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peteyperson
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PostPosted: Fri Feb 04, 2005 3:22 pm    Post subject: Valuation-driven, contrarian investing Reply with quote

When thinking about valuations, 'market timing' gives smart thinking a bad name. It is a too easy way for people to quickly dismiss what otherwise might be a sound idea.

The history of markets has shown that investors often discover new technology, get overly enthusiastic and buy stocks at any price. For a few short years, market returns are incredible but then the market crashes. Investors buy in for fear they may miss out on an incredible opportunity but few are able to sell out before the market discovers their folly and punishes them. The NASDAQ Index is a good example of this. The QQQQ Index launched late 1999 and is down 20% today.

The majority of investors do not have any concept of how to value markets. They tend to buy what has gone up, and not consider what the expected future real returns are likely to be long-term. Most would not know how to do so, many would not want to take the time.

When I think about investing, valuations and expected future real returns, I believe we have some wonderful historic and recent examples to consider. By late 1997, the S&P 500 was beginning to be considerably overvalued following the hype of the latest "new technology", "new era" hype continuing on from such previous investing manias connected to electricity, automobiles, radio and television. Stock yields were falling, P/Es were rising into the 20s and the market was booming. Few people except market sages like Warren Buffett were saying anything was wrong about all of this. People were getting rich! Few people stopped to consider the implications of such valuations.

I have come to believe from what I have read that if the expected real return I calculate does not reward me for taking the market risk, I should look elsewhere to invest. Regardless of how highly regarded the investment is thought of by other people. Through the 90s, small cap stocks and to a lesser extent the value style of investing were out of fashion both in the US and the UK. Small cap trailed large cap by a wide margin and valuations were relatively cheap for small cap at a time when most investors were chasing tech, media & telecom stocks. It was almost like everyone was looking the wrong way when the body of their enemy went floating by. Chasing the market up, without realising that valuations held up by nothing but temporary investor enthusiasm was not real wealth creation and never in the history of the markets has ended with a positive outcome. Meanwhile small cap was cheap, unloved and inviting.. Ah, to be a contrarian investor!

When calculating future real returns, the estimates are approximate but useful. Earnings growth is a variable thing, difficult to predict with any accuracy, but one can comfortably use the long-term growth in earnings per share of 5% for the S&P 500. This is a decent starting point. Initial dividend yield is easy. For the speculative return - the adjustment in valuation that will change the way stocks are priced in the long run - this does depend on what you consider the average price-to-earnings ratio. Bogle states the figure at 14.1x last year's earnings for the S&P. Jeremy Grantham has opinioned that 16 looks more reasonable in today's environment. Whether this is a lax moving-the-goalposts suggestion in light of higher present valuations is unclear. In any case, one can use an online calculator to determine the gain or loss expected from an adjustment in what investors are likely to be willing to pay for $1 of earnings in the future when the mania has ended. The Emperor has no clothes - only few people realise it just yet.

If one were to have considered the valuation of the S&P 500 around 1997, one might have easily calculated that the future real expected returns looked somewhere between low and negative. An understanding of the history of the markets would have revealed the then current market euphoria, excitement about new technology and so forth, as simply a repeat of previous events. Both pieces of information taken together would have suggested selling off an investment in the S&P 500 index. The ability to take such an action depends on the tax implications of such a move and should there be earlier than expected capital gains implications, one would need to weigh the tax impact with both the preservation of capital in an overvalued market and the alternative returns available elsewhere when compounding an after-tax sum of money vs the future expected real return of the S&P 500 while deferring capital gains tax.

There is something of a cult with regard to asset allocation and diversification, a "never leave an asset class behind" mentality which seems devoid of logic. A cogent, careful analysis of expected real returns that highlights a poor future return while accepting market risk would indicate the poor risk/reward distribution. This should rightly trigger a search amongst all other investable asset classes for an alternative investment which offers a sufficient reward for bearing the various risks accepted when investing, be they market risk, interest rate risk, inflation risk, credit risk, currency risk and so forth. If one intends to ensure reasonable levels of diversification then in most circumstances there are a sufficient selection of investments offering attractive valuations and respectable real returns to satisfy. Investment managers who prefer diverisfication across all investable asset classes just for the sake of completeness without due regard for the future expect real returns of each asset class would seem to be doing a disservice to their clients. Is there any point in accepting market risk if the return doesn't compensate you for doing so? I cannot think of a reason.

One good example of this is the current interest in investments in emerging market bonds. Five years ago, the spread between Treasury bonds and EM debt was in the double-digits. This rewarded investors for bearing the additional risk involved with investing in foreign sovereign debt of developing nations. The five year returns of most EM debt funds bear this out with annualized returns comfortably in the 10-15% range, the best of which offered 20% annualized returns. Today however spreads have closed to approximately 4%. It should be stated that EM debt credit ratings have improved substantially - half off all EM debt is now investment-grade rated - which should mean a lower return as new bonds are issued with lower interest rates. When examining this asset class, the rewards are insufficient for the additional risk still present. This is often too the case with HY bonds. Only occasionally do such investments make good sense based on the junk to treasury spread. Most investors are still invested in EM debt, many on the basis that it is one of the many asset classes to be held in order to "not leave any asset class behind" and others chasing the past good performance. The incessant need to diversify in the face of an availability of information demonstrating the lack of merit in owning everything when returns are expected to be poor is incredible to me.

One can acquire sufficient diversification when investing only in those assets which offer reasonable returns for risk accepted. As many investors have experienced over the past five years, staying invested in asset classes that have poor return outlooks is folly. Switching into alternative asset classes that have had a poor run, are a little undervalued and thus offer a far better positive return outcome is the only thing that makes sense. One has to be careful not to adopt a speculative mindset but in truth market movements from undervaluation to overvaluation typically take a decade or more to develop. I don't believe switching between asset classes is a poor strategy, nor is it the often mentioned 'market timing', it is simply a rational consideration of the available facts and their implication for your portfolio return.

Petey


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JWR1945
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PostPosted: Fri Feb 04, 2005 6:06 pm    Post subject: Reply with quote

Outstanding!

Have fun.

John R.


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hocus2004
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PostPosted: Sat Feb 05, 2005 1:47 am    Post subject: Reply with quote

One has to be careful not to adopt a speculative mindset

I think this is an important point.

I believe that we are in a transition stage in our understanding of how markets work. I believe that some of the dogmas of today have their roots in sensible ideas. There really are some ways in which the market is efficient. Stocks do generally perform better when you hold them for the long term. Stocks do generally offer a pretty darn compelling value proposition. It does make sense to look at historical data to inform one's understanding of what may happen in the future. There is indeed risk in avoiding all risk because, if you do, the unseen risk of inflation will ruin you over time. Indexing offers some powerful strategic benefits. Jumping in an out of investment classes is generally not too good an idea.

