Give up on stocks?

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ataloss
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Give up on stocks?

Post by ataloss »

scott burns:

http://money.msn.com/articles/invest/ex ... pecial=msn



Two years into a declining market and stocks are still dear. Using traditional measures like the price-to-earnings ratio, price-to-cash flow or price-to-book value, stocks are now selling at levels associated with bull markets, not bear markets. Absolutely no one is yelling that this market is a screaming buy.

At best, the prevailing attitude seems to be stoic: Leave me alone to take my beating.

Query: Does this mean we should abandon equities?

The answer, a distinct "No," can be found in the February issue of the Journal of Financial Planning.

Their findings, in a nutshell: Stock returns from periods of high P/E ratios are lower than returns from periods of low P/E ratios. Stock returns are still higher, however, than competing returns on cash or bonds. In other words, stocks are less attractive as investments today, but they are still better than the common alternatives

thanks to rkmacdonald
http://boards.fool.com/Message.asp?mid=16873307

I don't see anything saying that we can't buy small caps or emerging markets :wink:
Have fun.

Ataloss
peteyperson
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Re: Give up on stocks?

Post by peteyperson »

Either it is very late or the text is gradually getting smaller down the page and you're testing my eye sight!

:lol:

Petey

ataloss wrote: scott burns:

http://money.msn.com/articles/invest/ex ... pecial=msn



Two years into a declining market and stocks are still dear. Using traditional measures like the price-to-earnings ratio, price-to-cash flow or price-to-book value, stocks are now selling at levels associated with bull markets, not bear markets. Absolutely no one is yelling that this market is a screaming buy.

At best, the prevailing attitude seems to be stoic: Leave me alone to take my beating.

Query: Does this mean we should abandon equities?

The answer, a distinct "No," can be found in the February issue of the Journal of Financial Planning.

Their findings, in a nutshell: Stock returns from periods of high P/E ratios are lower than returns from periods of low P/E ratios. Stock returns are still higher, however, than competing returns on cash or bonds. In other words, stocks are less attractive as investments today, but they are still better than the common alternatives


thanks to rkmacdonald
http://boards.fool.com/Message.asp?mid=16873307

I don't see anything saying that we can't buy small caps or emerging markets :wink:
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ataloss
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Post by ataloss »

petey, your problem is related to time zones :lol:

anyway hocus posted a link to the original paper at his board

http://www.fpanet.org/journal/articles/ ... -art10.cfm


[img]
http://www.fpanet.org/journal/articles/ ... 0-img4.jpg[/img]

It is important to emphasize, however, that these results do not necessarily imply that the stock market is inefficient and that investors can easily "time" the market for "excess" profits. The predictability of stock returns could simply reflect changes in the appropriate expected rates of return for stocks

I would go out on a limb and suggest that if an investor thinks that expected returns are lower for tsm we should favor other asset classes
( vs his/her default portfolio allocation)

as I said before (in tiny type)
I don't see anything saying that we can't buy small caps or emerging markets :wink:
Have fun.

Ataloss
therealchips
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Post by therealchips »

However, because important assumptions of the regression model are violated, the results above should be taken as only suggestive of a relationship between current P/E and future stock returns. In creating the subsequent holding period returns, the data is subject to an "overlapping periods" problem - the observations are not independent. For example, with a five-year holding period return, four of the years will be the same as the previous five-year holding period return. A number of researchers have looked into this problem and suggested various statistical corrections to the standard regression techniques to obtain unbiased standard errors and t-statistics. However, the nature of these corrections is not without controversy and is still being debated in the econometrics literature. For example, Goetzman and Jorion (1993) and Kirby (1997) argue that, when overlapping periods are used to compute long horizon returns, the R2 are biased upward and the standard errors are underestimated. After corrections are made, they both conclude that predictability of returns is not statistically warranted. On the other hand, Campbell and Shiller (1998) and Shiller (2000) find that predictability of returns survives even after statistical corrections are implemented. Thus, at this stage, our results should only be taken as "suggestive."
Writ large for my aging eyes.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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ataloss
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Post by ataloss »

Hi Chips, I am pretty sure that if we could statistically "prove" how the maket would behave, investors would adjust their behavior and our prediction would fail.

ataloss
not trusting anyone who claims to know the optimal future asset allocation or swr :wink:
Have fun.

Ataloss
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ataloss
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Post by ataloss »

Hi Chips, I am pretty sure that if we could statistically "prove" how the maket would behave, investors would adjust their behavior and our prediction would fail. OTOH to be certain that the historical rate would work when valuation was outside the historical range doesn't seem prudent.

ataloss
not trusting anyone who claims to know the optimal future asset allocation or swr :wink:

ps: I thought Oliver made a good point on the hocus board that anyone who thought that the swr in 2000 was 2% could have just bought ibonds with a real return of 3.4 to 3.6% (and I think zero volatility.)

pps: are you interested in mean variance optimizers at all? It seems like a math sort of thing. IIRC, raddr has one and has used it extensivsely.
Have fun.

Ataloss
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