Subject: Re: S&P500 valuations
Manlobbi,

You are one of my favorite all time posters on any message board and hate to disagree with you. But here it goes

1. You says sales increased by 3.8% and roughly matches inflation. So no real sales growth. The composition of the sales changed quite a bit. Grocery/department stores sales cannot be weighted the same as say iPhone, Google Ads, Amazon 2P sales, etc.

2. The same goes for profit margins.

3. You say much of the value was via dividends. Now a lot more is retured via stock buybacks even after accounting for options. Real EPS did not grow much in the past and Arnott I think calculated it at 0.7% per year. But now with buybacks this several multiples of that number.

4. 6.5% real returns were during a period of time when there are impossible for anyone to earn those kinds of returns. In the 1920s, 40s etc. there is no way anyone can buy a diversified portfolio of stocks at a low cost. They have to take a train and go to a brokerage and have to rely on financial data that is difficult to get, less disclosure, etc. Basically the cost to implement a diversified portfolio would have been more than 2% or so annually. So stocks did give 6.5% real but no one actually got them after considering costs. Now anyone can get market returns at near zero cost. So why should stocks still give 6.5% real returns?

5. Until the 1950s people thought stocks must have higher dividend yield than bonds because stocks are riskier. But they wised up as they realized that stocks dividends grow. Similarly people have realized the advantages of stocks and everyone and their dog knows that stocks are a primary building block of retirement portfolios. There is a huge industry that developed to educate, provide automatic workplace retirement plans, etc. Now I dont think people would need as much equity risk premium as in the past. Instead of 6.5% they might settle for 4%. So valuations can and should be higher than the past.