These are some of the ideas that dominate conventional thinking today. If these ideas were dumb ideas, they would not possess the influence they do. They possess influence because they are generally smart ideas. The problem is that people have become dogmatic about them. People have experienced the benefits of these ideas and then they became convinced that these ideas will always come through for them, that there are no circumstances in which these ideas will let them down. People have allowed their emotions to get the better of them.

I believe that we are in a transition to a new stage of understanding of how markets work. In the new stage, I believe that these ideas will still be in evidence, but that they will be redefined in dramatic ways.

For example, is there any reason why an index fund could not be set up that engages in switching along the lines suggested by JWR1945's research? I don't see why not. Not everyone would want to go with that option, but it seems to me that it is one of the options that should be on the table. Then you could tap into the benefits of switching without ever needing to make a single trade yourself. Your fund manager would do it for you, following rules that he would describe to you up front. He would increase the fund's stock allocation when the historical data indicated that that is a good idea and he would decrease the fund's stock allocation when the historical data said that was a good idea.

I am not a pure indexer. But I am sure glad that index funds are available. I think that the indexing concept has helped a lot of investors and will continue to do so for many years to come. I think that "buy and hold" makes sense, but I also think that switching (or long-term timing) makes sense. I think we need to develop a new approach to buy-and-hold, a less rigid approach.

Ideas are often not born perfect. They need to be developed over time, as succeeding generations add their input and experience to the mix. I hate it that some in our community see those who participate at this board community as "the enemy." We are not the enemy. We are trying to take ideas that others are now happy with and change them so that they will live to see another day. Ideas that never change die.

We are not anti-SWR analysis, we are pro-SWR analysis. To be pro-SWR analysis today, you need to be willing to acknowledge the errors made in earlier studies and correct them. We are grateful for the work done by SWR analysts who have come before us. But we don't want to see that work put in a tomb. We want to build on it, expand it, make it more relevant and meaningful and accurate and important and useful. Those who say "this thing can never change" are killing the thing they pretend to want to preserve.


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peteyperson
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PostPosted: Sat Feb 05, 2005 4:55 am    Post subject: Reply with quote

Hi Rob,

hocus2004 wrote:
One has to be careful not to adopt a speculative mindset

The idea to be wary not to adopt a speculative mindset came from John Maynard Keynes. I do not think one is in danger of doing so if one is using facts about valuation levels - various metrics - in order to make reasoned decisions. I don't really expect frequent movements from one asset class into another. I expect during accumulation phase one has a choice between strict adherance to a set asset allocation policy which to some extend would require buying to fill it rather than buying what offers the best value & highest expected long-term return from the date of purchase. This where traditional asset allocation thinking makes Charlie Munger conclude it is idiotic. During distribution phase one is likely to be rebalancing mostly and only occasionally completely switching out of an asset class. One would if trying to avoid slipping into a high tax band restrict the yearly withdrawals gradually selling down the asset class one wants to move out of.

Indeed alluding to your second point, Jeremy Grantham puts out his interpretation of future expected returns including the effect of PE compression/expansion in PDF format every couple of months. The weighting in his client's portfolios is adjusted between asset classes accordingly. He pulled then gradually completely out of Japan during their extreme bubble in a "bet the [investment] firm" decision. US clients left in droves, 60% of funds were withdrawn. His advice currently is to own no US dollar assets at all, particularly no US common stocks. In his client portfolios however he has only adjusted US common stock exposure down to the mid 25%'s because "I would have no investing business otherwise". His own portfolio is a more complete snapshot of his true convictions therefore and includes a good chunk of low-risk hedge funds his firm manages (because he too sees little material reward for bearing US market risk at this time - only EM equity is still reasonably valued were his last observations). There is a mutual funds which acts as an index fund to GMO and Jeremy Grantham arranges the asset allocation model there. It does unfortunately come with a second layer of fees and does not include access to his private equity GMO Renewable Resources timber funds, but it provides an interesting, somewhat cropped to satisfy US clients, view of his thoughts on asset allocation 'in-the-trenches'.

Evergreen Asset Allocation Fund
9.59% annualised 5-year return. 1.8% yld. 1.17% e/r. Only negative year oddly is -0.8% this ytd but it is early yet. No negatives for 2001-3.

Holdings--
http://quicktake.morningstar.com/Fund/Holdings.asp?Country=USA&Symbol=EAAFX&fdtab=portfolio

I don't plan on being a pure active or pure indexer. I think that would be the wrong way to look at it. I simply look at the market opportunities and the risks. How efficient is the market for this asset class? How much alpha/value premium can be reasonably expected? What will it cost to obtain the alpha? What is the spread? This is an intelligent way to go out things, far more so than those who just blankly drive on through without looking at the scenery. Taking up better opportunities for returns rather than dogmatically indexing everything is just plain smarter. The latter is like the sad cases of airline pilots who fly right out of cloud cover and into the side of a mountain because they decided that the information on their instruments was wrong and they were not in fact off-course. Now what saves the passengers from this bad case of denial and ignorance of relevant timely data is a computer which spits out "PULL UP! PULL UP!". This new device has saved countless lives so far.

Petey

hocus2004 wrote:
For example, is there any reason why an index fund could not be set up that engages in switching along the lines suggested by JWR1945's research? I don't see why not. Not everyone would want to go with that option, but it seems to me that it is one of the options that should be on the table. Then you could tap into the benefits of switching without ever needing to make a single trade yourself. Your fund manager would do it for you, following rules that he would describe to you up front. He would increase the fund's stock allocation when the historical data indicated that that is a good idea and he would decrease the fund's stock allocation when the historical data said that was a good idea.

I am not a pure indexer. But I am sure glad that index funds are available. I think that the indexing concept has helped a lot of investors and will continue to do so for many years to come. I think that "buy and hold" makes sense, but I also think that switching (or long-term timing) makes sense. I think we need to develop a new approach to buy-and-hold, a less rigid approach.

Ideas are often not born perfect. They need to be developed over time, as succeeding generations add their input and experience to the mix. I hate it that some in our community see those who participate at this board community as "the enemy." We are not the enemy. We are trying to take ideas that others are now happy with and change them so that they will live to see another day. Ideas that never change die.


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Delawaredave
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Joined: 26 Dec 2004
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PostPosted: Sat Feb 05, 2005 8:41 am    Post subject: Reply with quote

Great thread and forgive me please in advance if I don't use "quote" feature well...

Quote:
Switching into alternative asset classes that have had a poor run, are a little undervalued and thus offer a far better positive return outcome is the only thing that makes sense

I agree wholeheartedly with above. Where/what are these target asset classes today ? I'm gradually pulling money out of domestic equities - but it has to go somewhere.

Regarding Grantham, are there any web links that detail the below ?

Quote:
His advice currently is to own no US dollar assets at all, particularly no US common stocks. In his client portfolios however he has only adjusted US common stock exposure down to the mid 25%'s because "I would have no investing business otherwise".

Reducing equities to me in high-valuation markets is more "gut wrenching" than buying equities after dips -- just feels like I'm "leaving the party early" -- which can be a good thing if there's trouble ahead.


