Brendan Burgess
Founder
- Messages
- 52,279
tyoung in a post on the cult of the equity said the following:
<!--EZCODE QUOTE START--><blockquote>Quote:<hr> A lazy kind of thinking has replaced risk analysis. It goes something like this:
Equities are the best performing asset class over long periods of time.
Therefore they should be the primary(sole)asset class for longterm investors.
You can't beat the market so don't try. Just buy the market.
Market timing doesn't work so don't worry about valuations because of the above.(stocks always win and You can't pick winning stocks).
Stop thinking and just buy index/tracker funds. <hr></blockquote><!--EZCODE QUOTE END-->
This summarizes my views on the stockmarket exactly. I even agree with the characterization of my thinking as "lazy", though I would have preferred the word "efficient".
I have learnt a lot from the debates on the Cult of the Equity. But is there any evidence that you can time the markets ? It's not enough to say that markets are overvalued. You must also say what the correct value is and identify the price at which you are prepared to buy back into the market.
I thought that the Japanese stockmarket was ridiculously overvalued at 40 times earnings. Then it climbed up to 80 times earnings.
I "knew" that the technology companies were grossly overvalued. I knew that it was a bubble. I read the justifications of the ridiculous values and I laughed at them. I was savaged on the Motley Fool for doing so. I looked for a way of profiting from this overvaluation, but I couldn't find one.
Sir Ivor, tyoung and others are laughing at my blind faith in equities, just the same way that I laughed at the blind faith of a large number of technology investors.
But what is the "correct" price of a stockmarket ? Can we ever know what the correct price is ? Maybe there is a range of prices ? For example the price should be somewhere between 10 and 20 times earnings. If the price is above 20 times earnings - sell all your shares. If the price is below 10 times earnings, borrow to invest in the market. If the price is 40 times earnings, try to find a long term a put option on the index.
It seems that a higher price earnings ratio was justified a few years ago as the World economies were roaring ahead. Now growth has slowed down and uncertainty has increased dramatically , the price earnings ratio should be lower. But how much lower ?
Let's agree that the American market, is still overvalued at 20 times earnings. What is the correct value ? Let's say that it declines to its correct value over the coming 2 years until it reaches 16 times earnings. Should you then invest in the market again at that stage ? Or should you wait until it reaches 10 times earnings ? If the US market drops by 50% over the coming 2 years, will anyone feel like investing in the market ?
But what is the American market ? I don't have the figures, but I understand that p/e of 20 is inflated by huge p/e ratios for Microsoft and other technology stocks. So maybe most of the stocks are correctly valued. But now we are into stock picking.
Jim Grant seemed very confident in his assertions about the overpricing of the market. I had never heard of him before. I haven't heard of anyone who has consistently called the turning points in the market. What is Jim Grant's record ?
What about the Irish market ? The p/e ratio of the top ten companies is about 14 at the moment. This ranges from about 8 for AIB to 25 for Elan. Is this overall value of 14 justified ? I don't want to discuss individual stocks, but it is certainly reasonable for some stocks to be valued on a much higher basis than others.
My advice to simply buy the top 10 Irish stocks looks reasonable in retrospect. To be honest, I didn't give much thought to P/E ratios. I was aware that Irish institutions have been big sellers of Irish stocks for technical reasons, so I felt that they might be good value. But this was more a gut feel than any incisive analysis. If the Irish market was priced at 30 times earnings, I would have given the same advice. Would this have been wrong ?
Let's say that overseas investors recognize the value of Irish shares and push the p/e to 30 over the next two years. I will feel very smug about the advice I gave in the first edition. But should I now say that the market is overvalued ?
What is the p/e ratio of the Eurostoxx 50 ? I have absolutely no idea. It could be 10. It could be 50. I just don't know. Which goes back to tyoung's description of me as lazy.
Do I need to moderate my advice to invest all your money in equities to something like this:
"Over the past 150 years, equities have always provided the best long term returns. But during those years, there have been many periods of huge overvaluation and undervaluation. If you happened to invest while stocks were grossly overvalued, it would have taken you up to 10 years to beat an investment in cash or gilts. The best long term strategy is to be fully invested in the stockmarkets. Many commentators feel that the American and European stockmarkets are currently overvalued. In the longer term, this doesn't really matter. But in the shorter term, you might lose some sleep "
Brendan
<!--EZCODE QUOTE START--><blockquote>Quote:<hr> A lazy kind of thinking has replaced risk analysis. It goes something like this:
Equities are the best performing asset class over long periods of time.
