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Both the Dow and the S&P 500 hit record highs today.

The people who have reaped the rewards of what the market has delivered over the last 15 years are the people who stayed fully invested in index funds through

* Brexit in 2016
* the 2018 Nasdaq near bear-market
* the 2020 Pandemic bear market when the US unemployment rate hit 14%
* war in Ukraine
* the 2022 bear market
* Israel/Hamas war
* skyrocketing interest rates with the 10-year T-bill hitting 5%
* continual declarations over the years that the market was overvalued

The key to succeeding in the market is patience that is measured in years, discipline, and temperament. Lots of intellectuals sound smart when predicting crashes and poor returns ahead. But when it comes to investing, temperament beats intellect. It's best not to celebrate too much when the market is going up, and not to be crestfallen when the market goes down. Just continue to be even-tempered through the ups and downs, and ignore the gloom and doomers.

Both the Dow and the S&P 500 hit record highs today.
The people who have reaped the rewards of what the market has delivered over the last 15 years are the people who stayed fully invested in index funds through

Your message is very right. There is no argument that the number one remedy for good investment returns is patience and keeping away from the news.

But take care with comparing returns over a period with radically different valuation multiples at the start and end. The start and end dates really matter.

Starting from 2009 to the present, we move from very low earnings multiples (temporary) to the current high multiples (also temporary).

To look at the returns over 17 years, rather than 15, we are starting and ending with high multiples. From July 2007 to today (Jan 2023) where the earnings multiples are not so distant, the S&P500 went from 153 to 482, and CPI went from 200 to 300.

So stocks returned 4.5% per year real over the last 17 years, with comparable starting and ending valuations, plus the approx. 1% dividend (492/153*200/300)^(1/17).

Still, the valuations were lower in mid 2007 than they are today - comparing the ratio of today's S&P500 price multiple over the last 10 years of earnings (the multiple was 27 then), compared to the same ratio in 2024 today (the multiple is 32 now), and factoring that in, the normalised real return of the S&P500 the last 17 years is (492/153 * 200/300 * 27/32)^(1/17) = 3.5% per year. They are the real capital gains you would get if starting and ending at the same earnings multiple the last 17 years.

That real 3.5% growth in the S&P500 (if the valuation remained unchanged) is still higher than the historical average of about 2% real capital gains (and likewise 2% earnings growth). The reason for the returns being above average is owing to (1) corporate margins increasing, and they cannot keep increase so either way where they are or resort to the lower historical average, (2) the cultural habit for US firms to pay out a lower dividend, retaining more of the earnings for growth versus, for example, Australian firms which pay out most of their earnings in dividends, and also (3) related to stock buybacks being in vogue. Also (4) a transition from less friendly to more business-friendly taxation law.

Long-long-term (25 plus years), expect capital gains closer to 2% after inflation if things were to simply remain rosy (high margins are retained, taxation policy doesn't return to the past, sales per share grow at the rate of the last 20 years), and less than 2% if the end-obervation point has a lower earnings valuation than today (extremely likely given valuations have only very briefly been this high before).

- Manlobbi

I personally retired early in 2020 with way more than what I calculated I needed to pay my living expenses for 40 years. I never had a pension, and I was never a highly paid corporate executive.

I did this thanks to 25 years of compounded gains in tax deferred 401K plans invested automatically in index funds every month, stock-based compensation I received as RSUs, and investing aggressively in growth stocks like Amazon and Shopify (thanks, Tom Gardner!) in my self-directed IRA. At one point, my initial purchase of SHOP shares with 5% of my portfolio grew to 20% of my portfolio, before I trimmed it. I currently have 6 years of living expenses in Schwab money funds (SNSXX) yielding a guaranteed 5% (and yes, I know that's too much in cash, even for a retiree). I still have 70% of my investment portfolio in stocks, and the rest in bonds.

Thankfully, according to Vanguard, the vast majority of investors did not flinch when their 401K balances declined by 20% during the 2022 bear market. That phrase is so important, I'll repeat it in bold: they did not flinch. There are now roughly 400,000 401K millionaires in the US and almost an equal number of IRA millionaires.

https://www.cnbc.com/2023/02/17/401k-balances-drop...