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hocus2004
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PostPosted: Sat Feb 05, 2005 11:45 am    Post subject: Reply with quote

I do not think one is in danger of doing so if one is using facts about valuation levels - various metrics - in order to make reasoned decisions.

I understand. What I was thinking of as "speculation" is trying to be too precise with one's timing strategies.

Say that there is an investor who believes that stock prices are too high today and that it makes sense to lower his stock allocation a bit until they come down. I think that makes sense. Now say that there is an investor who takes all of his money out of stocks at today's prices and then holds back from getting back in even after prices drop to moderate levels on the thinking that prices usually snap back not just to the middle level but to a level at which stocks are undervalued. That sort of strategy strikes me as "speculative."

The observation that this investor is using to guide his allocation strategy is an accurate one. Prices do as a general rule fall to lower than moderate levels after a period of overvaluation. But I am uneasy with the idea of taking one's ability to predict future market directions too far.

I don't have a problem with someone saying "I am going to not put that last 10 percent or 20 percent into stocks until prices come down pretty low." A decision to do that could be one element of a balanced overall strategy. It becomes "speculative" in my mind when you have too many chips riding on a bet that you can pick things just right.

I like the humilty of the guy who BookM quoted over on the Index Funds board thread (the behavioral finance guy) who said that he was in index funds because he didn't think that he could outthink the market as a whole. I do take valuation's effects into account in my investing strategies. So if that guy does not lower his stock allocation at times of extreme overvaluation, then I don't think he is making the best possible allocation decisions. But I like the idea of having some fear for what markets can do, of not thinking you are too much of a hot shot.

I guess where I am coming from is that I do not view the idea of taking valuations into account as being a hot-shot sort of thing to do. I see it as a prudent and common-sense oriented and balanced sort of thing to do. I see it as the "bold" thing to do to say "I don't care what the price is, I will go with the same allocation regardless."

But I don't like the idea of trying to get too cute with the timing concept. There is a point at which you are taking it too far, where you are getting too big for your britches. I think it is a feeling that those trying to time are getting too cute that is responsible for timing generating such skepticism in some circles. I think that skepticism re "over-timing" is probably well founded.

So in the end I feel that I am a moderate re timing. I am not willing to be so bold as to reject the idea of timing out of hand. But I am also uneasy with the idea of aiming for too much perfection with my timing strategies. I aim to mix elements of "buy and hold" with elements of timing to come up with something new that enjoys the best of both worlds.

I don't want to be so heavy in stocks that I can't stand the feeling that comes with a big price drop. And I don't want to be so light on stocks that I feel regret over missing out on big price run-ups. I am looking for a strategy that provides me a sense of reasonable well-being regardless of what Mr. Market is up to. I envision this approach aa a true buy-and-hold strategy, one which results in truly holding stocks for the long term, not just in words but in reality.


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hocus2004
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PostPosted: Sat Feb 05, 2005 12:07 pm    Post subject: Reply with quote

Reducing equities to me in high-valuation markets is more "gut wrenching" than buying equities after dips -- just feels like I'm "leaving the party early"

You're looking at the all-time King of "leaving the party early," DelawareDave.

I didn't have much money accumulated as of the mid-90s, when I first began looking into this stuff. But what I had I had in stocks. And after looking into this stuff, I took it all out of stocks in 1996.

There were big price jumps in 1997, 1998, and 1999. My recollection is that the jumps were something like 30 percent per year. I had a friend at work who I used to go to lunch with a lot and talk about this stuff with who thought I was out of my mind. He thought that I was out of my mind about a lot of things, but he thought I was out of my mind in a special way re stock investing.

I was tempted at times to get back in. But I always just pulled out some piece of paper relating in some way to the historical data and stared at it a little bit and considered how much I wanted to get out of that corporate job, and I always ultimately was able to stay the course.

Now we are in a stage where a number of other people are starting to talk about lowering their stock allocations a bit, and I am thinking of increasing mine up to 20 percent or so. It's a very much mixed-up situation!

My point, though, is that this is a party that has gone on way past its "predicted" termination date. Robert Shiller gave congressional testimony back in 1996 in which he said with a good bit of confidence that those who were buying stocks in 1996 were probably going to regret it within 10 years. These academic types are painfully cautious in what they say, so I think he must have had some good reasons for saying that. And here we are nine years into the 10-year prediction, and people who bought in 1996 are still feeling good about that choice.

I don't think it is "too early" to leave the party. I think it is possible that we will see another big run up in prices. We could go up another 30 percent or another 50 percent or whatever. But if we did, that would just suggest to me that the price drop to follow would be even worse than now seems likely. So I wouldn't feel comfortable hanging on for that ride up.

There's not much harm in keeping a portion of your assets in stocks so that you get to enjoy any further ride up. That seems balanced to me. I am very uneasy, however, with the idea of making too big a bet on stocks at today's prices. The probabilities do not seem to me to favor the investor who places a high percentage of his life savings in stocks at the prices at which they are selling today.

The way I would try to look at it is to say: "That was a rockin' party! Now I had better be heading home before I end up doing something that I feel real foolish about come the morning."


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JWR1945
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Joined: 26 Nov 2002
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PostPosted: Sat Feb 05, 2005 12:32 pm    Post subject: Reply with quote

hocus2004 wrote:
Now we are in a stage where a number of other people are starting to talk about lowering their stock allocations a bit, and I am thinking of increasing mine up to 20 percent or so. It's a very much mixed-up situation!

Interesting.

In my latest thread (related to transition planning), a 0% stock allocation looks best for 5 years from now and a 20% stock allocation is likely to do the best 10 years from now.

Scary, isn't it?

Have fun.

John R.


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peteyperson
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PostPosted: Sat Feb 05, 2005 1:42 pm    Post subject: Reply with quote

UK Small Cap Value and UK Micro Cap are fairly valued. Small cap may be a tiny bit overpriced but not by much. NZ timber is fairly valued as the land is pre-owned and the forest is grown over a 20 year period and then harvested. So no easy way for it to be overpriced as it is not already grown. There are pockets of companies available at fair value still. This works fine for long-term buyers who own solid growth businesses who manage their cash flow particularly for shareholders' benefit with share buybacks, growth where possible and dividend or debt repayment when opportunities are short. This adds incrementally to returns but even then returns are only 4-5% net real. There are not a wide choice of companies in developed markets one can select but I plan to hold a concentrated portfolio so there will always be something.

Re: Grantham. If you go to www.gmo.com, he pubishes his 7-year forecast of expected annual returns. This is based on earnings growth, initial dividend yields and any adjustment to P/E valuation over the period. For assets like US stocks they are negative real returns even with active management now for large and small cap stocks. He basically assumes current P/E 19+ will fall to 16 over seven years and factors that in. This is one step beyond what Shiller does in his book Irrational Exuberance. Presently the two assets that look good to him are EM equity and timber. Grantham's position on US value stocks is such that because markets are so overpriced, there are no large stocks available in sufficient number to satisfy insitutional fund flow levels. Essentially, stocks are not priced below intrinsic value and so there is no value premium seems to be his take. I don't disagree with that. I think those US value funds holding 20+ stocks are not owning stocks below intrinsic value but simply the cheaper of the expensive stocks available. Not the same thing!

