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I've asked this question many times in many different formats and have never gotten a satisfactory response that's grounded in fundamentals. I think it ultimat

I've asked this question many times in many different formats and have never gotten a satisfactory response that's grounded in fundamentals. I think it ultimately comes down to people trusting history to repeat itself.

adrianN 8y ago
How would an answer based on fundamentals even look like? Nobody can predict the future.
- smallgovt 8y ago
  We can't predict the future with certainty, but we can certainly build models. I'm basically saying I'd like a somewhat bottoms up approach to modelling the S&P index where the inputs can explain the x% YoY increase in price.
- JumpCrisscross 8y ago
  > How would an answer based on fundamentals even look like? Start with demographics. Layer on productivity growth and you have a first-order approximation of national productivity. Figure gross margins and from that net margins, as well as average corporate tax rates–boom, you have the economy's profitability. Estimate a pay-out rate and you get a high-level return estimate. It's very approximate, but it's theoretically solid for any closed economic system. (Cf: natural resource inputs are not properly accounted for.)
  - toomuchtodo 8y ago
    How would you account for central bank actions?
  - smallgovt 8y ago
    Let's say you do this exercise and arrive at a discounted cash flow model that accurately predicts a 5-10% YoY appreciation in value for the S&P index. How do you explain why this appreciation in value isn't arbitraged away, as suggested by GP? In his words, "if 9.7% long-term returns were guaranteed, wouldn't everyone just borrow 30-year loans on margin at 5% interest rate and invest it in S&P?" This would effectively drive up the current day price and eliminate any projected future growth in index price -- invalidating the hypothesis that the S&P price will continue growing in the future.
    - omarchowdhury 8y ago
      It's not arbitraged away because it's not guaranteed.

adrianN 8y ago

How would an answer based on fundamentals even look like? Nobody can predict the future.

smallgovt 8y ago
We can't predict the future with certainty, but we can certainly build models. I'm basically saying I'd like a somewhat bottoms up approach to modelling the S&P index where the inputs can explain the x% YoY increase in price.
JumpCrisscross 8y ago
> How would an answer based on fundamentals even look like? Start with demographics. Layer on productivity growth and you have a first-order approximation of national productivity. Figure gross margins and from that net margins, as well as average corporate tax rates–boom, you have the economy's profitability. Estimate a pay-out rate and you get a high-level return estimate. It's very approximate, but it's theoretically solid for any closed economic system. (Cf: natural resource inputs are not properly accounted for.)
- toomuchtodo 8y ago
  How would you account for central bank actions?
- smallgovt 8y ago
  Let's say you do this exercise and arrive at a discounted cash flow model that accurately predicts a 5-10% YoY appreciation in value for the S&P index. How do you explain why this appreciation in value isn't arbitraged away, as suggested by GP? In his words, "if 9.7% long-term returns were guaranteed, wouldn't everyone just borrow 30-year loans on margin at 5% interest rate and invest it in S&P?" This would effectively drive up the current day price and eliminate any projected future growth in index price -- invalidating the hypothesis that the S&P price will continue growing in the future.
  - omarchowdhury 8y ago
    It's not arbitraged away because it's not guaranteed.