Australian (ASX) Stock Market Forum

The official "ASX is tanking!" panic thread

Jump to new
In the history of the S&P500 how many decades have avoided a -33% loss?

Two
- 1950s
- 2010s

Imagine these threads when we're no longer in one of the most stable periods in financial history.
 
Data.png

Not sure where to post this.

Data since 2000
Earnings yield is the inverse of the ASX 200 P/E ratio
Market Premium is Earnings Yield - 10 year bond yield

I'm not great with this sort of thing but with the recent sell off we are starting to get 'out there' a little bit in terms of return distribution. Green line is where the market is at as at 01/01/19. Once can draw there own conclusions however since 2000 it's been an OK bet buying something and putting it in the bottom draw at this point historically.

This is where I need the smart guys in the room to step in!
@systematic
@craft
 
kid hustlr said:
View attachment 91162

Not sure where to post this.

Data since 2000
Earnings yield is the inverse of the ASX 200 P/E ratio
Market Premium is Earnings Yield - 10 year bond yield

I'm not great with this sort of thing but with the recent sell off we are starting to get 'out there' a little bit in terms of return distribution. Green line is where the market is at as at 01/01/19. Once can draw there own conclusions however since 2000 it's been an OK bet buying something and putting it in the bottom draw at this point historically.

This is where I need the smart guys in the room to step in!
@systematic
@craft
Click to expand...

Hi @kid hustlr,

P/E on it's own is not going to make you a good valuation measure and especially not as a comparator for "equity risk premium" calculations.

Suggest you read up a bit on this :

https://www.hussmanfunds.com/wmc/wmc171009.htm
https://hussmanfunds.com/wmc/wmc070820.htm

What you'll see is that at a bare minimum, you really need to adjust the E for profit margins which are cyclical.

Generally speaking at the index level there are some better (as in, very high correlation to long term future returns) shorthand tools you can use. A few are demonstrated here:

https://www.hussmanfunds.com/wmc/wmc140414.htm
https://www.hussmanfunds.com/wmc/wmc130318.htm

Shorthand Shiller PE model: 1.063 * (15 / ShillerPE)^(1/10) – 1 + Dividend_yield (decimal)
In this case, 6.3% is the long term nominal peak-to-peak or trough-to-trough growth in S&P500 earnings and 15 is the long term average of the Shiller PE for S&P500. You'd need to sub those values with ASX appropriate ones.

But if you plug those numbers in for the US you get:
1.063 * (15/28.21)^(1/10) -1 + 0.021 ~= 0.01893460284280889128

i.e. the current forecast 10Y annual return for the S&P500 is 1.89%/pa.

Plug that into the Sharpe ratio calculation using the 10Y US Gov bond yield and long term historical volatility of 15% you get:
(100*(1.063 * (15/28.21)^(1/10) -1 + 0.021) - (100*0.02689)) / 15 ~= -0.05303598104794072478

...negative forecast Sharpe ratio.
 
InsvestoBoy said:
Hi @kid hustlr,

P/E on it's own is not going to make you a good valuation measure and especially not as a comparator for "equity risk premium" calculations.

Suggest you read up a bit on this :

https://www.hussmanfunds.com/wmc/wmc171009.htm
https://hussmanfunds.com/wmc/wmc070820.htm

What you'll see is that at a bare minimum, you really need to adjust the E for profit margins which are cyclical.

Generally speaking at the index level there are some better (as in, very high correlation to long term future returns) shorthand tools you can use. A few are demonstrated here:

https://www.hussmanfunds.com/wmc/wmc140414.htm
https://www.hussmanfunds.com/wmc/wmc130318.htm

Shorthand Shiller PE model: 1.063 * (15 / ShillerPE)^(1/10) – 1 + Dividend_yield (decimal)
In this case, 6.3% is the long term nominal peak-to-peak or trough-to-trough growth in S&P500 earnings and 15 is the long term average of the Shiller PE for S&P500. You'd need to sub those values with ASX appropriate ones.

But if you plug those numbers in for the US you get:
1.063 * (15/28.21)^(1/10) -1 + 0.021 ~= 0.01893460284280889128

i.e. the current forecast 10Y annual return for the S&P500 is 1.89%/pa.

Plug that into the Sharpe ratio calculation using the 10Y US Gov bond yield and long term historical volatility of 15% you get:
(100*(1.063 * (15/28.21)^(1/10) -1 + 0.021) - (100*0.02689)) / 15 ~= -0.05303598104794072478

...negative forecast Sharpe ratio.
Click to expand...

thanks

FWIW I tried to quote you also in this thread but I couldnt work out how to spell your bloody name :)
 
qldfrog said:
So bonds and cash...
Click to expand...