Petey

Delawaredave wrote:
Great thread and forgive me please in advance if I don't use "quote" feature well...

Quote:
Switching into alternative asset classes that have had a poor run, are a little undervalued and thus offer a far better positive return outcome is the only thing that makes sense

I agree wholeheartedly with above. Where/what are these target asset classes today ? I'm gradually pulling money out of domestic equities - but it has to go somewhere.

Regarding Grantham, are there any web links that detail the below ?

Quote:
His advice currently is to own no US dollar assets at all, particularly no US common stocks. In his client portfolios however he has only adjusted US common stock exposure down to the mid 25%'s because "I would have no investing business otherwise".

Reducing equities to me in high-valuation markets is more "gut wrenching" than buying equities after dips -- just feels like I'm "leaving the party early" -- which can be a good thing if there's trouble ahead.


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peteyperson
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PostPosted: Sat Feb 05, 2005 2:08 pm    Post subject: Reply with quote

Well I don't think in terms of lowering my stock allocation. I think in terms of are there any asset classes that provide reasonable real returns? Global equity real returns from 1900-2002 were 5.4% real. The UK was 5.2% real. This is for total market indices and doesn't take account of either value premiums or small cap premium possibilities open to investors. This is the benchmark I use on common stock investments. If I'm adding in value premium/alpha net of fees and still not getting close to the basic indexed return, I know I'm in trouble! In truth, a value/small value oriented common stock allocation should be able to deliver significantly higher real returns than 5.4%. Small-cap premium here is 1.9%. Micro Cap premium is 5.5%. Value on small cap can deliver an additional 4% net of fees here. One needs all of these potential boosts to returns in order to get anything decent over a 20-year holding period from here. I have access to an emerging market value fund specialist that has outperformed the EM index (net of index fee) by 2.5% net of their fees. This is one area where Jeremy Grantham is still satisfied is at reasonable enough valuations to proceed. UK real estate is happily sitting just below NAV in most cases having risen from 30% below NAV three years ago. French REITs like Unibail and Silic are the highest quality, pay 4% dividends and are priced at NAV. So I think for the small investor there are usually always opportuntiies if one wants to look. Gems may not all be hanging around on the sand's surface, all nice and shiny easy to be seen!

So I don't look in terms of excluding or reducing common stocks. I simply look at what is out there at good prices that indicate respectable long-run returns. I don't insist on owning all asset classes and sub-asset classes and am quite prepared not to own a stitch in the US at these levels if I can find nothing that have a sensible expected real return. A range of real assets offer me 4% net real at present, so I don't even have to own common stocks if the risk wasn't being rewarded. I certainly agree with Jeremy Grantham that it is an asset allocator's nightmare at present. But that will pass. Whilst the small investor may not be able to get into the best of hedge fund, venture capital and so forth, they still have other advantages that we can play. Getting into a small selection of companies priced favorably is one such opportunity. There will always be something out there. Lloyds TSB Group, top 4 bank in the UK is one such opportunity. PE 8, Div 7%, recent growth as they sort thru some acquisitions that were not that great. On a quick look one could easily see 2% conservative growth + Div 7% + PE upgrade to PE 10 2% = 11%. Even if all of that didn't happen, one is still comfortably making 4-5% real. It certainly isn't 10-15% that one can get when markets fall to PE 7.5 and dividends are 6.2% like they were in 1982, but it is what there is <lol>.

I see that just as being a smart purchaser, much like someone who is a value shopper. Investing into bubbles is madness. One never makes out, you're either invested and tank with everyone else eventually or you are invested elsewhere. The smart money is elsewhere, it's really just that simple. Buffett didn't join in with the madness, articles came out calling him past it, but he made out just fine. Investors forgot about value for a few years but his empire's earnings kept growing. Later his stock price rebounded. Just investor psychology, Mr. Market, Exuberance and Manic Depression. Learning from history, ain't it a wonderful thing! Laughing

Petey

hocus2004 wrote:
I do not think one is in danger of doing so if one is using facts about valuation levels - various metrics - in order to make reasoned decisions.

I understand. What I was thinking of as "speculation" is trying to be too precise with one's timing strategies.

Say that there is an investor who believes that stock prices are too high today and that it makes sense to lower his stock allocation a bit until they come down. I think that makes sense. Now say that there is an investor who takes all of his money out of stocks at today's prices and then holds back from getting back in even after prices drop to moderate levels on the thinking that prices usually snap back not just to the middle level but to a level at which stocks are undervalued. That sort of strategy strikes me as "speculative."

The observation that this investor is using to guide his allocation strategy is an accurate one. Prices do as a general rule fall to lower than moderate levels after a period of overvaluation. But I am uneasy with the idea of taking one's ability to predict future market directions too far.

I don't have a problem with someone saying "I am going to not put that last 10 percent or 20 percent into stocks until prices come down pretty low." A decision to do that could be one element of a balanced overall strategy. It becomes "speculative" in my mind when you have too many chips riding on a bet that you can pick things just right.

I like the humilty of the guy who BookM quoted over on the Index Funds board thread (the behavioral finance guy) who said that he was in index funds because he didn't think that he could outthink the market as a whole. I do take valuation's effects into account in my investing strategies. So if that guy does not lower his stock allocation at times of extreme overvaluation, then I don't think he is making the best possible allocation decisions. But I like the idea of having some fear for what markets can do, of not thinking you are too much of a hot shot.

I guess where I am coming from is that I do not view the idea of taking valuations into account as being a hot-shot sort of thing to do. I see it as a prudent and common-sense oriented and balanced sort of thing to do. I see it as the "bold" thing to do to say "I don't care what the price is, I will go with the same allocation regardless."

But I don't like the idea of trying to get too cute with the timing concept. There is a point at which you are taking it too far, where you are getting too big for your britches. I think it is a feeling that those trying to time are getting too cute that is responsible for timing generating such skepticism in some circles. I think that skepticism re "over-timing" is probably well founded.

So in the end I feel that I am a moderate re timing. I am not willing to be so bold as to reject the idea of timing out of hand. But I am also uneasy with the idea of aiming for too much perfection with my timing strategies. I aim to mix elements of "buy and hold" with elements of timing to come up with something new that enjoys the best of both worlds.

I don't want to be so heavy in stocks that I can't stand the feeling that comes with a big price drop. And I don't want to be so light on stocks that I feel regret over missing out on big price run-ups. I am looking for a strategy that provides me a sense of reasonable well-being regardless of what Mr. Market is up to. I envision this approach aa a true buy-and-hold strategy, one which results in truly holding stocks for the long term, not just in words but in reality.