Investing does not have to be complicated by market timing. You could have the worst timing and have invested a lump sum at the high of the market every year during each of the last 20 years, and you would still have almost the same amount as someone who invested at the annual lows each year. Investing consistently every year, and staying in rather getting scared out, is what matters.

To the millenials and GenZ-ers with 30 years to go before retirement - don't get scared out of investing because someone tells you the market is overvalued. There's no formula that uses a trailing P/E ratio that can consistently predict future market returns. Schiller's CAPE ratio can't do it either. Read this study by tedthedog to understand the true facts about CAPE -

https://www.shrewdm.com/MB?pid=592241089

And, for inspiration, read this article about a Gen-Z who achieved financial independence at age 29:

https://www.businessinsider.com/retire-early-vp-jp...

It's OK if you have not achieved FIRE status at that early an age, the basic principles of investing to tax deferred accounts and setting up a backdoor Roth iRA apply.

The reason why P/E ratios don't work as valuation yardsticks for hyperscalers like Amazon is that they've built platforms that they use to unlock new revenue streams that you can't possibly guess today. Could you have guessed that Amazon would go from books to the "everything store", to AWS, advertising and Prime Video, all of which are additional multi-billion dollar revenue streams? Could you have anticipated that Netflix would go from CDs via mail to video streaming on demand to now becoming their own movie studio? What about Tesla and its robots? And Microsoft and OpenAI? Did you know that Nividia makes revenues from software as a well as the very expensive GPUs that they sell? What are the future revenue streams from those? You can't easily plug these unknowns into a DCF formula.

Uber recently got added to the S&P 500 index. This forces Vanguard and every other index fund and ETF to buy shares in Uber, no matter how expensive they think it's trailing P/E of 125 is. (It has a forward P/E of 58.) I take 5 or 6 vacations every year, and I always use Uber no matter what country I go to. That's because I get Uber cash via my Amex Platinum csrd, good for discounted or free future Uber trips. I certainly did not anticipate that I could also order lunch via Uber delivered directly to my house or hotel. So I use that service, too. Uber has built a platform, off which they can launch multiple services. Will Uber eventually offer rides via self-driving cars? Now that's something that I can anticipate they _will_ do.

I had mentioned Uber in my previous message. Uber shares are rallying 11% right now on management announcing plans to buy back up to $7B of stock.

https://www.investors.com/news/technology/uber-sto...

This is undoubtedly contributing to the rise in the S&P 500 today. When you invest in an index, the people who manage the index periodically replace losers that no longer meet their standards with new companies that do. They kicked out Sealed Air Corp (SEE), a company few people have heard of - it was experiencing lower revenues, and its market cap shrank to $5B. And replaced it with Uber, a global brand with $37B of revenue growing at 15% YoY.

This is another advantage you get when you invest in SPY or VOO.

Uber shares are rallying 11% right now on management announcing plans to buy back up to $7B of stock.

They kicked out Sealed Air Corp (SEE), a company few people have heard of - it was experiencing lower revenues, and its market cap shrank to $5B. And replaced it with Uber, a global brand with $37B of revenue growing at 15% YoY.

This is another advantage you get when you invest in SPY or VOO.

Recent investors in Uber have done quite well, the stock is up over 100% in the past year. Has its value increased at the same rate? A more difficult question to answer. Certaintly SPY investors would have been better off if it had been added a year ago when it was trading in the $20s; and we can be thankful it wasn't added in April 2021 when it was at $60.

I guess time will tell if adding it at $75+ / share and a PE approaching 50x (TTM) is a good investment idea or not.

BTW: Yes revenue is growing, but earnings are still flat.

tecmo
...

Yes this is true, unfortunately...
The total return of the S&P 500 still remains behind risk free T-bills since its January 2022 peak more than two years ago.

Kinda what you'd expect from these valuation levels?
1 yr T-Bills paying 4.97% vs S&P 500 earnings yield of 3.68%.
S&P 500 P/Book is currently 4.65, in 2009 it hit 1.78.
Buffett Indicator is 184%. Warren has said, "If the % relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you."
S&P 500 Dividend Yield is currently 1.4% in 2009 it hit 3.24%. (A recent Fidelity research paper states that since 1930, dividends have accounted for roughly 40% of the total return of US stocks.)

