I see... the CAPE is wrong AND the Ph.D's that backtested the CAPE at Vanguard are ALWAYS wrong... oh wait, but wouldn't your argument than make the CAPE right (since their argument was that the CAPE was not a predictor in the short term)?pmward wrote: ↑Mon Apr 06, 2020 8:17 pmI do not have any "PhD studies", and I personally do not care about these things as academics are always getting these things wrong. A PhD means absolutely nothing in the markets. Case in point, look at the famous Fama-French studies. They pretty much called the top on the "value premium" as soon as they published their research. The value factor has substantially underperformed for 18 years straight now. Small caps have also been much weaker, especially in the last 10 years. I would take these research studies with a grain of salt. Pretty much everyone who ever took Fama-French seriously has lost. CAPE metrics have been better for international than U.S. for over 10 years now, and the "undervalued" international stocks seem just find new ways to become more "undervalued". There are much better ways to be tactical than using valuation metrics.CJ043332 wrote: ↑Mon Apr 06, 2020 8:05 pmA 2012 research study funded by Vanguard authored by Joseph Davis, Ph.D., Roger Aliaga-Diaz, Ph.D., and Charles J. Thomas, CFA appear to have concluded something quite differently. They did an analysis of several popular metrics and back-tested their predictability.pmward wrote: ↑Mon Apr 06, 2020 7:10 pmCAPE has 0 predictability when it comes to timing. Like I said, valuation premiums are a multi-decade kind of thing. Most investors do not go multiple decades without tinkering with their portfolio. I see no reason for a long term investor to skew their portfolio up or down based on CAPE. If someone wants a tactical portfolio allocation then it should be based using more technical or quantitative measures. Otherwise, it's probably best to just pick the portfolio allocation and rebalance over time, letting the rebalancing help you buy low and sell high.CJ043332 wrote: ↑Mon Apr 06, 2020 7:05 pmpmward wrote: ↑Mon Apr 06, 2020 6:51 pmThe problem, as it always is with valuation based investing, is that the market can stay irrational longer than you can stay solvent. There is also the problem of "overpriced", "underpriced", and "fairly priced" being completely arbitrary. Over the years I have seen the "fairly priced" marker get quoted over a wide range of numbers. Picking one fundamental metric is arbitrary, and all fundamental metrics are relative. They also place no emphasis on timing at all. I mean Warren Buffet has underperformed the S&P 500 for what... 17 years now? Can you really handle that kind of underperformance? Is that even acceptable? Every fund manager alive would be fired for that kind of performance, yet WB is still looked at as a hero/genius/etc. If someone wants to be tactical in their allocations then they need some kind of a technical or quantitative basis behind it. Otherwise, people are just going to wind up juggling their portfolio based purely on feelings, and that tends to get people in to trouble. I would just be careful with trying to time the market based on your perception of what the market valuation is. Valuations tend to only really matter over very long multi-decade time frames. You're likely to get chopped up and capitulate long before you reap any valuation premium.CJ043332 wrote: ↑Mon Apr 06, 2020 6:28 pmHere is a very rough example:
25% S&P 500
25% Long Term Treasuries
Fairly priced market:
20% S&P 500
12.5% Small Cap Value
22.5% Long Term Treasuries
25% Small Cap Value
15% S&P 500
20% Long Term Treasuries
You can see that the allocations adjust based on how "cheap" the overall stock market it. As it heats up, more automatically gets allocated to the other asset classes as insurance since the risk is higher. Nobody knows for sure what will happen... but that doesn't mean that statistically the predictability is at zero either.
Any long term investor that invests in a PP or GB would needs to be able to stomach under-performance. Besides, at 40% equities it is unlikely you will go insolvent.
Furthermore, the CAPE was not chosen by random. A study by Vanguard showed that P/E 10 and PE/1 were basically the only metrics that amounted to anything. As stated above,
Are you attempting to state:Shiller CAPE doesn't have a very strong predictability over a 10 year period... but it isn't exactly a very weak predictability either.
1. CAPE literally has a 0% predictability rate.
2. CAPE has some predictability rate, however that rate should be disregarded entirely for investing purposes even in the smallest of ways.
Do you have any research studies to support your claim of zero predictability over a 10 year period for CAPE?
Now, is there a chance that those Ph.D.'s got it wrong? Sure. Is it also possible that a GB is a worse allocation than a PP? Sure. Worst case scenario you end up with basically a PP or a GB. Back where you started.
What if they are right?
If I play roulette and 40% of the numbers are red and 60% are black (no green on this imaginary wheel)... my investment allocation should not be 50/50. Granted, if I was playing only 1 hand (i.e. a 1 year investment time-frame), I would be crazy to make a huge bet. But the longer you play, the more the true odds have a real impact. If you want to have the highest chance of breaking even over a long horizon (i.e. over a 10 year period), you better be sure you have a 40% red and 60% black allocation.
I would also point out that it appears that the vast majority of Permanent Portfolio investors have in fact adjusted their asset allocations to a GB allocation as equities (over the past 10 years) have become more expensive based on CAPE. Surely, you must see the irony in that.
I kid, but seriously...
TLDR, "You have no real evidence to support your claim of 0% predictability of CAPE, and dislike people with PhDs."
No judgement... I have no PhD, so I am not offended.