Portfolio evaluation and correcting for the wealth effect

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7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

Shouldn't the question of why earnings are low relative to price be considered as well as why price is high relative to earnings? Maybe frugality is catching on? :lol: Maybe passivity is becoming increasingly expensive?

I was reading an interview in Barron's (can't recall name) with somebody quite intelligent who made the point that there is a level beyond the wisdom in simply not believing "It's different this time." The economy and the market are complex evolving systems, so strategies have to change. At some point previous benchmarks must be abandoned. For instance, the very secure investment strategy outlined in YMOYL wouldn't work so well nowadays. There are underlying mechanics beyond statistics and indices even in regards to such factors as irrational exuberance of the mob. How is the Robinhood investor of 2020 like the Newsboy Investor of 1928? How might he be different? Etc.

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unemployable
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Re: Portfolio evaluation and correcting for the wealth effect

Post by unemployable »

7Wannabe5 wrote:
Sun Jan 10, 2021 8:04 am
The economy and the market are complex evolving systems, so strategies have to change. At some point previous benchmarks must be abandoned.
Probably most importantly, the Greenspan put didn't exist before 1987, although some previous crashes were accompanied by a fair amount of intervention by private parties, most notably 1907. (Monetary policy tightened after 1929.) How to correctly value this option and account for its potential "expiration" is a separate issue, but for now the strike price seems to be in the down 40-50% range.

In addition, share buybacks have become a more popular way to return profits to shareholders versus dividends. This should raise P/Es for a couple reasons: due to favorable tax treatment (zero for buybacks until you sell vs. 30%+ for dividends immediately if you're rich and live in a high-tax state), and due to a promised lower P/E after the buyback due to fewer outstanding shares.

ertyu
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Re: Portfolio evaluation and correcting for the wealth effect

Post by ertyu »

Quadalupe wrote:
Sun Jan 10, 2021 7:52 am

The value of a 60% S&P500 and 40%10Yr Treasury portfolio currently is 0.6*15.81/38.43 + 0.4 * 1.119/3.84 = 36%.
ouch

i hate this situation. on the one hand, now is a terrible, horrible, bad, no good time to put cash into the market. on the other hand, it keeps going up and up and the amount of real assets one can buy with any given level of cash is less and less. everyone is having fun except this apparent permabear here

2Birds1Stone
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 2Birds1Stone »

ertyu wrote:
Mon Jan 11, 2021 2:05 pm
everyone is having fun except this apparent permabear here
non solum

Married2aSwabian
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Re: Portfolio evaluation and correcting for the wealth effect

Post by Married2aSwabian »

@7Wannbe5, yes, I subscribed to Barron’s again starting last summer. I try to keep up with market week data, but always read Up and Down Wall St (Alan Abelson was the best back in the day!) and Streetwise. Yesterday, both columns are pointing to the Barron’s Panic / Euphoria Index as a flashing red light that equities are wildly overvalued, with Euphoria off the charts. Jack Haugh writes about the same “shoe shine boy” / “newspaper boy” trader indicator. Could things go higher still, with the Fed keeping rates at zero for another couple of years? Sure. Is a big correction due in the next six months? Seems very likely.

As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.” If you look at the 1918 pandemic curve, it is very similar to what we’re experiencing now: second wave in winter more deadly than the first, people got sick of wearing masks and social distancing and spread it around more.

I added some light reading to my list just before the pandemic began: “The Great Crash 1929” by John Kenneth Galbraith.

He outlines the wild euphoria leading up to the crash (like today), with huge amounts of leverage being used to invest. Of course, there was no SEC or regulation back then, so it was worse - kind of the Wild West of Wall St, with plenty of larger than life characters running in to save the day when things got dire. Hoover made things much worse by worrying about balancing the budget after the crash, so no fiscal stimulus to get through it.

There are plenty of similarities, though, with the easy money and euphoria. There was also a substantial rebound after late Oct, ‘29, but not new highs. This was a dead cat bounce that was followed by many subsequent dead cat bounces until the market had lost 85% of its value.

Some big differences this time include China, the interconnectedness of the global economy and fiscal stimulus.

I’m afraid we’re in for a correction period that will last a couple of years, but not be nearly as bad as back then. The other historical comparison that could result from the unprecedented decade plus of money printing is the “lost decade” of the ‘90s in Japan. Wild times for sure!

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