No. of Recommendations: 23
I'm impressed that smart people like you, who really should know better, can calculate the degree of "overvaluation" to this level of precision.
Now now, no need to get upset. I haven't said that the market was that overvalued, let alone that the number I mentioned is the right one. I'm merely pointing out that IF (and to the extent) one thinks those assumptions are valid, that is the conclusion the numbers imply. It's just information. Information per se has no agenda. I thought they were numbers that more people should be aware of; being better informed makes one a better investor.
I don't intend to make people depressed, but it's true that numbers can do that to a person. Valuation levels go up sometimes, and they go down sometimes. Sometimes mean reversion makes more sense as a baseline assumption than extrapolation does. In 1999 a survey of investors showed that the plurality expected the market to return 20%/year: they were in the second group and should have been in the first group. Cheery or not, it's better to be aware that things have become very expensive compared to historical and recent norms, rather than being blind to the fact and expecting to see the prices rise to the sky forevermore. Nobody likes an unpleasant surprise.
In the long run, a Boglehead's long run real total return is going to be reasonably approximated by real GDP growth during that investing career plus the dividend yield the day they buy. (Plus or minus a one time change in valuation levels--it's most reasonable to expect a move in the direction of "normal", whatever you estimate that to be). Those numbers don't add up to the sort of returns that have been seen from the broad US market lately, so expecting more of the same well into the future probably isn't wise. What the wise man does at the beginning, the fool does in the end.
On a cheerier note---
I personally think the line of reasoning using price/sales is towards the bearish end of possible analysis, since (for example) the large growth in industry concentration of US corporations in dozens of industries has caused typical pricing power to rise and typical net profit margins have risen, at least for now. Consequently there is a good case that we've seen a one time step change upwards in the value of a given dollar of sales, if you will.
Again, that happy result for capitalists ought not to be extrapolated. And it doesn't change things THAT much. Any grounded analysis of what the broad US market valuations are will say the same thing, to varying extents: things are a whole lot more expensive these days than they used to be, and even a lot more expensive than they have been on average in this richly priced century so far. Even if valuation levels stay this high forever, certainly not something I would count on, returns would necessarily be low. Each dollar invested is getting a much smaller pile of future dividends and earnings than it used to--those are the things that produce the value that produces the returns.
Last couple of decades? If your investing thesis has been wrong for 20 years, it's time to change your investing thesis.
Sorry, I don't get your comment at all. Wha?
Tautologically, the average valuation measures in the last 20 years that I cited have been typical in that period: though they could not have been known in advance, they would have been the perfect foundation for one's investing thesis. I have been extremely fortunate with my own returns in the last 20 years, but that's in large part because I never buy something that is plainly overvalued relative to any reasonable expectation of its forward returns. I wouldn't touch SPY with a barge pole at these levels.
Jim
