https://fred.stlouisfed.org/graph/?g=tRur
Or am I looking at the wrong graph?
A lot of cash still on the sidelines
BTW, I'm long-term bullish on AI, I just think companies have gotten over their skis in the short-term.
It's reasonably clear what it means to backstop failing financial institutions and so on. Not clear on how the concept applies to Microsoft or Nvidia or something.
Although the market can be irrational longer than Trump needs to stay in office.
Government trying to “backstop” firms to prevent a bubble bursting may be able to delay it somewhat, but not indefinitely, and only at the cost of magnifying the impact when it does.
And the capacity to even delay it is constrained by the state of the rest of the economy, and that isn’t looking great right now in the US, which is teetering on the edge of stagflation.
If you look at the P/E of mid and small cap companies, their valuations look much more sane: https://x.com/sonalibasak/status/1970881745227833694
Very confusing picture
PE ratio of S&P 500: 31
PE ratio of RSP: 21
The future is India and Africa, the last of the world with a demographic dividend ahead before rapidly aging like the rest of the world. Not easy for your average investor to get risk adjusted exposure there yet though.
(not investing advice)
Value funds are widely available (often paired with the opposite "growth" funds), and you can put some money there if it helps you sleep. The concept might already be oversubscribed, idk, but at least it's simple and you're still owning equities at 1x, no weird derivatives. It's not a big fancy ripoff like some sort of "structured product" that you'll get if you ask your question here of a self-interested financial advisor.
If you think you've got too much Mag 7, you could also go for small and midcap funds. Often means higher beta & vol, but less concentrated. But who knows, aggregation theory might still not yet be fully played out, and the giants could keep eating more and more of the pie.
Bond funds have a place, too.
* Or maybe not, see reducesuffering's comment below.
I know there's consensus that smaller caps are actually higher beta and thus higher risk. However, I don't believe there's any consensus on value being lower beta, less risky, or less returns. After all, large cap and mid cap value also outperformed total market: https://www.portfoliovisualizer.com/backtest-asset-class-all...
I think it's still accurate to say that you'll lag the total market during the run-up, right? So anyone buying value should be prepared for that feeling of FOMO, in exchange for long-term peace of mind.
Then again, the beta on your small cap portfolio is 1.04 (higher than your mid/large cap portfolio .93). This matches my intuition: going for value means lower beta, but going small means higher beta. So for small cap value, these effects sort of cancel out and you end up slightly above 1.
Altogether, small cap value is an interesting choice. Not bad.
Well, can we at least agree on the part about most structured products being a rip-off?
They often have something like "Value" in the name, e.g. VTV, IUSV, SPYV. While not explicitly targetting now Shiller PE, they usually have significantly lower PE than "growth orienten" stocks (such as most of the tech megacaps that currently dominate SP500, VT and other market cap weighted funds). What exactly goes into "Value" funds is either too opaque or takes too long to explain in a comment.
> what difference does it make in terms of volatility and/or expected returns to invest in something like SP500 or $VT compared to Shiller-PE-adjusted products?
Volatility is likely (but not certainly) lower. Expected returns: convincing narratives could be told either way, but nobody knows with any certainty.
> does this matter in the long-term, or better, when exactly is "long-term" long enough so that Shiller PE doesn't matter and one can just go with SP500/$VT without sleepless nights?
Again, nobody knows, and you should be skeptical about pretty much any opinion that smells like investment advice. The posted graph shows that the current S&P 500 PE (or some approximation thereof, SP500 didn't exists until the 1950s) is high by historical standards. What to make of that is open to different interpretations.
Many people might intuit some sort of mean-reversion process behind (Shiller-)PE, but
- it's unclear which to "mean" and at what time frame it would revert
- as another poster pointed out, mean-reversion could take place by E going up as well as P going down
If your hypothesis at that time was that the internet would benefit tech companies, it was not a bad time to invest:
Microsoft shares were $58. Now they are $510.
=> 9% annualized ROI.
Amazon was at $4. Now it is at $220.
=> 17% annualized ROI.
QQQ was at $89 and is now at $592
=> 8% annualized ROI.
But most of the companies that people were "investing" in at the time, the ones that drove that PE, were dot coms that went out of business. Like pets.com.
As Warren Buffett warned at the time, every new technology wave results in a similar bubble. People invest because we know that the technology will reshape the future. And we reward the first to the market because we can't imagine that they won't be long-term winners.
But the companies that arise early in a technology bubble, are seldom the ones that survive long-term.
We are witnessing the same today. Most of the current AI leaders, won't be AI leaders in 20 years. So which one will you invest in?
The NASDAQ topped at 5,048.62 on March 10, 2000. It took 15 years for the NASDAQ to recover to its dot-com peak level. In those 15 years, you got an inflation-adjusted negative annualized ROI.
Annualized return of the NASDAQ from the 2000 peak to today is an inflation-adjusted 3.4%. Even "sure thing" blue chips like Cisco and Intel still haven't recovered their 2000 peaks in real terms, 25 years later.
You're cherry picking
nobody knew in 1999 which companies would be the survivors
If so there is one issue with that. It is more tax efficient to have lower earnings and disguise profit and reinvestment as R&D cost.
Tech companies can do this covertly due to the jack of all trade Software Engineering (and friends) roles that could be BAU or RD work.
When a metric becomes a target it ceases to become a good metric. But when an accounting metric causes you billions of dollars in tax, and you are mostly compensated in share price not earnings it becomes really skewed!
Stock prices are not just historically high relative to earnings (using CAPE or not), they're historically high relative to book value or sales. There might be a clever effort to not have earnings that are justified by share price, for tax reasons. Is there similarly a clever effort to not have sales that are justified by share price?
> due for correction
That's pretty hard to predict.
I also wonder about the impact of the growing fraction of the economy no longer subject to gamified speculation held by private equity which is now around $3.5T AUM, but comes with other downsides because they do not seem to care about the longevity or goodwill of businesses they own and seek unsustainable maximum resource extraction rather than predictable steadiness.
digitcatphd•4mo ago
boyka•4mo ago
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Which is interesting "this time" because much of the issue may be due to historical and tax-quirk fullfilling index weighting. And the people invested nearly entirely in these indexes is kinda by definition the people who normally don't even look at their investments. "Irrational autopilot"?
digitcatphd•4mo ago