Subject: Re: Just to be provocative
I guess I'm not the only pessimist on the message board, and your opinion is, justifiably, much more highly valued (pun intended) than mine.
Just a reminder that high valuation levels tend not to last : )


Berkshire's P/B is maybe 12% or so above fair value, while the S&P's P/E is more like 45% above fair value.

I agree with the general conclusion, but I warn folks to doubt the notion that the S&P 500's average valuation level in any given period is a good guide to its fair value or average future level. (it seems to work better for Berkshire). For a simple reason: Even if you pick a 30 year stretch, you get wildly different numbers for the "normal" level of US equities depending on the date range. I have almost no idea what the average valuation level will be for US equities in the next 20 years.

You can still try to estimate what sort of forward return seems plausible, and decide whether or not that is sufficient for you. That's because we know what current profits are, and how much we're paying for them. In very round numbers, you might expect a forward real total return equal to the sum of (1) the dividend yield on purchase date (1.41%), plus (2) the rate of growth in the market value of the equities. Over time the latter is going to be the growth of real value, which tracks real growth of profits, which tracks real growth of sales, which can be approximated with real US GDP growth (2.2%/year since the mid 1990s).
Plus the one time adjustment wildcards (3a): the annualized impact of the one time change in valuation multiples during your holding period, and (3b) given recent extremes, any one-time impact from a change in the "normal" level of net profit margins.

The margin question is hard to predict, but you can look at this chart and eyeball what level you think would be "normal" in future, and how that differs from the latest figure, which gives you the size of the one-time change to expect. https://fred.stlouisfed.org/gr...
There is a big correlation between US corporate net profit margins and federal government deficits, for pretty good macroeconomic reasons. So if you have an opinion on the trajectory of future deficits, you can feed that into your expectation of how much net margin mean reversion to expect.

Jim