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peteyperson
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PostPosted: Sat Feb 05, 2005 2:34 pm    Post subject: Reply with quote

Hi Rob,

Must say I find your post a bit troubling. Very unRob-like.

I think you either understand and believe in the fundamental valuation & return estimate mechanisms or you do not. It would make no sense at all to put money into stocks if one concludes returns are minimal and risk to capital is higher than normal. That is a poor risk/reward distribution. Your decision in 1996 was completely correct. Whether you knew enough then to make the right decision for the right reason only you know. But in any case, PEs at that stage were sufficiently high that future real returns were zero or less. The assumption was that there was going to be much higher growth rates that would last, but they are unpredictable and don't last. Investors always think higher growth will accompany new technological marvels but it rarely does. Efficiencies in pricing, manufacturer & competition quickly remove any such benefit to the businesses. Understanding that this kind of thinking has happened all through the last century with new inventions is important. I just know that for the next time I will be prepared and if I screw up then it will be my own damn fault!

Shiller said what he did when he did because P/E ratios were already in the 20s and shooting up. Companies with no earnings were valued in the billions and the market was losing traction. He was looking back at history and seeing this has all happened before. He knew that buying in at high valuations doesn't work because if you trade in and out you might make money but the trading is not based on company fundamentals, one would only be betting on the greater fool theory that someone else is bound to pay more than you paid for the stock. This works until everyone wakes up and the NASDAQ falls 80%. Oh yes, that happened already, sorry. Laughing Beyond that, what is one doing? Hoping? Hoping that returns will be better than you've worked out? The only way that can happen is if earnings growth doubles which just doesn't happen very often (usually it only comes attached with higher inflation) or PE ratios keep going up. That isn't a real return, that's a speculative bubble that will end at some point. The only way, like the trading, to benefit from that as a buy & hold investor is to hope stocks won't come back down. But we know they do. This is what Shiller knew and why he said what he did. It is a nice and fanciful idea that one can buy a stock, it goes up 100% and then we sell. And then we do it again. This is what everyone thought during the internet mania and some people did this successfully for a while. Everyone was a great investor back then! But if you own when the market tanks, it'll take back everything you made and more. Markets cannot go up in the long-run faster than the earnings of the underlying businesses. Or one has to be able to understand investors' psychology that is moving market prices in the short-term and who can do that with any accuracy for the long haul?

Run the numbers and see if your real returns are going to be acceptable for the risk you'll be running. If they're not, don't do it, my friend. Have a look at Grantham's latest forecasted returns at www.gmo.com. EM equities still look tasty. One can index cheaply or go active on that. I would certainly happily put money there. I would not be buying any large-cap indices from developed markets right now. When you chop the future returns down to account for the high PEs, you're not making out. Grantham's number also show this too. I tell you, the one book I will take with me when I travel in case there is a major market event is Shiller's book in paperback (lighter). It is the one thing one should reach for in a panic when the market just tanked and one gets the urge to act like a lemming. Bit like someone who's feeling unhinged and roots out the bible for some soul searching. Gotta remove the emotion from the decision and look at the cold hard numbers. Being a contrarian doesn't necessarily mean doing the opposite of everyone else unless it makes sense to do so. I watched Marc Faber make this mistake recently, suggesting the US dollar would rebound because too many people think now that it will decline. Contrarian for its own sake, not because the facts make it the right thing to do. If you're feeling unsure what to do about an equity position, reread Shiller, Rob. This will reground you and then proceed. The stocks won't go anywhere while you do that!

Don't do it! Stay away from the light! Laughing Laughing

Petey

hocus2004 wrote:
Reducing equities to me in high-valuation markets is more "gut wrenching" than buying equities after dips -- just feels like I'm "leaving the party early"

You're looking at the all-time King of "leaving the party early," DelawareDave.

I didn't have much money accumulated as of the mid-90s, when I first began looking into this stuff. But what I had I had in stocks. And after looking into this stuff, I took it all out of stocks in 1996.

There were big price jumps in 1997, 1998, and 1999. My recollection is that the jumps were something like 30 percent per year. I had a friend at work who I used to go to lunch with a lot and talk about this stuff with who thought I was out of my mind. He thought that I was out of my mind about a lot of things, but he thought I was out of my mind in a special way re stock investing.

I was tempted at times to get back in. But I always just pulled out some piece of paper relating in some way to the historical data and stared at it a little bit and considered how much I wanted to get out of that corporate job, and I always ultimately was able to stay the course.

Now we are in a stage where a number of other people are starting to talk about lowering their stock allocations a bit, and I am thinking of increasing mine up to 20 percent or so. It's a very much mixed-up situation!

My point, though, is that this is a party that has gone on way past its "predicted" termination date. Robert Shiller gave congressional testimony back in 1996 in which he said with a good bit of confidence that those who were buying stocks in 1996 were probably going to regret it within 10 years. These academic types are painfully cautious in what they say, so I think he must have had some good reasons for saying that. And here we are nine years into the 10-year prediction, and people who bought in 1996 are still feeling good about that choice.

I don't think it is "too early" to leave the party. I think it is possible that we will see another big run up in prices. We could go up another 30 percent or another 50 percent or whatever. But if we did, that would just suggest to me that the price drop to follow would be even worse than now seems likely. So I wouldn't feel comfortable hanging on for that ride up.

There's not much harm in keeping a portion of your assets in stocks so that you get to enjoy any further ride up. That seems balanced to me. I am very uneasy, however, with the idea of making too big a bet on stocks at today's prices. The probabilities do not seem to me to favor the investor who places a high percentage of his life savings in stocks at the prices at which they are selling today.

The way I would try to look at it is to say: "That was a rockin' party! Now I had better be heading home before I end up doing something that I feel real foolish about come the morning."


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hocus2004
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PostPosted: Sun Feb 06, 2005 3:05 am    Post subject: Reply with quote

Must say I find your post a bit troubling.

OK. But it lead you to puting up a good response, didn't it? That makes it all groovy, does it not?

I think you either understand and believe in the fundamental valuation & return estimate mechanisms or you do not. It would make no sense at all to put money into stocks if one concludes returns are minimal and risk to capital is higher than normal.

An argument can be made that it makes little rational sense. I think it makes emotional sense.

There was a Bob Dylan line that I quoted somewhere not too long ago that continues to grow on me the more I think about it.

Dylan: "You always need to be prepared. But you never know for what."

He's one of my favorite personal finance advisors of all time. When Dylan talks money, hocus listens.

Your decision in 1996 was completely correct. Whether you knew enough then to make the right decision for the right reason only you know.

I was sort of in a fog then and I am sort of in a fog now. Another thing that Dylan said at a much earlier time was "I accept chaos." I'm not sure that I would go quite that far, but I try not to get involved in a big fight with chaos each and every time I see it show up on my doorstep.

I think that I made a not-bad decision in 1996 for me. It would not have been the right decision for others in other sorts of circumstances. I don't regret the decision.

