in terms of supply and demand. The relative size of the boomer cohort compared to previous generations, coupled with 401k tax law that forces boomers to buy only equity for growth in their tax deferred accounts. The law limits to a lesser extent what defined benefit pension plans can put in their portfolios also, and defined benefit plans have grown markedly during this period.

Robert also notes the correlation between periods of rapid economic growth and valuations. This growth rate may also partially be a side effect of the size of the boomer cohort. The boomers are in the age range traditionally associated with a lot of spending, which increases corporate profit growth. His paper is quite good, and adds yet another piece of the puzzle. However, we still need more to explain why valuations are so far from their historic norm. If we can answer this question, we may be able to estimate when or if they may return to what they were in the past.

Raddr has noted that the period of high valuation corresponds with the wide spread introduction of index funds for the masses. To the extent that this may be affecting valuations, valuations could remain above their historic norms for an extended period. To the extent that the size of the boomer cohort may be affecting valuations, high valuations will be limited in time by the boomer's continued aging. To the extent that generational removal from the truama of the Great Depression may be affecting valuations as Robert postulates, the Depression will only move further away in time. It is quite a fascinating puzzle to work on.

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