Subject: Re: Seth Klarman on CNBC The second person would have been 28% better off waiting for 14.2 years before investing and starting the DCA process... ... Are you seriously telling young people in their wealth-building years to wait 14 years before adding to an index fund?
I'm seriously suggesting that EVERYONE should look at the price of what they're buying, investments or hamburgers. If they're going to go ahead and buy anyway, which is fine by me, they should have appropriately modest expectations of what they're getting in return. And modest expectations for investment systems which look good in long bull markets.
Markets are very high. Each time that happens, all discussions of checking the price are dismissed as a waste of time, because it's obvious that markets can only go up. DCA seems like a brilliant can't-lose strategy once again. Then markets go down, and people change their views for a few years, then it all repeats. It was ever thus.
Humans always have the tendency of seeing the current situation as the normal or typical situation. The S&P 500 is at 4505 at the moment. Yet if valuation levels were the same as in summer of '82, the S&P would be at 887 right now adjusted for inflation. That's definitely not a prediction of what will happen and not my expectation, but it's a nice reminder of what CAN happen. Sometimes things are very cheap. Sometimes they are very expensive. If the valuation level today were the same as at the 2007 credit bubble peak, the S&P would be at 4064 right now adjusted for inflation, 10% lower.
Today's S&P 500 valuation level is very similar to that of mid 1997, six months after the famous "irrational exuberance" speech, which an optimist could see as bullish if looking forward three years. Though a pessimist might view it more darkly, as there was zero net real total return from the S&P 500 in the next 12 years.
So what's a not-crazy expectation? Since 1995, a purchase of the S&P 500 at this valuation level has been consistent with a seven-year-forward real total return of about inflation + 1.9%/year. (for comparison the 7 year TIPS yield is inflation + 1.638%, which is entirely certain to the extent that the US dollar doesn't tank)
This valuation level is based on the current level of smoothed real earnings, which is based on the large upsweep of earnings as net margins have soared in the last few years. If net profit margins slide back towards their prior normal or high levels, the current value estimate would turn out to have been an overestimate and the likely forward returns correspondingly lower. Phrased another way, US corporate profits have gone up way more than sales lately, so a sales-based value metric would give a very much lower expectation of forward returns.
Invested in Became profitable =========== ========= Jan. 2000 6 years 10m Mar. 2001 1 year 6m Sep. 2001 2 years 1m Mar. 2002 1 year 2m June 2002 6m
FWIW, dollars invested in the S&P 500 at the March 2000 peak had a negative real total return until May 8 2013, 13.13 years later. Half a typical investing career, give or take. For comparison, ten year TIPS yields in March 2000 were roughly inflation + 3.9%.
One can buy the broad market all the time, but one should then also be aware that at times of high valuation there is no particular prospect for an increase in wealth from the current purchase.
My point is merely that the DCA strategy can give very good results or very poor results, depending on the era it is started. Somebody starting in (say) 1962 would have been better off with zero-real-return cash savings even 20 years later. Though the world has changed a lot, based on earning power the broad US market is 85% more expensive today than it was in 1962.
And the times that DCA seems like the smartest idea are often the worst times to actually do it, as they are the times that markets have had a very strong recent stretch. Never mistake the cycle for the trend.
Valuations do matter. In November 1999 Mr Buffett wrote that famous Fortune article about how the next 17 years wouldn't be anything like the prior 17. His guess of real total returns for the next 17 years was around 4%/year (first paragraph on final page). The actual result was 2.5%/year. It was less than 4.0%/year for all ending dates till roughly the 20th anniversary in late 2019. (the real result for Berkshire stock for the 17 years starting from that article was 6.42%/year) On the lighter side, the broad US market isn't quite as expensive as it as when that article was written in 1999. And Berkshire stock isn't expensive at all.