The killer is, even if we are to presume that I got that one right (not a universarlly accepted notion, to be sure!), I still have ahead of me the decisions that I need to make for 2005 and 2006 and 2007 and all those other damn 2000 numbers. I'm totally screwed! There's no getting off this crazy carousel.

You get a decision right against all odds and you would think that perhaps there would be some kind of reward, some kind of rest for the weary spirit. But no! You've got to get right back out of bed againd and make yet another--Decision! And then another after that on and on into infinity. Some fun game, huh?

The bottom line is that I took a shot at it in 1996, and, when my wife and I revised our plan last month, I took a shot at it in 2005. And I'll expect to be taking a shot at it in a whole bunch of other years that I am hoping are going to be turning up for me and expecting decisions out of me. I like to think that I am better prepared for the shot that I took so far in 2005 than I was for the shot I took in 1996. That's what matters to me.

I'm making a serious point here in my long-and-winding-road fashion. When you retire at age 65, you can say "this is the investment plan that I intend to stick with until the final days." When you retire at age 43, you cannot. Your life is going to change from age 43 forward in dramatic ways and there is no way to know all that you need to know by age 43 anyway. So the age-43 plan needs to be subject to regular revision in the years ahead.

I don't think that you can take the rules that apply for an age-65 retirement and apply them without significant change for an early retirement plan. I think that an early retirement plan needs to have a whole bunch more flexibility built into it. So I was not even aiming to get it exactly right in 1996, or in 2005 either. I'm just taking shots at the target.

I've learned some important stuff from the research that JWR1945 has posted to this board. That was stuff that I didn't know about in 1996. So my 2005 shot is definitely a better informed shot than was my 1996 shot. I have hopes that my shots will continue to get better. I like Shiller a lot, but if I find out in coming years that Shiller messed up big time on something, I am going to ditch that chapter of Shiller's book and look elsewhere for ammunition on that particular aspect of a future shot.

We are clearly in agreement that valuation matters. It doesn't sound to me that we are in agreement on all aspects of the implementation question. But I don't see that as raising any sort of problem. I just put out my stuff and you just put out your stuff and the others have to try to make some sense of it for themselves.

I am not saying that you are not making good points. I think you are making some good points. My sense of this is that you have more comfort in going where the data suggests that one go than I do.

I like knowing what the data says. I feel that the data is my friend. But I don't entirely trust the story told by the data. I listen, and I nod my head, and then I go do what my heart tells me to do. When the data asks me why I did what I did, I come up with some story about how maybe what the data said wasn't entirely clear, that the data must have mumbled or something. And the data tries harder than ever not to mumble. And I continue listening to the parts of the story that sound good to me and ignoring the parts that don't suit me right.

That's just me. I'm not saying that all others should follow that practice. I will be putting forward a case for doing it that way when I figure out a way to make it sound a little more reasonable than it probably sounds now. But I don't say that everyone should walk that path. I'm an emotions-first kind of guy. I'm not married to what the data says. This entire SWR matter is sort of a fling for me. As you noted elsewhere, I am a "soft side" guy at heart. I belong on the soft side and I hope to work my way back over there in days to come.

Being a contrarian doesn't necessarily mean doing the opposite of everyone else unless it makes sense to do so

I very much agree. That is a potential pitfall. Knowing what the data says helps in this regard, in my view.

If you're feeling unsure what to do about an equity position, reread Shiller, Rob. This will reground you and then proceed.

One can't go too far wrong reading Shiller. I'm trying to find time to reread Siegel. He's the knucklehead who wrote that "Stocks for the Long Run" book. Now that I am reasonably clear on what Shiller says, I feel that I need to get a firmer grasp on this Siegel guy and figure out why he has such difficulty understanding the Shiller book (he and Shiller are personal friends by the way, a very cool fact to know and tell).

Stay away from the light!

I'm so far on the dark side at this point that you don't have to worry about me, Pete. I'm Mick Jagger. This board is the Sympathy for the Devil board. I mean, come on.


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peteyperson
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PostPosted: Sun Feb 06, 2005 4:29 am    Post subject: Reply with quote

hocus2004 wrote:
The killer is, even if we are to presume that I got that one right (not a universarlly accepted notion, to be sure!), I still have ahead of me the decisions that I need to make for 2005 and 2006 and 2007 and all those other damn 2000 numbers. I'm totally screwed! There's no getting off this crazy carousel.

You get a decision right against all odds and you would think that perhaps there would be some kind of reward, some kind of rest for the weary spirit. But no! You've got to get right back out of bed againd and make yet another--Decision! And then another after that on and on into infinity. Some fun game, huh?

No. This is the wrong way to look at it, Rob.

One now would simply look, as Jeremy Grantham or Robert Shiller do, at the returns based on fundamentals over the next 7-20 years. It is perfectly true that one could expect due to high valuations that you would get a flat nominal return, pull out and for the next decade the market goes up 10% a year regardless. You worry about this and think you've missed out. But you haven't. Here's why..

You will need to be invested in order to live off your money over several decades. If you hop in and out of investments by trying to ride up wild bull markets, you'll get the timing wrong because one cannot know when the markets will tumble down to earth. When they do, they tend to wipe out not only all your speculative bubble gains, but some of what you started with too. This would reduce your effective withdrawal rate subsequently (this is evident if you look at the "gains" investors made during the tech NASDAQ bubble). Not good. Riding a market up above fundamentals, a market that gets way ahead of itself and the true values of the businesses listed on the market, has no sound valuation-backed foundation. The valuation loses its moorings. If you buy anything at such prices, you overpaid and will suffer accordingly. Businesses are properly valued based on the value of the discounted future free cash flow and net assets. Over history they have never been valued any other way. In bubbles investors will seemingly pay anything to own something but obviously this is not a smart policy and only invites the whipsaw when this irrational mentality disappears. Being caught in that scenario is not good!

Taking a step back from that, one can easily see that almost no one comes out of such a market with a net gain 20 years down the line. The market booms, the market busts, because the booming values were not based on each company's ability to create earnings to support such lofty valuations. Those investors less knowledgable may conclude that the stock market is a lousy place to stick their retirement money. These people then run herd-like to real estate and oil and gold, just like they did in the 70s. Creating a new bubble there, mass overbuilding which turned 15% annualised real estate returns into negative returns. They sell that off, cursing and wonder what to rush into next. This is what the average investor does. The average investor would not understand, for instance, why bonds are a worthless investment beyond limited protection at the foundation level of a portfolio. They would not understand that long-term returns are 5.3%, 20% tax hits that 1%, fees 0.2, inflation 4% and so 0% net real return for UK bonds over the last century. "Do you wanna own something that won't grow in value one red cent", I'll ask them. Most investors don't know what they don't know, most are clueless.

