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7:01 am
August 3, 2010
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qook25
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There is a quality article written by Warren Buffett on this issue.
http://money.cnn.com/magazines…..10/314691/
Also, Jeremy Grantham makes great predictions based on a value approach. He was bearish on the market for 12 years(1996
to 2008) and then became bullish on March 2009, which is pretty impressive. I think more research should be done on him,
since he really does well on valuing overall markets.
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7:01 am
August 3, 2010
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qook25
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| New Member | posts 2 |
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There is a quality article written by Warren Buffett on this issue.
http://money.cnn.com/magazines…..10/314691/
Also, Jeremy Grantham makes great predictions based on a value approach. He was bearish on the market for 12 years(1996
to 2008) and then became bullish on March 2009, which is pretty impressive. I think more research should be done on him,
since he really does well on valuing overall markets.
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10:40 pm
August 1, 2010
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Jae Jun
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You make a great point about the dividend yield. That site is awesome by the way. It's so hard to find sites that provide simple graphical views of the current market weightings.
The S&P PE also does agree with what Floris and I were mentioning. PE of 19-20 is much too high for the market.
And I'm in complete agreement with you about the future market outlook. My performance this year is a testament to that so far.. doh..
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4:21 pm
August 1, 2010
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somrh
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Post edited 11:22 pm – August 1, 2010 by somrh
I've finally started to dig around the forum and so I may end up resurrecting a few posts (such as this one). The following is a set of information that indicates that one can take a value investing approach to the "market" as a whole.
http://www.multpl.com/
This is a great site with pretty charts that are mostly based on Robert Shiller's data (updated daily on his website.) The P/E ratio is the 10 year earnings ratio. Graham recommended never purchasing a particular issue that sells for more than 16 PE10. This happens to coincide with historical average for the S&P 500 which is interesting in of itself.
There is a pretty good relationship between P/E and subsequent returns. See, for example, this chart which is based on Shiller's data. A simple strategy of, say, buying at or below 16 and moving out of the market at, say, 20 might work well.
But there is one additional point to consider. Looking at http://www.multpl.com/ one can see that dividend yields are below half historical average. For this reason, the market may be way overvalued and simply looking at P/E ratio would not be beneficial. Robert Arnott notes that stock returns are better correlated with dividend yields than earnings yields. He makes an interesting case (article linked below) that many beliefs regarding stocks (it's the best investment strategy, risk premium is 5%, historical returns should be 8% or more) are not well-founded and are partly the result of changes in valuation.The future may be grim for market returns.
What Risk Premium is 'Normal'? , Robert Arnott
Robert Arnott is also critical of stock and bond indices that are capitalization/debt weighted. This results in higher(lower) weight in overvalued (undervalued) stocks as well as having more debt obligations from companies that issue large amounts of debt. He advocates a fundamental index that weights stocks by various fundamental measures. The Powershares FTSE RAFI US 1000 (PRF) is an example of an ETF that is weighted in such a way.
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4:28 pm
October 10, 2009
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Floris
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| Member | posts 30 |
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I agree. I think a pe of 19 is simply too high. Its an earnings yield of roughly 5%. Equities offer growth and (some) inflation protection, but an EY of only 5% is not enough to compensate for the risk the average investor is taking (imho). 7-8% seems to be more fair for putting your capital at risk (if you're not a value investor that is).
I hope that I will be comfortable losing a significant amount of "paper wealth", if that leaves me the opportunity to buy stocks at a significant discount. This should be the case if the estimation of intrinsic value is reasonably accurate.
Anyway thx for the response, let's see what the future brings,
reg,
Floris
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1:40 pm
October 10, 2009
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Jae Jun
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I've come across this as well. I would have thought that a PE of 19 would still be too high for any earnings. My ideal level of a fair market would be around the 15-16 PE mark.
Also considering that about 5-6 of my investments have reached fair value (I already sold) I too am finding it difficult to find more great opportunities but it still exists none the less. My current holdings I believe are still way way undervalued.
I've also never been a good macro guy so I'm usually on the train going down but I don't think I will sell my undervalued positions.
If value investors learnt anything until March, it's that you should keep averaging down on your best ideas.
While we can incur paper losses if the market dives, it only provides an opportunity to make huge returns if you can ignore many of the things going around and focus on what is the cheapest and best opportunity.
I would mind getting a bag full of 10 baggers. We also know what type of companies rose the most during the rally.
The sickening dive down may just be worth it…
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5:30 am
October 10, 2009
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Floris
| | Rotterdam, Netherlands | |
| Member | posts 30 |
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Hey,
Just this week, as I have been searching for bargains to invest in, I noticed a lot of blogs by value investors discussing the price level of the market. While value investors do not generally look at the price of the market, they only look at cheap securities that are available for sale. As I have seen a strong decrease in bargains being available I also wondered about the price level of the market. Furthermore a correlation between value investors discussing the price level of the market should be perhaps be seen as a warning sign. I read the following article:
http://www.jonathangoldberg.co…..eason.html
And also downloaded the most recent shiller index
http://www.econ.yale.edu/~shil…..r/data.htm
The goldberg article argues that the market is overvalued, whereas the shiller 10 year pe ratio (which I believe to be very relevant for long term value investors) shows a pe ratio of 19 for the S&P. While this is the lowest level since 1992, paying 19x long term earnings is still very high historically. I dont feel confident drawing any conclusions (I dont feel confident forecasting the near future, as I believe I will only be right 50% of the time) but all I can say is that great net asset bargains have been dissapearing with the recovery.
Curious to know what you think.
Reg,
Floris
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