CAPE is simply the price of a stock divided by the average of 10-years previous earnings of that company, adjusted for inflation. It has nothing to do with reversion to mean.
A lot of people invest in equities through their pensions while carrying a mortgage. That's leveraged investing but most people don't see it that way for some reason.
Remember the biggest pension funds in the world 'need' 7,8,9% to make the numbers work they are therefore are forced out the risk curve (exactly what the central Banks wanted by the way) hence inflated prices as investors bid up the price of those assets in turn reducing their return.
I know Colm's post is partly tongue in cheek, but just because you "need" 6,7,8,9%, does not mean equities will fulfill your needs. With bonds yielding 1% and many people "needing" far more than that, I have to strongly suspect that equities (like bonds) are currently over priced and in the end of the day, for someone investing their ARF now, the return they will get is decided by the price that they pay for their equities in the second hand market.My reason for going against conventional wisdom is simply that an investment strategy that included bonds would not keep me and my other half in the manner to which we’re accustomed. My retirement plan is constructed on the basis that I will earn close to 6% per annum on my savings for the rest of my days.
Not really, Duke. My long-term financial plan is based on that assumption. It's worth adding the later sentence from the article, however:I know Colm's post is partly tongue in cheek,
I rely particularly on the latter. My investment philosophy is to only invest (and only to stay invested) in shares/bonds (I have bought one particular bond in the past that qualified under these criteria - I may write about it sometime) that I believe will deliver that return over the next 5, 10, 20 years. I am confident that all the stocks in my portfolio, a large proportion of which have been mentioned in the diary by now, will deliver the required 6% a year (I do have a small margin of safety in that I'm budgeting on getting slightly less than 6%).My confidence that I will earn 6% or more from equities is based partly on history - they have delivered significantly more than this on average over the last 100 years - and partly on hard-headed analysis of likely future returns, based on projections for future growth in profits and dividends.
I love these semantic debates. In this case I must adjudicate in favour of Sarenco. As I understand it, CAPE tries to measure current market prices by reference to an average of recent earnings over a period of years. This seems entirely valid and closer to reality than using the average earnings over the last 12 months. For example, if a company reports a loss in a year, its price doesn't go to zero, instead investors give credit for past earnings. Maybe GG is arguing that this shows that investors demonstrate a certain reversion to mean in their valuations but if so that does not invalidate the metric.Incorrect; it has everything to do with reversion to mean.
Ahh Gordon are you sure you haven't had a wee dram after breakfastDuke, perhaps you both had a late night, but for the avoidance of doubt, virtually ALL measurements like this assume mean reversion!
Otherwise they’re meaningless numbers (e.g. 32). What is 32? Oh, it’s high is it? Based on what? Oh, I see, mean reversion!
I had to review the "angels dancing on pins" debate. This is where it began. This is quite clearly a criticism of the CAPE methodology per se on the grounds that it is based on the "idea of mean reversion". That is blatantly incorrect. GG has subsequently generalised his criticism against any statement that a current ratio is historically high or low. That is not what he meant in the first place. Let's move on.You are incorrect regarding CAPE; it is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion.
I had to review the "angels dancing on pins" debate. This is where it began. This is quite clearly a criticism of the CAPE methodology per se on the grounds that it is based on the "idea of mean reversion". That is blatantly incorrect. GG has subsequently generalised his criticism against any statement that a current ratio is historically high or low. That is not what he meant in the first place. Let's move on.
(CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion.
The first of the above statements requires no guesswork as to what the author meant. It is an incorrect statement, end of. It subsequently transpires that what you really meant was something quite different.Duke, I’m not sure why both you and Sarenco have a fascination with telling people what they mean.
The first of the above statements requires no guesswork as to what the author meant. It is an incorrect statement, end of. It subsequently transpires that what you really meant was something quite different.
How is it incorrect? It’s a ratio. What are ratios? Means of comparison.
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