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- Manlobbi
Halls of Shrewd'm / US Policy
No. of Recommendations: 7
The result of the rise in valuations of large-growth stocks is that they are now trading well above historical averages. And the result of the decline in valuations of small-value stocks is that they are now trading well below historical valuations. This has important implications for future expected returns. Simply put, valuations are the best predictor we have of future returns, and the longer the investment horizon, the larger the role of valuations. However, over short horizons, such as one year, current valuations have virtually no predictive value.
The same divergence in performance in the US between large and small stocks and growth and value stocks has also occurred between US stocks and international stocks.
The fact that every single risk asset goes through such long periods of underperformance, and there is no evidence that investors can forecast when such regimes will change, is the reason we diversify the sources of risk in a portfolio—eliminating the risk that all our investments are in the wrong basket at the wrong time. The solution is to build a broadly diversified portfolio that includes unique sources of risk and stay the course.
https://www.morningstar.com/portfolios/large-growt...
No. of Recommendations: 1
"The same divergence in performance in the US between large and small stocks and growth and value stocks has also occurred between US stocks and international stocks."
from a first order thinking point of view this is statistically true. The question I have is why?
No. of Recommendations: 1
However, over short horizons, such as one year, current valuations have virtually no predictive value.
I often see this statement. So, I don't need to take any action over the next year to change to value as it is a coin toss on which group will perform better?? Or should I look back and see how long the variance from historical valuations has been in place. If it has been 5 to 8 tears or longer, then perhaps I should make the change later this year as we will be getting closer to a real change in the next 2 to 3 years?
It seems like the original statement has two conflicting actions - stay in large growth as it is a coin toss for the next years performance and large growth has been performing well lately,or go to small value because it has been trading below historical averages for a very long time.
Aussi
No. of Recommendations: 20
When puzzling about the market, I often think back to Keynes 1935 observations. CoPilot AI provides this nice summation:
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In Chapter 12 of his book, Keynes introduced the concept of the Keynesian beauty contest. He described an imaginary newspaper contest where participants are asked to choose the six most attractive faces from a hundred photographs.
The twist is that the prize goes to those who pick the faces that most participants would find beautiful, not necessarily the ones they personally find most attractive.
Investment Analogy:
Keynes believed that investors in the stock market behave similarly to participants in this beauty contest.
Instead of choosing stocks based on their fundamental value or personal preferences, investors try to predict what other investors will choose. The goal is not to pick the stocks they think are best but to anticipate what the average opinion of other investors will be.
Higher-Order Thinking:
Keynes went further, suggesting that this process can extend to higher-order reasoning. Investors may not only consider what they think others believe but also what others believe others believe, and so on. It becomes a complex game of predicting market behavior based on the reasoning of other rational agents1.
Implications for Investing:
In financial markets, this means that stock prices are influenced not only by fundamental value but also by collective expectations. Investors may buy stocks not because they believe in their intrinsic worth but because they expect others to buy them, driving up prices.
The market becomes a self-referential system where perception matters more than reality.
In summary, the Keynesian beauty contest analogy highlights the importance of understanding investor psychology, market sentiment, and the impact of collective expectations on stock prices.
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Over the years, unfortunately, I've learned that I'm poor at picking beauty contests. But often that's the only explanation of what's happening.
No. of Recommendations: 4
In financial markets, this means that stock prices are influenced not only by fundamental value but also by collective expectations. Investors may buy stocks not because they believe in their intrinsic worth but because they expect others to buy them, driving up prices.
nowhere is this more obvious than in the crypto markets. :>)