...and maybe some gold?

Depending on your portfolio construction, it can be alright to hold equities even when valuations are high, because if you're maintaining constant weights, you're selling into valuation expansions and buying valuations compressions...
 
kid hustlr said:
- Those Hussman articles are 5 years old and the market is far higher than what they were predicting
Click to expand...

After 20+ years of outperforming Hussman badly underperformed since the GFC bottom (despite convincingly calling the bottom). Does that make the information wrong? Well, I'll leave that with you to read some more of his writings and think about.

If valuations were the only dictator of stock returns then we would never see equities become overvalued or undervalued. One thing that is obvious looking at market indexes historically is that overvalued markets can keep getting more overvalued and undervalued markets can keep getting more undervalued.

Did you know the Nikkei 225 had a CAPE of over 80 in the year 1990, just before the longest bear market in recent history? Or that S&P 500 had a CAPE of just a tad over 5 in 1982, just before US equities began one of the greatest bull markets of all time?

What's evident is that:
- Historically, valuations have proved extremely useful at predicting long run returns. Given that equities are a claim on a long run of future cash flows, this shouldn't be too surprising.
- Valuations are subsumed by investor sentiment in the short run and can over or under shoot (see here )
- Extreme over/undershoot on valuation expectations has historically led to extreme under/outperformance in the opposite direction going forward.

Anything could happen. Maybe investors will go crazy and bid equities up to CAPE of 80+ like they did in Japan in the 80s.

If they did, would that make equities at the current valuation good investment? Were US equities in 2013 a good investment, just because in hindsight "the market is far higher"? Were tech stocks a good investment in 1998?

Some people on this forum definitely have no issue riding a wave like that and will convincingly tell you they'll even be able to get out near the top.

My own strategy is to maintain a constant equity exposure as a % (25% to be precise) of my total portfolio, so while I'm long I'm periodically selling into insanity and buying despair.

- Have you read this?

https://personal.vanguard.com/pdf/s338.pdf
Click to expand...
Yup I did read it a long time ago.
 

Investo, I really appreciate these chats. Some comments/questions:

- 25% Equities seems low? I like the balancing aspect of your portfolio. How old are you (if I can ask that??)
- my key takeaway from the discussion above is that earnings multiples do matter but's its just not that simple due to a variety of factors. Long term the numbers do show that accumulating more aggressively when stocks are at a low CAPE ratio may be beneficial.

I personally subscribe to the Vanguard position of 'slowly accumulating consistently over a long period of time to achieve a roughly average return' with 2 caveats:
- I will try to be slightly more aggressive at perceived very low multiples assuming my personal circumstance allows
- I allocate a portion of my funds to trading to try to 'beat the market'

At some stage I'll need to assume a % in bonds/defensive but my view is I am far too young to take this approach at present.
 
Yes I noticed that 25% in equities as well. Perfectly understandable in the current down market, but over the long term, it doesn't seem much
 
No
Logique said:
Yes I noticed that 25% in equities as well. Perfectly understandable in the current down market, but over the long term, it doesn't seem much
Click to expand...
Not much but you would have made a killing in Japan..
When demographic are taken into account, a wise position in europe us..to a lower extend in Australia imho
 
kid hustlr said:
- 25% Equities seems low?
Click to expand...

It's a 25% envelope for equity strategies/portfolios within a larger envelope that consists of identical allocations to cash, gold, bonds. Each being an envelope for strategies/portfolios on that asset/class. e.g. one month I might be 25% US Equity Momentum and the next month 25% Europe Value. In cash I might be USD, EUR, AUD, CNY depending. Bonds might be Gov or Corp, shifting up and down duration, etc. Gold is pretty much just gold although the beta of gold to various macro factors changes over time without me needing to do anything (right now mostly real rates) ;)

You can get an idea of why I might pursue this strat by looking at https://allocatesmartly.com/tactical-permanent-portfolio-gestaltu-investresolve/

I like the balancing aspect of your portfolio
Click to expand...

See https://gestaltu.com/2012/02/volatility-harvesting-and-the-importance-of-rebalancing.html/

How old are you (if I can ask that??)
Click to expand...

33 or 34 I think.

I personally subscribe to the Vanguard position of 'slowly accumulating consistently over a long period of time to achieve a roughly average return'
Click to expand...

