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Howard Marks writing in the FT today.

Is the US stock market in bubble territory?
Valuations might be frothy but don’t seem nutty

https://on.ft.com/4g4AUdz

Here's his corresponding memo: https://www.oaktreecapital.com/insights/memo/on-bu...

That chart at the end is quite illustrative.

The graph, from J.P. Morgan Asset Management, has a square for each month from 1988 through late 2024 [he means 2014], meaning there are just short of 324 monthly observations (27 years x 12). Each square shows the forward p/e ratio on the S&P 500 at the time and the annualized return over the subsequent ten years. The graph gives rise to some important observations:

There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.

Today’s p/e ratio is clearly well into the top decile of observations.

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%.

Ah, but this time it's different.

There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.

I might be looking at this wrong, but doesn't this stand to simple reason without even looking at any actual numbers? Let's say there's an expected long-term return, call it 10% for ease of this illustration. If you look at windowed periods (of 10 years, or 20, or whatever) and the first portion of the period has averaged higher than 10%, then doesn't it stand to reason that the probability is that the remainder of the period might be under 10% at some point to roughly keep within that average expected return over the long period?

Furthermore, if this were NOT the case, if a higher than expected average happened near the start of a period, and the future returns DO NOT go lower to maintain that long term average. Then wouldn't it cause two things:
1. The long term average increases and the premise was incorrect.
2. Possibly, to maintain that status forever, the returns keep going up and up with time. (but I haven't thought through this part)

At one end of the ‘Magnificent 7’, you have Microsoft, which perhaps deserves its rating. At the other end you have an industrial, heavy capex, metal bashing core business, with internet bubble imagination type ventures bolted on, which is giving rise to, call it 95% of it’s market capitalisation. In between, you have a mix of things with varying degrees of questionable multi decade sustainability. A few have societal effects that might not be tolerated forever but may well be, or may be taxed harder. Who knows. AI will certainly make the world more efficient and many of these Mag 7 companies will try to monetise that. And other companies will emerge but they could be acquired by Mag 7 companies.

Add a sprinkle of crypto dust mania and central banks and governments injecting the patient with bigger and bigger doses of medication.

Then throw in some inflationary policies and higher interest rates, it’s certainly not hard to imagine the house part is in full swing. We will see what happens.

Buffett said Noah isn’t famous for predicting the rain. He was famous for building the boat. His own actions, at Berkshire, in the last year suggest some caution is warranted. Over a third of its market capitalisation in cash. 75% of Apple sold.

Buffett has said in the past that he reads everything written by Howard Marks. Howard Marks’ son recently commented that his father made very few market calls but they were all right, because he only made them when things were extreme.

You can read the Howard Marks comments and interpret in different ways. On the one hand he sets out the dynamics of a bubble and factors in the current set up that fit. On the other hand, he says valuations don’t seem nutty.

At the end of the full memo and podcast which I listened too, he said something that perhaps points to what he really thinks. He says he is no expert on technology companies. He refers to a JP Morgan that presents the historical correlation between high multiples and lower future returns. He then says he “is just setting out the facts for readers to ponder, just as he did twenty five years ago”.

Twenty five years ago was a market call and this is another one.

In 2000, Howard acknowledges he was correct in calling out the irrational valuations of the dot coms but lucky in how quickly he was to be confirmed correct.

In any bubble, there is always the possibility it gets way bigger, like Japan did. The pro business administration might make that more likely, or there could be major stumbles from unconventional government actions.

The quality of Microsoft and Apple muddy the bubble thesis.

If there is a crash, the timing is of course impossible to predict.

Will Howard Marks be correct and what should I do about it now. Tesla puts seem like a nice addition to my anti fragile portfolio from where I’m sitting.

The quality of Microsoft and Apple muddy the bubble thesis.

Great post as usual EVBigMacMeal. I have much the same overall conclusion and sentiment as you have expressed. I wrote specifically about the very high margins (S&P500) on the Index Investing board recently, and essentially concluded that they are likely to remain higher than 20th C because of the political/technological structures rooted in place now, and not going away, that differ to the period when the large caps forms with largely resources and industrial manufacturing.

It is not specifically the individual dominant tech firms now that produce these high margins (thinking from the frame of selecting individual stocks) but the capacity for winner-takes all effects (which can spread from one firm to another, but collectively comprising a large portion of the S&P500) with wide moat and low cost characteristics of software infrastructure.

https://www.shrewdm.com/MB?pid=734282476

- Manlobbi

The quality of Microsoft and Apple are obvious. I would still be willing to wager, but won't live long enough to settle it up, that both will at some point underperform the market for "the next 20-30 years" and/or give little to no return for a decade or two...or three.