Smart investors look at values and expected returns. They don't own something because everyone else does. Everyone else is typically doing the wrong thing! Be smarter than that! I shall use Yale as an example. They funded significant new investments in real estate - even going so far as to assist in the foundation of several specialist real estate investment manager firms when they found none charging acceptable fee structures in the private arena - and bought up prime offices in good locations for a fraction of their replacment cost. Meanwhile the sellers of those properties likely bought into the bubble and sold out, in disgust, at a big loss. Yale looked at the fundamentals, could see the level of overbuilding had stopped, it would take years to see occupancy rates rise again, income from rents increase, but investment in high-quality commercial real estate at a large discount to replacement cost provided both downside protection and the potential for long-term profits as the markets came back to equilibrium. This is a sound contrarian investment approach. Sam Zell - known as The Grave Dancer - did this also during this time, as did Marty Whitman. Zell bought a $300m building for $100m Laughing.

For the last several years, Yale have been cutting their investment in private equity despite 34% returns over 30 years (net of fees) and 100% per year returns from 1996-2000. The fee structures are becoming unmanagable as even second-tier VCs put rates up as twice as much money floods into private equity chasing these very high returns. This despite median returns being below market equity returns - only the top-tier VCs deliver high returns and most don't have access to them. Yale do, but still they are reducing their exposure to this market. They know with more money comes less returns and opportunities will be better in the areas that currently command little attention from investors. They beefed up their absolute return & real assets allocations. Considering their size, Yale manages to avoid being managed by committee where following the status quo is de rigeur and sticks to contrarian strategies. Not contrarian for its own sake, but smart movement of capital to whichever opportunities are greatest while still maintaining a heavily diversified portfolio a whole. This is why I don't think in terms of "getting out of equities" or "getting off this crazy carousel". That is wrong. One should keep things simple and think in terms of where are the best opportunities and place money there. It is rare that this will mean placing much funds in cash or other low returning investments. And even if it does, one can wait that out. I mention Yale a lot because I think they are a wonderful example of what to do and what not to do that can easily be followed. Buffett & Munger are also excellent examples of the benefits of concentration with investments in each non-correlated/low-correlated asset class.

Petey


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peteyperson
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PostPosted: Sun Feb 06, 2005 4:49 am    Post subject: Reply with quote

hocus2004 wrote:
I'm making a serious point here in my long-and-winding-road fashion. When you retire at age 65, you can say "this is the investment plan that I intend to stick with until the final days." When you retire at age 43, you cannot. Your life is going to change from age 43 forward in dramatic ways and there is no way to know all that you need to know by age 43 anyway. So the age-43 plan needs to be subject to regular revision in the years ahead.

I don't think that you can take the rules that apply for an age-65 retirement and apply them without significant change for an early retirement plan. I think that an early retirement plan needs to have a whole bunch more flexibility built into it. So I was not even aiming to get it exactly right in 1996, or in 2005 either. I'm just taking shots at the target.

I've learned some important stuff from the research that JWR1945 has posted to this board. That was stuff that I didn't know about in 1996. So my 2005 shot is definitely a better informed shot than was my 1996 shot. I have hopes that my shots will continue to get better. I like Shiller a lot, but if I find out in coming years that Shiller messed up big time on something, I am going to ditch that chapter of Shiller's book and look elsewhere for ammunition on that particular aspect of a future shot.

We are clearly in agreement that valuation matters. It doesn't sound to me that we are in agreement on all aspects of the implementation question. But I don't see that as raising any sort of problem. I just put out my stuff and you just put out your stuff and the others have to try to make some sense of it for themselves.

I am not saying that you are not making good points. I think you are making some good points. My sense of this is that you have more comfort in going where the data suggests that one go than I do.

I don't think allocations are completely static and it does help to consider what you will want and need in the distribution stage to avoid needless and costly sales of asset classes that are not applicable. This may also mean buying assets less suitable during accumulation in order to late own them ready waiting in distribution. There is then the opportunity cost of buying all assets when they offer the best values vs filling out a pre-assigned asset allocation plan and put that priority above best deal available with each new bit of capital one has to deploy.

I was never a numbers guy. I have simply learnt through reading and the experience of others over recent and distant history that one needs to pay attention to the price one pays for investments if one is going to realise a return typical of that type of investment. i.e. if you pay twice what a bond is worth in a bond bubble, you won't get the long-run bond return you originally expected. Ditto, if you pay half, you'll get twice the long-run return and do four times better than the guy who overpaid. Perhaps not twice and four times better net of fees, taxes and inflation but you see my point. This is why one may get 5% real from stocks at fair prices, but 7.5% real at a discount and 2.5% real or less at a premium. Paying up for quality only makes sense if the value of the asset is worth the price. If it isn't, then you are just wasting your money. This is the same kind of simple value thinking one engages in when considering buying a prepared chinese takeout from the supermarket vs walking into your local chinese takeout, paying a lot more for the same thing. Is the freshly cooked meal worth more and therefore worth paying more for, or is it all just food for that evening and pointless paying more for? In that case it would depend how much you enjoy your food, but in the case of investing, one doesn't have to decide how much one likes one investment over another from a taste standpoint. One only has to consider how much one likes it from what it can give me in the future in growth & income. And that is, in part, a function of how much you paid to begin with. As Charlie Munger says, "If you pay way too much for a business, you'll get a poor return on what you paid, even if the return on tangible equity is very good." So I naturally clued into needing to get more familar with the numbers side of things or I'm basically gonna lose my shirt. I don't currently expect to earn anything like the salaries of the highly quaified majority of the good people who post here and at raddr's pages. I'm not gonna ever earn $125k most likely. I will do my best but I am being realistic as to desired FI timeline and income levels. Therefore it behooves me to utilise whatever advantage I can get in growing my smaller capital as best I can. If you can at least learn from others with investing rather than try to learn thru trial & error, you'll save time and do far better.

Petey


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Delawaredave
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PostPosted: Sun Feb 06, 2005 5:17 am    Post subject: Reply with quote

Great discussion. I'm learning a lot about allocations and changing them based on valuations.

I guess the question is not "whether or not to be in stocks" - rather what percentage of stocks is most appropriate and what mix.

Lot of good information of what is overvalued (seemingly everything).

What's undervalued or fair value right now ?

I keep reading US stocks overvalued, developed international markets same, real estate's gonna bubble, bonds are bad now (never were apparently in the UK), TIPS ditto.

If this is followed, one's going to end up with so much cash under their mattress that they won't be able to sleep because of the lump !

Can there be a world with simply too much capital - and therefore overvaluations across so many asset classes ? Or is something else going on, or are these views pessimistic ?

If you inherited $100,000 right now - and didn't need it for 10 years - where would you put it today ?

Thanks for any thoughts !!


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ben
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PostPosted: Sun Feb 06, 2005 6:55 am    Post subject: Reply with quote

Delawaredave; you hit the head on the nail.

While I enjoy peteys and hocus's discussions I see the problem you mention. Money where your mouth is: petey is not in market at all yet and as he mentions still talking small money available for that, and hocus about $400k in TIPs and CDs (besides a paid of $300k house).

Hocus have mentioned elsewhere that he is looking into putting about 20% in single stock - trying to pick some not too overvalued. Hocus; any change in status on that?