When it comes to equities, people are conditioned to believe that they go up, and Vanguard can market this effectively largely because in the US and a few other lucky places, they have.

But this strategy is only going to work if the underlying businesses are profitable over the long term and you aren't paying too much more than the businesses are worth. What "accumulating consistently over a long period of time" is, is a bet. It's a bet that the underlying businesses remain profitable and that you're not overpaying. And Vanguard looks smart because that bet has paid off.

I don't think that marketing strategy would work for index fund investors in Japan, or Greece, Spain, Italy, etc.

Maybe we'll be as lucky as the last 50+ years were and businesses will stay as profitable and on offer for decent prices for another 50. Then all the "Bogleheads" and FIRE people will look smart. Maybe it won't turn out like that at all (debt, demographics, growth, profitability, etc).

Since I don't know, I try and pay a bit more attention than that.

104623 Japan Equities 1.png e07fe15fe4b8e66e06179f653fdb4e3c.jpg gam-citywire-france-presentation-2013-24-638.jpg
At some stage I'll need to assume a % in bonds/defensive but my view is I am far too young to take this approach at present.
Click to expand...

I guess it's not surprising since this is a stock forum but I don't think most people understand precisely how bonds work in the global financial system or how they are priced.
 
InsvestoBoy said:
It's a 25% envelope for equity strategies/portfolios within a larger envelope that consists of identical allocations to cash, gold, bonds. Each being an envelope for strategies/portfolios on that asset/class. e.g. one month I might be 25% US Equity Momentum and the next month 25% Europe Value. In cash I might be USD, EUR, AUD, CNY depending. Bonds might be Gov or Corp, shifting up and down duration, etc. Gold is pretty much just gold although the beta of gold to various macro factors changes over time without me needing to do anything (right now mostly real rates) ;)
Click to expand...

As we have discussed before I do see the value in the approach being discussed

BUT

Are you not now strategy picking (within your envelopes) instead of stock picking? Bit hard to back test your dynamic system, and compare it to the very systematic approaches discussed in the papers above.
 
fiftyeight said:
Are you not now strategy picking (within your envelopes) instead of stock picking? Bit hard to back test your dynamic system, and compare it to the very systematic approaches discussed in the papers above.
Click to expand...

Correct, but the turnover on strategies is quite low!

That said, I'm constantly learning and reading about strategies, investment managers, investment products, etc. If I find something I feel is a better option after due diligence and consideration of long term risks then I will switch at my discretion.

What I'm talking about is factor exposure and trend/volatility management and these days a lot of ETFs and managed funds which wrap those kind of things are popping up in the US markets.

So you could backtest using those for a decent approximation.
 
InsvestoBoy said:
When it comes to equities, people are conditioned to believe that they go up, and Vanguard can market this effectively largely because in the US and a few other lucky places, they have.

But this strategy is only going to work if the underlying businesses are profitable over the long term and you aren't paying too much more than the businesses are worth. What "accumulating consistently over a long period of time" is, is a bet. It's a bet that the underlying businesses remain profitable and that you're not overpaying. And Vanguard looks smart because that bet has paid off.
Click to expand...

I've never heard this theory before. I think this is an odd way to look at equity markets & index funds. If you believed that it's "only a bet" you may as well stick with cash, and maybe gold.
 
Junior said:
I've never heard this theory before. I think this is an odd way to look at equity markets & index funds. If you believed that it's "only a bet" you may as well stick with cash, and maybe gold.
Click to expand...

It’s not a theory!

If you believe that mindlessly investing in equities over time will always lead to “average returns” (whatever those are), because they did in the past in your lucky corner of the world it’s a bet that the businesses you’re buying will remain profitable and you’re not overpaying.

The drivers of equity returns over the long run are well understood by academics and practitioners alike, there is no theoretical component.
 
Investo,

This is really good stuff. It's interesting comparing your thoughts/comments to some of the work Craft has put on this forum in the past regarding long term results/returns and his viewed preferred approach.

I have 2 underlying views:
- The more you know about this stuff the more you should touch your portfolio
- The majority of people who play the market are likely too aggressive/exposed whilst the those who know nothing about the market are likely heavily under-exposed

I'll admit the demographic factors you mentioned play on my mind to a degree and I think a long term investor can do several small things to 'tilt the odds' in their favour a fraction however the more i learn the more I like a consistent, long term approach based largely around equities.

InsvestoBoy said:
Some people just don’t really seem to grasp how lucky we are.
Click to expand...

I thank my lucky stars every day
 
Top