Valuation isn't just a price-to-earnings ratio, it is a portion of the total economy that is or is not sustainable. Things change, too many brilliant minds with moats and society's limits of winner-take-all have historical presence that will repeat. All the surety of the hyper-scalers of this era is simply of this era. The next era will be different.

In 1994 my business merged with AJ Gallagher and my life completely changed in that I finally had the opportunity to add to my investments (which I had inherited in a trust and kept- including Berk). I bought all the insurance brokers but mainly Poe and Brown which is now Brown and Brown. I have over 100 times my investment Brown and nearly that counting div's with AJG. These are "scalers" too and they are thriving today. So...

...this "thriving" will come to an end at some point, count on it. Something will interrupt it, somehow and some way. I read over time those that are quite sure of this and that sustaining, then time passes and nothing is heard. A new thing come and a new belief with it.

Life is great if you can stand it.

Tesla puts seem like a nice addition to my anti fragile portfolio from where I’m sitting.

I bought Jan 2027 290 TSLA puts. As with any short bet, the question is when to pull the plug. I plan to sell half if/when TSLA falls to my strike. Otherwise I'll close NLT Jan 2026 to preserve most of the time value.

I posted a link to the Howard Marks memo at Bogleheads, with this quote:

The graph, from J.P. Morgan Asset Management, has a square for each month from 1988 through late 2014, meaning there are just short of 324 monthly observations (27 years x 12). Each square shows the forward p/e ratio on the S&P 500 at the time and the annualized return over the subsequent ten years. The graph gives rise to some important observations:

There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.

Today’s p/e ratio is clearly well into the top decile of observations.

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%..

I thought a lot of S&P500 index fund investors might find it interesting. The thread was closed by the moderator as being a "Non-actionable (Trolling) Topic" after a few responses, mainly positive.

Interestingly, a thread posted by RationalWalk titled "Shiller PE now near 39 - 2nd highest ever" ran to 21 pages and is still open.

https://www.bogleheads.org/forum/viewtopic.php?t=4...

Must be me ;-)

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%..
...
The thread was closed by the moderator as being a "Non-actionable (Trolling) Topic" after a few responses, mainly positive.

Aww, maybe it just wasn't phrased in a way that was too vague or not sufficiently actionable?
The post should have said "If you are not satisfied with a total return of 2%/year or less, you should now sell all of your S&P 500 holdings".
: )


I calculated the average US trend real earnings yield for each of the 108 calendar years 1917 to 2024 inclusive. (effectively the inverse of CAPE, just with a slightly different smoothing method for the real earnings history)
I took the average of the ten highest yearly numbers from that set to get a feel for what "really high valuations" might look like.
The current reading is about 10% above that.

FWIW the ten highest years of average valuation level in calendar order were 1997-2001 inclusive, 2019-2022 inclusive, and 2024. You have to get down to rank 25 before you get a year before 1996.

OK, let's say it truly is different this time. Figures before the 1990s are irrelevant to the modern world.
So, looking at the same data a different way: the average trend earnings yield since X years ago is almost the same for any X you choose in the range 15-35 years (plus or minus only 0.1%). Could be 2010 to date, could be 1990 to date, or anything in between.
Today's S&P 500 valuation level corresponds to being 45% more expensive than any one of those averages based on smoothed real earnings. Much higher in terms of average price-to-sales, but ignore that.

That's not a prediction of a market crash, but one should expect low broad market returns starting from such high prices for the same old set of future earnings, even if valuation levels stay this high on average in future (which I doubt, personally)

Jim

the average US trend real earnings yield .... Today's S&P 500 valuation level corresponds to being 45% more expensive than any one of those averages

How much is a $ of earnings worth now, how much was it worth then? Lower interest rates justify higher stock multiples than higher interest rates. Until not too long ago we had historically low interest rates, justifying comparatively high multiples. Only right now valuations look high when taking this all-important factor into account.

As comparisons that do not take that into account is like "comparing apples with pears" (the original German saying for your "comparing apples with oranges"): Shouldn't comparing "today" with "then" limit the "then" to years with comparable interest rates?