Valuations matter.
Let's look at the historic ups (Bulls) and downs (Bears) of the S&P 500, shall we?

1929-1949 bear market (20 years): 0% total annual return. T-Bills outperformed the S&P 500 for a 20 year period.
1949-1966 bull market (17 years): 17% total annual return. S&P 500 outperformed T-Bills for a 17 year period.
1966-1982 bear market (16 years): 5% total annual return. T-Bills earned 7% during this bear market, outperforming the S&P 500 by 2% per year over a 16 year period.
1982-1999 bull market (17 years): 20% total annual return. S&P 500 outperformed T-Bills for a 17 year period.
2000-2009 bear market (9 years): -6% total annual return. T-Bills outperformed the S&P 500 for a 9 year period.
2009-2022 bull market (13 years): 16% total annual return. S&P 500 outperformed T-Bills for a 13 year period.
Currently The total return of the S&P 500 remains behind Treasury bills since its January 2022 peak more than two years ago.

In 2014, in the fifth edition of Stocks for the Long Run, Jeremy Siegel wrote:
"In the first four editions of Stocks for the Long Run, I noted that the last 30-year period when the return on bonds beat stocks ended in 1861, at the onset of the Civil War.
That is no longer true. The 11.03% annual returns on long-term government bonds surpassed the 10.98% on stocks for the 30-year period from January 1, 1982, through the end of 2011."

A full 30 year period where fixed income outperformed the S&P 500! With much less risk and stress.

Make sure your portfolio matches your need, willingness and ability to take risk. And as any Japanese Investor from the 1990's will tell you, diversification is your friend!

Cheers!

All #'s taken from Schiller's site.

https://www.multpl.com/shiller-pe

Just avoid the S&P 500.

PKW- Invesco BuyBack Achievers - ttm pe is 13.7, fwd is 12.6 and invests in companies who are buying back 5% or more of the shares a year.

DGRO - iShares Core Dividend Growth ETF . ttm pe 19, most s&p 500 names but skewed towards dividend payers

VBR - Vanguard Small Cap Value ETF . ttm pe 11.4, mid size/ small cap names. My only concern is how these companies will handle a higher interest rate environment for extended periods of time as they are more leveraged than ever

The total return of the S&P 500 still remains behind risk free T-bills since its January 2022 peak more than two years ago.

Two years is too short a time frame for long term investors to care. Most retirees (like me) are advised to have 5 or more years of living expenses in cash. We keep most of the rest in index funds to beat inflation and enjoy a higher Safe Withdrawal Rate. Investors should expect returns to beat cash yields over 5 to 10 years, not 2 years.

Kinda what you'd expect from these valuation levels? S&P 500 P/Book is currently 4.65, in 2009 it hit 1.78.

The relationship between the price-to-book (P/B) ratio of the S&P 500 and future market returns is a complex and debated topic. While some studies have found a negative correlation, suggesting that lower P/B ratios might predict higher future returns, others have found no significant relationship or even a positive one. Here's a breakdown of the key points:

Evidence for a negative correlation:

Value investing strategy: This strategy relies on buying stocks with low P/B ratios, believing they are undervalued and have potential for higher returns. The success of value investing strategies over time provides some evidence for a negative correlation.
Academic studies: Some research has found statistically significant negative correlations between P/B and future returns, particularly over longer time horizons.

Evidence against a negative correlation:

Other factors: Numerous other factors influence market returns, such as economic conditions, interest rates, and investor sentiment. P/B might not be a strong enough predictor to overcome these other influences.
Short-term vs. long-term: Correlations might be stronger over longer time horizons (5+ years) compared to shorter periods like 2 years.
Conflicting studies: Not all studies find a negative correlation, and some even find a positive one, suggesting the relationship might be more nuanced or non-existent.

Overall conclusion:
While there is some evidence for a negative correlation between P/B and future returns, it's not a foolproof predictor.
Other factors significantly influence market movements, and the relationship might be weaker over shorter time horizons.
Relying solely on P/B for investment decisions is risky, and considering other factors alongside it is crucial.

Source: gemini.google.com

On Jan 20 (more than a month ago), I wrote at the top of this thread that Uber got added to the S&P 500 index. Since that date, Uber is up 23%.

Both the S&P 500 and Nasdaq closed at another record high today. Another great month.

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