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> lofty valuations This is the correct answer. Enormous equity bubble over a decade in the making. There is precisely zero justification for buying index funds

> lofty valuations This is the correct answer. Enormous equity bubble over a decade in the making. There is precisely zero justification for buying index funds at a Shiller PE over 30, yet that's exactly what every price-insensitive investor on the planet, including the SNB, has been doing for years, now. Every bubble eventually finds a pin. Looks like we finally found one.

shoo 7y ago
Assuming Schiller PE is another name for cyclically adjusted PE, i.e. mean over t in {the last 10 years until now} of PricePerShare(now)/EarningsPerShare(t) Some stocks for individual companies can have a Schiller PE of over 30, or worse, a negative Schiller PE because on average they've made a negative net profit over the last 10 years, and still be undervalued from a fundamental perspective based on net present value of estimated future net profits. E.g. young business with strong maintainable revenue growth in industry with high fixed costs that needs to increase revenue by another 15% before net earnings become positive for the first time. CAPE is a useful metric but it does not differentiate between a mature company in a downward long term trend versus a young company working toward profitability. Of course, I completely agree that some stocks with a CAPE of over 30 are overvalued, but that depends on what you believe the fundamental valuation of the particular company in question to be. I also completely agree that expected returns on invested equity should be relatively low compared to historical returns when buying into an index that is highly priced from a CAPE perspective. Interest rates are low, there's a lot of cash looking for a good investment relative to the number of good investments. Expected returns for investments in equity have been relatively low, compared to historical returns, but what else are you going to do with money to invest right now? Invest it in bonds? Keep it in cash and wait? If hypothetically the average investor gets irrationally spooked or rationally concerned about price momentum if of their investment time horizon is very short - and move to withdraw e.g. 10% of their stock investments - we should expect to see a large drop in stock market prices in the short term and a corresponding increase in expected yield of stocks as an asset class .

shoo 7y ago

Assuming Schiller PE is another name for cyclically adjusted PE, i.e. mean over t in {the last 10 years until now} of PricePerShare(now)/EarningsPerShare(t) Some stocks for individual companies can have a Schiller PE of over 30, or worse, a negative Schiller PE because on average they've made a negative net profit over the last 10 years, and still be undervalued from a fundamental perspective based on net present value of estimated future net profits. E.g. young business with strong maintainable revenue growth in industry with high fixed costs that needs to increase revenue by another 15% before net earnings become positive for the first time. CAPE is a useful metric but it does not differentiate between a mature company in a downward long term trend versus a young company working toward profitability. Of course, I completely agree that some stocks with a CAPE of over 30 are overvalued, but that depends on what you believe the fundamental valuation of the particular company in question to be. I also completely agree that expected returns on invested equity should be relatively low compared to historical returns when buying into an index that is highly priced from a CAPE perspective. Interest rates are low, there's a lot of cash looking for a good investment relative to the number of good investments. Expected returns for investments in equity have been relatively low, compared to historical returns, but what else are you going to do with money to invest right now? Invest it in bonds? Keep it in cash and wait? If hypothetically the average investor gets irrationally spooked or rationally concerned about price momentum if of their investment time horizon is very short - and move to withdraw e.g. 10% of their stock investments - we should expect to see a large drop in stock market prices in the short term and a corresponding increase in expected yield of stocks as an asset class .