I started seriously investing in 1998. I was also there learning that everything was overvalued. I did not have the knowledge I have now - and reits/small caps were not yet on my radar screen. Anyway; had I bought directly into my current asset allocation (very similar to yours) I would have done fantastic all through the years. About 14% in avg. per year. (of course I instead thought I could pick single stocks and went well initially, followed by the crash).

So what would I do with $100k now? DUmp it straight into a low cost, mostly indexed, well diversified portfolio like yours and mine. If felt could not handle that emotionally I would do the same but split in 2-4 buys over a period I felt comfortable with.

Now petey can tell you to look at some New Zeeland timber "scam" Laughing and some UK microcapfund your broker can't get to, while hocus can tell you to wait untill PE10 drops about 50% and meanwhile just sleep on the lump! Very Happy

In 30 years we will see what was the best choice. Cheers, Ben

Ps. personally my money is exactly where my mouth is. Very Happy



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peteyperson
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PostPosted: Sun Feb 06, 2005 7:28 am    Post subject: Reply with quote

One useful Shiller quote about markets that even Jeremy Grantham seems to be forgetting:

Quote:
Many media accounts in the mid- to late 1990s have focused on what they consider the craziness of investors. For example, a Fortune story in April 1996 told reports stopping random people on the street and asking them for stock tips. They stopped a policeman, a Starbucks barista, a carpenter on a billboard crew, and an ID checker at a fitness club, and all of them offered expansive stock recommendations. They could not find a shoeshine boy, but otherwise their experience mirrored that of Bernard Baruch before the crash of 1929, who remarked that he had received stocks tips from the shoeshine boy and interpreted that as a sign of market excess. [Note: Bernard Baruch sold out of the market before it peaked and became wealthy for the remainder of his life as a result of buying back in later. Up until the 1900s American represented an emerging market, regulation was limited & fraudulant accounting on assets was typical of the time. Therefore, traditional long-run data on returns was of less use then than it was today, necessitating a more hands-on feel for irrational exuberance. Once again, buying into overpriced market - or holding during one - doesn't pay.]

I noted in Chapter 1 that the high pricing of the market in 1901 was not followed by any immediate or dramatic price decline, but rather than prices ceased to increase and that eventually, after some twenty years had elapsed, the market had lost most of the real value it had had in 1901. The change took so long to work itself out that it is rather more generational in character and therefore it is hard to find comment about in the media [of the day].

If we look at 1920-21, when the real stock market was at its lowest since 1901, discussions of the stock markets centered on what had gone wrong; the glowing descriptions of future prosperity seen in 1901 were no longer to be found.

Presumably at least initially this then presented a real opportunity to buy at a fair or discounted price. Of course Shiller is also referring to the total market index and not alternative size or style returns & correlations which may well have been better. Ben Graham, for instance, generated 20% annualized returns despite suffering through 1929-32 and the great depression that followed.

Petey


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PostPosted: Sun Feb 06, 2005 7:33 am    Post subject: Reply with quote

Hi Dave

I don't think there can be such a world. That capital would find its way to be deployed in building new businesses either here or abroad. The national savings rate is so low that too much capital is not really the problem directly.

Bonds were bad almost everywhere including the UK. Real returns after taxes and fees were effectively zero.

UK RE and Euro RE is priced at NAV with no overbuilding present that I can discern. Timber looks sound, both private and listed. Emerging equities are thought to have good valuations, slightly too high but not by much. There are still pockets of opportunity. BTW, I wouldn't take a 10 year outlook on the markets, but a 20 year one. It can take a decade to fall from 15PE to 7PE and another decade to come back up. This is what happened in the 70s and 80s, so the traditional suggestion of 5-10 yr stocks horizon is wrong IMHO.

Petey

Delawaredave wrote:
Great discussion. I'm learning a lot about allocations and changing them based on valuations.

I guess the question is not "whether or not to be in stocks" - rather what percentage of stocks is most appropriate and what mix.

Lot of good information of what is overvalued (seemingly everything).

What's undervalued or fair value right now ?

I keep reading US stocks overvalued, developed international markets same, real estate's gonna bubble, bonds are bad now (never were apparently in the UK), TIPS ditto.

If this is followed, one's going to end up with so much cash under their mattress that they won't be able to sleep because of the lump !

Can there be a world with simply too much capital - and therefore overvaluations across so many asset classes ? Or is something else going on, or are these views pessimistic ?

If you inherited $100,000 right now - and didn't need it for 10 years - where would you put it today ?

Thanks for any thoughts !!


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PostPosted: Sun Feb 06, 2005 7:36 am    Post subject: Reply with quote

My money will be where my mouth is too. I don't discuss anything I don't believe in and it is up to the individual to weigh-up their own personal choices.

The NZ timber is a private investment that the likes of Yale and Harvard buy into and is not a scam. One could instead happily choose to own TimberWest in Canada or Plum Creek in the US (the latter which you have yourself done). Int'l brokers would give Americans access to the UK micro-cap and ScV funds I have mentioned. You know all this Ben, you're just being facetious! I do expect a little better from you, my friend.

Petey

ben wrote:
Delawaredave; you hit the head on the nail.

While I enjoy peteys and hocus's discussions I see the problem you mention. Money where your mouth is: petey is not in market at all yet and as he mentions still talking small money available for that, and hocus about $400k in TIPs and CDs (besides a paid of $300k house).

Hocus have mentioned elsewhere that he is looking into putting about 20% in single stock - trying to pick some not too overvalued. Hocus; any change in status on that?

I started seriously investing in 1998. I was also there learning that everything was overvalued. I did not have the knowledge I have now - and reits/small caps were not yet on my radar screen. Anyway; had I bought directly into my current asset allocation (very similar to yours) I would have done fantastic all through the years. About 14% in avg. per year. (of course I instead thought I could pick single stocks and went well initially, followed by the crash).

So what would I do with $100k now? DUmp it straight into a low cost, mostly indexed, well diversified portfolio like yours and mine. If felt could not handle that emotionally I would do the same but split in 2-4 buys over a period I felt comfortable with.

Now petey can tell you to look at some New Zeeland timber "scam" Laughing and some UK microcapfund your broker can't get to, while hocus can tell you to wait untill PE10 drops about 50% and meanwhile just sleep on the lump! Very Happy

In 30 years we will see what was the best choice. Cheers, Ben

Ps. personally my money is exactly where my mouth is. Very Happy


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ben
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PostPosted: Sun Feb 06, 2005 8:20 am    Post subject: Reply with quote

Guess my tone just got a bit sharper after being called (directly or indirectly) devoid of logic, idiotic and have a bad case of denial and ignorance on threads here recently. All based on my "no asset class left behind" attitude. Might be over sensitive these days. Laughing

I agree that EM equity looks good still - 10% is in EEM in my base portfolio and a bit more via VTRIX.

Delawaredave; let me know whe you have opened those international brokers and been to new zeeland... Laughing

Cheers, Ben



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