AdrianC wrote:

I thought a lot of S&P500 index fund investors might find it interesting. The thread was closed by the moderator as being a "Non-actionable (Trolling) Topic" after a few responses, mainly positive.

Wow. I am shocked. I have always had a high regard for the Bogleheads, especially their very useful spreadsheet of annual index returns.

--

My general question is this: where were these issues two years ago? That's not meant to be an aggressive or rhetorical question. I really am interested, and am not sure I know. My (imperfect) memory causes me to think that discussion then sounded pretty similar. But since then the market has risen ~50%. Does believing in the current bubble mean believing that that entire gain will be given back? If it is, will we not simply be back to where we were two years ago, when the market was already widely judged to be overvalued?

The phrase "it's different this time" is often used ironically to highlight the naďveté of undue optimism. Does it not apply on the other side as well: why is it "this time" that the future really will turn out to be bleak?

One reason I am so concerned is that this time I am far more inclined to believe in the on-rushing bear. But my reasons have nothing to do with the stock market, and if I there is one thing I have always tried to avoid, it is making investment decisions based on my own good judgment.

Baltassar

Wow. I am shocked. I have always had a high regard for the Bogleheads, especially their very useful spreadsheet of annual index returns.

I used the title of Marks' memo in the BH thread title...I expect the moderator does not like the words "Bubble Watch". Whatever :-)

How much is a $ of earnings worth now, how much was it worth then? Lower interest rates justify higher stock multiples than higher interest rates. Until not too long ago we had historically low interest rates, justifying comparatively high multiples. Only right now valuations look high when taking this all-important factor into account. ...
Shouldn't comparing "today" with "then" limit the "then" to years with comparable interest rates?

Nope. Not if you're interested in future stock returns, as I am.

I think there is a very important distinction to make.

Lower prevailing interest rates explain higher stock multiples. It's what historically happens, so that generally seems to be the reason it happens.

But lower interest rates don't justify higher stock multiples. The future earnings of those equities, and consequently the medium-to-long run returns you can expect from them, are unchanged. So a higher price just means a lower future return. The stocks aren't worth any more than they were at higher interest rates*.

That's solid theoretically, and solid empirically: stock returns from purchases made when interest rates are low and valuations are high are invariably poor. It's the starting valuation multiple on the stocks that determines the future returns, not the prevailing nominal interest rates at the time of purchase.

This old paper sets it out very succinctly.
https://www.aqr.com/Insights/Research/Journal-Arti...

One snippet:
"A simple analogy might be helpful. Say you can successfully show that teenagers usually drive recklessly after they have been drinking. This is potentially useful to know. But, it does not mean that when you observe them drinking, you should then blithely recommend reckless driving to them, simply because that is what usually occurs next. Similarly, the fact that investors drunk on low interest rates usually pay a recklessly high P/E for the stock market...does not make such a purchase a good idea, or imply that pundits should recommend this typical behaviour.
...
In fact, 1999-2000 is a nice example of the difference between describing how P/Es are set versus justifying them. When the fitted series peaked in the 40s in 1999, it was not saying that this P/E is rational for the S&P 500 (it was not). It was saying that, assuming investors act the way they have in the past, and given how low equity volatility had been versus bond volatility, and how low interest rates were, such an irrational high P/E was to be expected. The Fed model, alone or modified for volatility, offers no solace to those buying the S&P 500 at a P/E of 44, but it does explain what tricked them into doing so."

Jim


* higher real interest costs for indebted companies is a tiny quibble by comparison to the large valuation multiple swings, so it can be largely ignored for this discussion. It happens to some firms, and the reverse happens for others like Berkshire.

My (imperfect) memory causes me to think that discussion then sounded pretty similar. But since then the market has risen ~50%. Does believing in the current bubble mean believing that that entire gain will be given back? If it is, will we not simply be back to where we were two years ago, when the market was already widely judged to be overvalued?

Perhaps you're reading too much into the reasoning. A high valuation level is a great example of being "approximately right", not a market forecast.

The conclusion from high valuation levels a couple of years ago was that medium-to-long term forward returns would probably be a lot lower than average, with reasonably high confidence. That still seems right, and nothing has shown it to be wrong.
The conclusion from high valuation levels now is also that medium-to-long term forward returns would probably be a lot lower than average, just with higher confidence and consequently somewhat lower central expectation.

If you don't read any more precision than that into the observations, there is no contradiction. The market can be exuberant for a long time. Forward returns will be quite poor starting now and ending on any date in the future that corresponds to the average valuation level in the next 20 years.