Therefore they should be the primary(sole)asset class for longterm investors.
You can't beat the market so don't try. Just buy the market.
Market timing doesn't work so don't worry about valuations because of the above.(stocks always win and You can't pick winning stocks).
Stop thinking and just buy index/tracker funds. <hr></blockquote><!--EZCODE QUOTE END-->
This summarizes my views on the stockmarket exactly. I even agree with the characterization of my thinking as "lazy", though I would have preferred the word "efficient".
I have learnt a lot from the debates on the Cult of the Equity. But is there any evidence that you can time the markets ? It's not enough to say that markets are overvalued. You must also say what the correct value is and identify the price at which you are prepared to buy back into the market.
I thought that the Japanese stockmarket was ridiculously overvalued at 40 times earnings. Then it climbed up to 80 times earnings.
I "knew" that the technology companies were grossly overvalued. I knew that it was a bubble. I read the justifications of the ridiculous values and I laughed at them. I was savaged on the Motley Fool for doing so. I looked for a way of profiting from this overvaluation, but I couldn't find one.
Sir Ivor, tyoung and others are laughing at my blind faith in equities, just the same way that I laughed at the blind faith of a large number of technology investors.
But what is the "correct" price of a stockmarket ? Can we ever know what the correct price is ? Maybe there is a range of prices ? For example the price should be somewhere between 10 and 20 times earnings. If the price is above 20 times earnings - sell all your shares. If the price is below 10 times earnings, borrow to invest in the market. If the price is 40 times earnings, try to find a long term a put option on the index.
It seems that a higher price earnings ratio was justified a few years ago as the World economies were roaring ahead. Now growth has slowed down and uncertainty has increased dramatically , the price earnings ratio should be lower. But how much lower ?
Let's agree that the American market, is still overvalued at 20 times earnings. What is the correct value ? Let's say that it declines to its correct value over the coming 2 years until it reaches 16 times earnings. Should you then invest in the market again at that stage ? Or should you wait until it reaches 10 times earnings ? If the US market drops by 50% over the coming 2 years, will anyone feel like investing in the market ?
But what is the American market ? I don't have the figures, but I understand that p/e of 20 is inflated by huge p/e ratios for Microsoft and other technology stocks. So maybe most of the stocks are correctly valued. But now we are into stock picking.
Jim Grant seemed very confident in his assertions about the overpricing of the market. I had never heard of him before. I haven't heard of anyone who has consistently called the turning points in the market. What is Jim Grant's record ?
What about the Irish market ? The p/e ratio of the top ten companies is about 14 at the moment. This ranges from about 8 for AIB to 25 for Elan. Is this overall value of 14 justified ? I don't want to discuss individual stocks, but it is certainly reasonable for some stocks to be valued on a much higher basis than others.
My advice to simply buy the top 10 Irish stocks looks reasonable in retrospect. To be honest, I didn't give much thought to P/E ratios. I was aware that Irish institutions have been big sellers of Irish stocks for technical reasons, so I felt that they might be good value. But this was more a gut feel than any incisive analysis. If the Irish market was priced at 30 times earnings, I would have given the same advice. Would this have been wrong ?
Let's say that overseas investors recognize the value of Irish shares and push the p/e to 30 over the next two years. I will feel very smug about the advice I gave in the first edition. But should I now say that the market is overvalued ?
What is the p/e ratio of the Eurostoxx 50 ? I have absolutely no idea. It could be 10. It could be 50. I just don't know. Which goes back to tyoung's description of me as lazy.
Do I need to moderate my advice to invest all your money in equities to something like this:
"Over the past 150 years, equities have always provided the best long term returns. But during those years, there have been many periods of huge overvaluation and undervaluation. If you happened to invest while stocks were grossly overvalued, it would have taken you up to 10 years to beat an investment in cash or gilts. The best long term strategy is to be fully invested in the stockmarkets. Many commentators feel that the American and European stockmarkets are currently overvalued. In the longer term, this doesn't really matter. But in the shorter term, you might lose some sleep "
Brendan