Comments on: Book Review: Triumph of the Optimists

By: Bill aka NO DooDahs!

Bill aka NO DooDahs! — Tue, 20 Nov 2007 19:17:32 +0000

Drat!

Short version and speed typing, I wasn’t answering the question about valuations, so I ignored them in my answer. Valuations matter in direct proportion to holding time. Active traders can outperform both the indices and value investors with increased activity and a plan for trading “overvalued” stocks. Let’s not get egotistical about “our” style and let’s remember that lots of styles work for lots of different folks.

What do you think valuations are now? S&P on their site says 17.7 P/E on TTM basis. What discount rate and projected growth (feel free to use a two- or three-stage modified DCF) do you think is needed to make 17.7 look reasonable? Where is your model for index P/E to 10+ year returns? Do you need to take current interest rates into account?

By: David Merkel

David Merkel — Tue, 20 Nov 2007 17:33:29 +0000

Bill, you might want to repost the comment, then. It looks like the spam filter ate it, and the rate of spam has gotten really high lately… in less than half a day the buffer fills, meaning that if a legitimate post goes to spam rather than moderation, my window for catching it is thin. Sorry, and I appreciate your posts here, even when they are critical.

That applies to all who criticize me here. Feel free to post, so long as you keep it clean, relevant, and civil.

By: Paul in Kansas City

Paul in Kansas City — Mon, 19 Nov 2007 16:22:44 +0000

Let’s also add “You Can Be a Stock Market Genius” by Greenblatt and Phil Fisher’s “Common Stocks and Uncommon Profits”. Ken Fisher’s foreward about his father is particularly interesting as it is very personal; something all of us fathers can relate to with their sons and vice versa.

By: Bill aka NO DooDahs!

Bill aka NO DooDahs! — Mon, 19 Nov 2007 16:13:10 +0000

I left a comment that hit moderation because of a link to S&P’s website …

By: BamBam

BamBam — Mon, 19 Nov 2007 00:26:57 +0000

Another book whose conclusions and backtesting methodologies I’d like to see you review is the Magic Formula book by Greenblatt.

By: James Dailey

James Dailey — Sun, 18 Nov 2007 20:32:13 +0000

Thanks for the response Bill.

GMO actually put out a chart examining subsequent 10 year real returns by placing the SPX (and their pre-1952 equivalent) into quintiles based on monthly P/E ratios. The average average annual real return for the most expensive quintile was barely over 1% per year for 10 years. Your comment once again ignores valuation. History is clear, if one buys stocks for a buy and hold purpose at present valuations, the expected future return is likely to be 1-2% real over the next 10 years. That is not what most people I know are 1- counting on and 2- willing to sit through given the risks of owning stocks.

By: Bill aka NO DooDahs!

Bill aka NO DooDahs! — Sun, 18 Nov 2007 13:36:04 +0000

Don’t view it as using 80-100 year returns, view it as seeing 8-10 data points of 10-year returns. Over *almost* any 10-year period, you get the same results. Stocks better than bonds better than cash. I believe that over ANY 20-40 year historical period, you will get the same results.

By: Paul in KC

Paul in KC — Sat, 17 Nov 2007 01:05:19 +0000

My copy is at the office but there is a wealth of data; look at equity and fixed income returns of Japan and Germany; those stats are eye opening

By: Don

Don — Fri, 16 Nov 2007 22:09:18 +0000

“US 1939-1932″ I assume this is 1929-1932.

One of the long term big picture challenges that I really don’t know how to work around is the coming population changes. America is graying slower than the other developed markets and many emerging markets, but nearly everyone has a peak in worker populations in the next 30 years.

In the 1900-2000 timeframe we had improving productivity and growing worker populations driving economic growth. Hopefully we will still have decent productivity growth going forward but it will be working against population declines which seems likely to lead to slow growth.

Also many people will be heading for the exits from equity (and other) markets as they seek to live off of their investments. On that theme as well it seems there will be a quest for safety as more people look for places to put the money during the drawdown phase of their investment lifecycle. The CDO story is as much about a reach for safety as it is a reach for yield. Individuals as well as pension fund managers are and will be looking for safe decent yielding investments in a world awash with not so safe low yielding stuff.

It seems like there isn’t a good way around low returns over the next few years.

By: Josh Stern

Josh Stern — Fri, 16 Nov 2007 15:22:59 +0000

James Dailey, IMO the argument about stocks vs. bonds in the context of time horizons should really be recast as an argument about investments with high vs. low risk premiums to earnings yield.
It’s important for investors to look at the entire macro universe of investment possibilities, rather than thinking their decision as a choice between mainly U.S. stocks vs. mainly U.S. bonds vs. dollar denominated cash. At a time when hedge funds are booming, the small investor has less need of hedge funds than ever before because he has convenient access to exchange traded products and/or mutual funds to fit most every conceivable macro thesis about where the best investment returns will be over his decision-making horizon. At the level of investment generalities, there is always going to be a positive long term return for accepting risk premiums while controlling overall risk at the portfolio level. Which asset classes have attractive characteristics for long horizon investors is continually changing. But if one insists on an even less specific view, its true that “stocks” tend to have those characteristics more than “bonds” do. But yeah, that view is too non-specific (as witnessed by early 2000 bubble in tech stocks).