Valuation alone is a truly terrible predictor of market direction in the short to medium term.* But for the long run it's as reliable as the laws of thermodynamics, just with less precision.

I have a very good idea of how high current valuations are among various categories of US stocks compared to history and the factors that seem to affect valuations, and literally hundreds of market prediction models, but I have absolutely no clue what the next year will be like. The short term will be somewhat more likely to be good than bad, and the medium-to-long term will definitely be poorer than average, but that's about it.

Jim


* The exception being moments of clearly cheap prices. Statistically, that tends to turn out well quite reliably and quite promptly.

Mungofitch wrote:

A high valuation level is a great example of being "approximately right", not a market forecast.

Truly, I do understand this. What I am trying to understand is why something that is only expected to be approximately right over indefinite but long periods of time is of serious interest. I am not managing a university endowment. My second twenty-year window as a serious investor is about half over, and most of us only get two.

Perhaps it is the case that valuation offers more realistic, worthwhile advantages to people who invest in individual stocks (BRK vs TSLA), rather than in index ETFs? For myself, things like your DBE ("no new highs lately") indicator have proven far more useful.

Baltassaar

Until I read Jim commenting rates explaining stock prices rather than justifying them I thought I was the only person on planet earth who held this same view. But over time, at least to me, it is crystal clear that this is correct.

75% of Apple sold.

Last I saw, it was 2/3 of the position sold. And amazingly, it STILL remains the largest position in the portfolio. Normal prudence alone likely might have dictated selling that much of it. Plus there's got to be a reason to sit on all this cash. And one reason could be that they are expecting some bargains to pop up in the near/medium future.

I am shocked. I have always had a high regard for the Bogleheads

They are an interesting group. If you want to see spirited discussion by smart people on assembling a bond ladder in taxable vs. non-taxable accounts, the place is amazing. Equally amazing is their lack of understanding of BRK. I gave up on them when someone said BRK is simply "a whole lot of Apple, a pile of unallocated cash, and a mish-mash of old companies they own. BRK is lagging the S&P, so why consider it?". That summary was lauded as the best ever analysis of BRK.

What I am trying to understand is why something that is only expected to be approximately right over indefinite but long periods of time is of serious interest. I am not managing a university endowment. My second twenty-year window as a serious investor is about half over, and most of us only get two.

It's probably far more important information for individuals than for endowments.

The single most important number for anyone's retirement planning is the likely expected real return from the portfolio in question. Imagine this sort of observation provides you with a rational expectation of (say) inflation plus 0-2%/year in the next 15 years. You would then have two rational choices: plan your retirement expenditures to that low number, or invest in a different way. Simply saying you want to assume ever greater market valuation levels, the only way you'd get historically typical returns from here from the broad US equity market, is not an approach I would recommend.

Sticking with the Bogle style is a perfectly rational choice and I don't mock anyone in that camp. But they should have their eyes wide open: the result is highly dependent on the starting point.

When SPY was introduced in early 1993, it was a great thing: it helped a lot of people do well. And it wasn't particularly overvalued or undervalued at the time, a nice bonus. The S&P 500 index has risen inflation + 5.81%/year since then, a fine result (plus the dividend yield has averaged 1.91% since then). But one can't ignore the fact that the VALUE of the S&P 500 index has only risen 3.65%/year since then (smoothed real earnings), despite the amazing upswing in net profit margins. The other 2.16%/year of index rise has been from multiple expansion. If the index had risen only the same amount as trend earnings since then, the S&P index would be 3058 today, about half today's level.

So, we now know that a period of ~32 years of valuations rising at ~2.2%/year is possible. Would it be possible for valuations to fall at ~2.2%/year for 32 years? Sure. Besides, it has happened before. That's not a prediction, but it's something that one might need to be prepared for.

Jim

Equally amazing is [Bogleheads] lack of understanding of BRK.

"Berkshire? You kidding me? That's single stock risk. Nope. Dumb. I guess maybe if you want to play with 1% of your portfolio."

I always chuckle at that.

They'd have a heart attack knowing some of us have like 80% in Berkshire.

Sticking with the Bogle style is a perfectly rational choice and I don't mock anyone in that camp. But they should have their eyes wide open: the result is highly dependent on the starting point.

I apologize, I have not been thinking about this along lines that are relevant to your point: that the S&P500 and others of its kind are a poor choice as long-term holdings at recent valuations. I could not agree more. I have never owned it or anything like it except in the expectation of selling it based on a mechanical signal.

