5 ms·

The counterexamples that have been brought up elsewhere on this post are Gold (still below 40 year high) and the Nikkei (still below 30 year high).

jjoonathan 7y ago
Also, the fact that the Nikkei's behavior is typically attributed, at least in part, to a demographic trend that's likely to hit the US within our lifetimes.
jfengel 7y ago
The Nikkei high was wildly artificial; its price-to-earnings ratio indicated that there was an enormous bubble. The US stock market is (probably) currently inflated, but by a factor closer to 2 (or less) than 10. (I've looked less into the price of gold, which has a weird place in people's minds and would require a lot more research than I've put into it.) It's entirely possible, of course, that the US is entering a long-term economic disaster of a kind it has been courting for decades: government borrowing, student loans, Baby Boomer retirement, etc. But US companies have been earning money, and in general that does justify the belief that they merit a stock price that's roughly where it is now; somewhat lower, but not radically different.
- phreeza 7y ago
  Could it be that the E part of the P/E Ratio is currently also significantly inflated? For the tech sector I could definitely see that happening due to the influx of VC money, causing unsustainable b2b spend on cloud&ads, which currently show up as earnings for FAANG but may quickly subside when VCs pull out?
  - jfengel 7y ago
    It's entirely possible. Earnings are historically high, and the Fed has been pumping money into the economy for over a decade. But it hasn't translated into higher consumer inflation, which has actually been below the Fed target. So the companies are earning money without raising prices, at least on the consumer basket of goods. FAANG, as you say, are B2B and don't show up as inflation. It's entirely believable that that's all fake money that will disappear from the market when the going gets tough. Whether it will come back... well, you probably don't want my complete unfocused brain dump which all comes down to "I dunno".
evanpw 7y ago
Gold is a single concentrated bet, not really comparable to a stock-market index, and the Nikkei shows why it's important to diversify outside of your home country. For almost everyone, "buy the global market portfolio and forget about it" is the right advice.
- phreeza 7y ago
  While I agree that this advice is better than picking stocks, something always rubs me the wrong way when it is repeated like it is an absolute fact. Like they say in the commercials, Past Performance Is No Guarantee of Future Results. I can't say what form it will take, but I can definitely see a future where the pendulum swings back from ever more indexification.
  - jfengel 7y ago
    I agree with you. I believe the biggest problem with indexification is that it encourages a generic flow of money into the market, regardless of whether the market can handle it or not. Although the market isn't just gambling, and there is real underlying value, it's not an infinite source of value to give returns to anybody buying into it. Eventually there can be too much money chasing too little corporate earnings, and the market gets overpriced. I don't think it's unreasonable for a person with spare cash to expect to get a reliable 5% or so long term just from the inevitable progress of technology. That may not continue forever, but if it ends, the problems will be bigger than just what index fund to purchase. The world will be a very different place. (Or the market could be, if people stop seeking to raise capital there, but that's also a very different future and hard to predict.)
    - evanpw 7y ago
      Every time you buy a stock, someone sold it to you, so flow of money into the market isn't something that's easy to define in a meaningful way. And even if a lot of the invested capital is passive (maybe half of the US stock market), almost none of the trading is, and that's what determines prices.
FabHK 7y ago
One thing to keep in mind is that the Nikkei 225 (like most indices except the German DAX) is a price index, and, (like the Dow) a mediocre one at that. A better index is the Topix, and that’s available in a total return (and net return) variant (that is, including dividends before (or net of) taxes)). A fairly low dividend yield would suffice to make the total return index exceed the 1990’s high by now. (It’s not trivial to find the data to confirm this for free.)

jjoonathan 7y ago

Also, the fact that the Nikkei's behavior is typically attributed, at least in part, to a demographic trend that's likely to hit the US within our lifetimes.

jfengel 7y ago

The Nikkei high was wildly artificial; its price-to-earnings ratio indicated that there was an enormous bubble. The US stock market is (probably) currently inflated, but by a factor closer to 2 (or less) than 10. (I've looked less into the price of gold, which has a weird place in people's minds and would require a lot more research than I've put into it.) It's entirely possible, of course, that the US is entering a long-term economic disaster of a kind it has been courting for decades: government borrowing, student loans, Baby Boomer retirement, etc. But US companies have been earning money, and in general that does justify the belief that they merit a stock price that's roughly where it is now; somewhat lower, but not radically different.

phreeza 7y ago
Could it be that the E part of the P/E Ratio is currently also significantly inflated? For the tech sector I could definitely see that happening due to the influx of VC money, causing unsustainable b2b spend on cloud&ads, which currently show up as earnings for FAANG but may quickly subside when VCs pull out?
- jfengel 7y ago
  It's entirely possible. Earnings are historically high, and the Fed has been pumping money into the economy for over a decade. But it hasn't translated into higher consumer inflation, which has actually been below the Fed target. So the companies are earning money without raising prices, at least on the consumer basket of goods. FAANG, as you say, are B2B and don't show up as inflation. It's entirely believable that that's all fake money that will disappear from the market when the going gets tough. Whether it will come back... well, you probably don't want my complete unfocused brain dump which all comes down to "I dunno".

evanpw 7y ago

Gold is a single concentrated bet, not really comparable to a stock-market index, and the Nikkei shows why it's important to diversify outside of your home country. For almost everyone, "buy the global market portfolio and forget about it" is the right advice.

phreeza 7y ago
While I agree that this advice is better than picking stocks, something always rubs me the wrong way when it is repeated like it is an absolute fact. Like they say in the commercials, Past Performance Is No Guarantee of Future Results. I can't say what form it will take, but I can definitely see a future where the pendulum swings back from ever more indexification.
- jfengel 7y ago
  I agree with you. I believe the biggest problem with indexification is that it encourages a generic flow of money into the market, regardless of whether the market can handle it or not. Although the market isn't just gambling, and there is real underlying value, it's not an infinite source of value to give returns to anybody buying into it. Eventually there can be too much money chasing too little corporate earnings, and the market gets overpriced. I don't think it's unreasonable for a person with spare cash to expect to get a reliable 5% or so long term just from the inevitable progress of technology. That may not continue forever, but if it ends, the problems will be bigger than just what index fund to purchase. The world will be a very different place. (Or the market could be, if people stop seeking to raise capital there, but that's also a very different future and hard to predict.)
  - evanpw 7y ago
    Every time you buy a stock, someone sold it to you, so flow of money into the market isn't something that's easy to define in a meaningful way. And even if a lot of the invested capital is passive (maybe half of the US stock market), almost none of the trading is, and that's what determines prices.

FabHK 7y ago

One thing to keep in mind is that the Nikkei 225 (like most indices except the German DAX) is a price index, and, (like the Dow) a mediocre one at that. A better index is the Topix, and that’s available in a total return (and net return) variant (that is, including dividends before (or net of) taxes)). A fairly low dividend yield would suffice to make the total return index exceed the 1990’s high by now. (It’s not trivial to find the data to confirm this for free.)