thanks, appreciate the comments and like you I read Hussman's musings to try and learn from the information while understanding that while valuations provide lots of information on expected future long term returns they literally are uncorrelated with near term returns and thus should not be used for timing, but to set long term capital return assumptions that help you decide on long term portfolio design
few things. First I wrote about an improvement to the CAPE 10 by using it with the companies that are in the S&P 500 TODAY where the current CAPE has companies that are no longer in the index.
Second, re intangibles, I agree not as strong but that can be addressed by using earnings adjusted for intangibles, putting them back on balance sheet. With that said, current earnings works close to the same as the CAPE 10 or the CAPE 5 or any other CAPE.
Annapolis, thanks for sharing. First I like Elm's work. Second, the approach in the article is basically the approach I have used and what led me to move to all small value in 2000 when TIPS yields were very high and the CAPE was very high but small value valuations were about historical average.
I always recommend investors compare equity expected return to TIPS, which is the true risk free investment for US investors, not tbills (which have some inflation risk, though not that much).
One question: do you think the CAPE 10's predictive power has degraded with the shift toward intangible assets? Feels like comparing P/E across eras gets less reliable every decade.
good question. First, you improve the CAPE 10 by changing the makeup to look back at the earnings of ONLY the companies now in the S&P 500, the Shiller CAPE doesn’t change prior years earnings when constituents change. That moves the correlation from about .40 to .50.
Second, seems logical to adjust for intangibles now that economy is much intangible capital. Question is how best to do it, putting the R&D and others back on the balance sheet and depreciating it is what some do.
Lastly note that the current earnings is not quite as good a predictor but not that far off.
I would never challenge the brilliance of our friend Larry. Everything he publishes is data driven. We, as skilled mathematicians call it "proof." Larry is a "genius." I know his IQ and SAT scores!
My only remark is supplemental. It relates to the comment related to 'CAPE' ( or use P-CAPE). My thought comes from my often times simplistic training in (symbolic) logic. Another use of "proof."
When you buy matters. I don't have time here, but there is adequate "proof" that this kind of "market timing", depending on what may be the comparative use of the funds, can succeed. Especially in very long cycles. Or as dad used to say: "More than one way to skin a horse."
Too many narratives ( not Larry's) give blanket advice, maybe for good reason, to folks who hear "timing" and rush to the conclusion that it is fast, loose and reckless. Waiting for the "next bus"(my view of equities and a general class now) can be an excellent strategy too). It's mine.
I would point all to the work on another friend, John Hussmann, for tons of research and data that one may find useful, to draw your own conclusions. My purpose here is not to be drawn into any debate or promote anything. I am not in the financial "industry."
A shameless plug would be for me to advise everyone to read all ( even if redundant) of Larry's books. You'll be better for it. I have.
You provided and I read long ago. Like you, I don't see this ( nor yours) as "advice." Rather, facts that allows one to make informed decisions based upon your own goals. Broadly I don't read Hussman to get a "forecast." Even if he makes some decisions that way ( he runs funds), he publishes a boatload on data ( like you) and it and anyone can avail themselves of it.
Personally, I'm a more of a "follower" of the Keynes' prognostication: 'In the long run, we'll all be dead. LOL.
Thanks for all you do for educating the public. You are a treasure.
thanks, appreciate the comments and like you I read Hussman's musings to try and learn from the information while understanding that while valuations provide lots of information on expected future long term returns they literally are uncorrelated with near term returns and thus should not be used for timing, but to set long term capital return assumptions that help you decide on long term portfolio design
Best wishes
Larry
few things. First I wrote about an improvement to the CAPE 10 by using it with the companies that are in the S&P 500 TODAY where the current CAPE has companies that are no longer in the index.
Second, re intangibles, I agree not as strong but that can be addressed by using earnings adjusted for intangibles, putting them back on balance sheet. With that said, current earnings works close to the same as the CAPE 10 or the CAPE 5 or any other CAPE.
Hope that helps
Annapolis, thanks for sharing. First I like Elm's work. Second, the approach in the article is basically the approach I have used and what led me to move to all small value in 2000 when TIPS yields were very high and the CAPE was very high but small value valuations were about historical average.
I always recommend investors compare equity expected return to TIPS, which is the true risk free investment for US investors, not tbills (which have some inflation risk, though not that much).
Best wishes
Larry
One question: do you think the CAPE 10's predictive power has degraded with the shift toward intangible assets? Feels like comparing P/E across eras gets less reliable every decade.
good question. First, you improve the CAPE 10 by changing the makeup to look back at the earnings of ONLY the companies now in the S&P 500, the Shiller CAPE doesn’t change prior years earnings when constituents change. That moves the correlation from about .40 to .50.
Second, seems logical to adjust for intangibles now that economy is much intangible capital. Question is how best to do it, putting the R&D and others back on the balance sheet and depreciating it is what some do.
Lastly note that the current earnings is not quite as good a predictor but not that far off.
Thanks, great article!
More to ponder. I have spoken with Victor on several occasions but have no financial interest in Elm.
https://elmwealth.com/earnings-yield-dynamic-allocation/?utm_campaign=28894384-2025%20Always%20On%20Marketing&utm_medium=email&_hsenc=p2ANqtz-_vHx11Px6WKL59A4wl8GeCPAThhZmY8RjI2O68YKHPuv8otZP-Rn9z2PMhx4nF6FyNesgx9dTuQLTBQ3g6PZfNLHX64A&_hsmi=397703686&utm_content=397703686&utm_source=hs_email
I would never challenge the brilliance of our friend Larry. Everything he publishes is data driven. We, as skilled mathematicians call it "proof." Larry is a "genius." I know his IQ and SAT scores!
My only remark is supplemental. It relates to the comment related to 'CAPE' ( or use P-CAPE). My thought comes from my often times simplistic training in (symbolic) logic. Another use of "proof."
When you buy matters. I don't have time here, but there is adequate "proof" that this kind of "market timing", depending on what may be the comparative use of the funds, can succeed. Especially in very long cycles. Or as dad used to say: "More than one way to skin a horse."
Too many narratives ( not Larry's) give blanket advice, maybe for good reason, to folks who hear "timing" and rush to the conclusion that it is fast, loose and reckless. Waiting for the "next bus"(my view of equities and a general class now) can be an excellent strategy too). It's mine.
I would point all to the work on another friend, John Hussmann, for tons of research and data that one may find useful, to draw your own conclusions. My purpose here is not to be drawn into any debate or promote anything. I am not in the financial "industry."
A shameless plug would be for me to advise everyone to read all ( even if redundant) of Larry's books. You'll be better for it. I have.
Glad you enjoyed my musings.
Re Hussman and market timing, I've written more than once about his forecasts and whether investors should take his advice. Here's one example, hope you find it helpful https://www.etf.com/sections/index-investor-corner/swedroe-why-care-what-hussman-forecasts
Best wishes
Larry
You provided and I read long ago. Like you, I don't see this ( nor yours) as "advice." Rather, facts that allows one to make informed decisions based upon your own goals. Broadly I don't read Hussman to get a "forecast." Even if he makes some decisions that way ( he runs funds), he publishes a boatload on data ( like you) and it and anyone can avail themselves of it.
Personally, I'm a more of a "follower" of the Keynes' prognostication: 'In the long run, we'll all be dead. LOL.
Thanks for all you do for educating the public. You are a treasure.