My interest in LTBH investing in growing, however, and frankly I'm beginning to think that the problem is not that I'm worried about valuation, but that I'm just not all that used to taking taxes into account in making investment decisions. That is probably where I should be focusing my planning efforts. I don't mind paying taxes, but I don't want to feel like a fool for doing it.

Always a pleasure to read your posts.

Baltassar

My interest in LTBH investing in growing, however, and frankly I'm beginning to think that the problem is not that I'm worried about valuation, but that I'm just not all that used to taking taxes into account in making investment decisions. That is probably where I should be focusing my planning efforts. I don't mind paying taxes, but I don't want to feel like a fool for doing it.

I know some people who let the tax tail wag the returns dog. A tax inefficient good investment is usually better than a tax efficient bad investment. But tax is certainly a real thing.

My usual reminder to people unduly worried about realizing gains and paying tax by switching investments half way through one's savings life: remember that even if you pay a big chunk of tax, you're not losing that money, you're paying it sooner as you'd have to pay it eventually anyway. (barring some country-specific exception cases).

The loss from paying tax on a realized gain (like a hundred billion worth of Apple stock?) is not the amount of the tax which so many people focus on, it's only some time value of that tax amount, which is generally a much smaller number. There is a big difference between losing a million, versus paying out a million 10-15 years earlier than you otherwise might have.

Jim

The loss from paying tax on a realized gain (like a hundred billion worth of Apple stock?) is not the amount of the tax which so many people focus on, it's only some time value of that tax amount, which is generally a much smaller number.

Indeed true. I have made some simple calculations of this, and it appears that, given my own tax situation, a portfolio that pays taxes on capital gains every year at the long-term rate needs to outperform a portfolio taxed only once (at the end) by about 2% annually, assuming plausible rates of return. As the CAGR of an LTBH port increases, the improvement required to beat it also goes up (slightly). But the longer the comparison is extended, the better the chances of the tax-paying portfolio.

Baltassar

it appears that, given my own tax situation, a portfolio that pays taxes on capital gains every year at the long-term rate needs to outperform a portfolio taxed only once (at the end)

This is clear on its face. Simple math.

If you pay tax every year, the annual return is reduced by that tax amount.
15% tax on a 10% gain is net CAGR of 8.5%.
That tax eats away at the return every year. The dollars you remove to pay the tax won't continue to compound.

Calculate using 10% CAGR, 15% tax, over 20 years.

Pay tax each year, $100 grows to $511

Pay tax at end, $100 grows to $672, minus 15% of the $572 gain = $587.

This is clear on its face. Simple math.

Of course it is. I was just surprised at how small the improvement in CAGR needed to be for the taxed port to keep up.

My tax bar is pretty high, since my state taxes long-term gains as ordinary income. But even so, if you think your trades can improve CAGR by 2 to 3 per cent versus LTBH, then they're probably worth doing.

Baltassar

A tax inefficient good investment is usually better than a tax efficient bad investment.

This is so true, and people should really internalize it. We see so many people desperately resort to 1031 exchanges when they sell real estate to avoid the capital gains taxes, and they often end up in substandard investments that cause future losses that exceed those taxes had they been paid.

My usual reminder to people unduly worried about realizing gains and paying tax by switching investments half way through one's savings life: remember that even if you pay a big chunk of tax, you're not losing that money, you're paying it sooner as you'd have to pay it eventually anyway. (barring some country-specific exception cases).

The USA has a HUGE exception in that assets held through death simply have their basis reset ("basis step up") to the value at the time of death thus escaping capital gains taxes completely.

There is a big difference between losing a million, versus paying out a million 10-15 years earlier than you otherwise might have.

I think inflation plays into the calculation here. And it is part of what makes levying taxes on the entire gain somewhat unfair. Take, for example, someone who invested $100,000 a long time ago, and saw it grow only modestly, let's say at the rate of inflation (200%) plus 30% over the entire period. So, that asset is now worth $330,000 ($100,000 + 230%). At 23.8% capital gains tax rate, the capital gains tax due would be $54,740, and the net value of that investment would now be $330,000 - $54,740 = $275,260.00. That means that net-net, this investment after disposal is worth less in real terms than it was at the start. All because of the taxes on the inflation component of the "gain". And the same often applies to annual interest as well - would you rather get 1% interest with 0% inflation, or 5% interest with 4% inflation? The first case (1% interest) results in roughly 0.75% interest net real yield after taxes, while the second case (5% interest) results in -0.25% net real yield after taxes. Again, because the inflation component of the gain/yield is also taxed.

But tax is certainly a real thing.

It sure is! Over the years, I calculate my net worth as stock A price x number of A shares + stock B price x number of B shares + cash + fixed income investments + etc. But late last year, I sold a large number of shares of a stock and realized a very large capital gain for 2024. In 3 days I will have to pay a very large estimated tax payment which will directly reduce my net worth by the amount of that tax payment. So maybe net worth should be calculated after subtracting likely taxes from the holdings? I don't know.

For better or worse, over the past several years we've paid no taxes on our withdrawals from taxable accounts, owing to their paucity. That's been true for all years except 2020, when I sold 93% of our BRK shares when my wife was panicking about market performance early in the Covid crisis. As we're not youngsters, I didn't want to take the risk of leaving her in a sorry financial state. Three weeks later I bought most of it back on a rapid upswing at about the same price I'd sold it, so our temporary market losses were soon erased.

But that year we were hit with quite substantial capital gains taxes, as we'd owned the BRK shares I sold for many years. Based on our income and expense patterns, and my awareness of the inadvisability of trading on the basis of macroeconomic factors, that now appears to have been an entirely avoidable loss. While it hasn't posed any real problem for us, primarily thanks to BRK's excellent performance since then, it did inflict temporary pain. Of course that's how I see it now from the perspective of 20/20 hindsight.

Tom

We see so many people desperately resort to 1031 exchanges when they sell real estate to avoid the capital gains taxes, and they often end up in substandard investments that cause future losses that exceed those taxes had they been paid.

Amen to that. We live in an area where real estate appreciation has made many of our friends quite well to do. We sold it all once, and just gutted up and paid an enormous tax bill that year. It freed up cash for a series of investments (BRK being one of them) which worked out very well. Meanwhile, we have friends who are rolling in net worth, but are miserable dealing with rental properties during what should be their "golden years". They rolled over real estate with 1031s, and now the accumulated depreciation coupled with the appreciation leaves them with a potential tax bill they can't stomach (even though they could and should just pay it). The tax tail is totally wagging the dog.

Calculate using 10% CAGR, 15% tax, over 20 years.
Pay tax each year, $100 grows to $511
Pay tax at end, $100 grows to $672, minus 15% of the $572 gain = $587.

The relevant question is, what is the CAGR drag from completely giving up the ability ever to change investments for 20 years?
For the average dentist, trades would add no value on average and LTBH is likely the best approach. Like most people, I think I can make a few judicious changes from time to time.

Jim
(and some stupid ones of course)

if you think your trades can improve CAGR by 2 to 3 per cent versus LTBH, then they're probably worth doing.

Improve the CAGR by 2%? Or by adding 2% to the CAGR?
IOW, 10% --> 10.02? or 10% --> 12%?




I was just surprised at how small the improvement in CAGR needed to be for the taxed port to keep up.

$100 invested for 20 years, CAGR 10%, CapGain tax 15%

Pay tax each year:
calc 100 * (1 + (.109 * 0.85)) ** 20
The answer is: 588.33


Pay tax at end:
Before tax
calc 100 * (1.10 ** 20)
The answer is: 672.75 (572.75 gain)

After tax
calc 100 * (1.10 ** 20 - (5.72 * .15))
The answer is: 586.95

Conclusion:
Paying tax every year, you need to get 10.9% CAGR
to equal 10% CAGR for buy&hold.

Indeed, the required additional gain is less that I expected, only about 9% greater CAGR. An extra 0.09%

Of course, there is trading friction that will also come into play. You pay that on every trade. Annually for one case and only once in the other.

For the average dentist, trades would add no value on average and LTBH is likely the best approach. Like most people, I think I can make a few judicious changes from time to time.


I do too.

The thing that concerns me is the possibility that I (erroneously) believe I'm in Lake Wobegon and am therefore above average.

OTOH, some of the people I follow and one I pay to subscribe to have gotten me to make trades that greatly outperformed the investments I sold to fund those trades.

So far.


what is the CAGR drag from completely giving up the ability ever to change investments for 20 years?
Well, BRK would have been a very good 20+ year investment for me. The $2000 I refused to pay for a single share would be worth $665,540 today.

From Jun 1985 to now, BRK is up 309x and VFINX (S&P500) is up 60x.

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