Beautifully put reason why buying stocks because they are cheap compared to bonds is "hooey" --------------------------------- One of the “arguments” for owning equities that we regularly encounter is the idea that one should hold equities because bonds are so unattractive. I’ve described this as the ugly stepsisters’ problem because it is akin to being presented with two ugly stepsisters and... [more]
Beautifully put reason why buying stocks because they are cheap compared to bonds is "hooey"
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One of the “arguments” for owning equities that we regularly encounter is the idea that one should hold equities
because bonds are so unattractive. I’ve described this as the ugly stepsisters’ problem because it is akin to being
presented with two ugly stepsisters and being forced to date one of them. Not a choice many would relish. Personally,
I’d rather wait for Cinderella to come along.
Of course, the argument to buy stocks because bonds are appalling is really just a version of the so-called Fed Model.
This approach is fl awed at just about every turn. It fails at the level of theoretical soundness as it compares real
assets with nominal assets. It fails empirically as it simply doesn’t work when attempting to predict long-run returns
(never an appealing trait in a model). Moreover, proponents of the Fed Model often fail to remember that a relative
valuation approach is a spread position. That is to say that if the Model says equities are cheap relative to bonds, it
doesn’t imply that one should buy equities outright, but rather that one should short bonds and go long equities. So
the Model could well be saying that bonds are expensive rather than that equities are cheap! The Fed Model doesn’t
work and should remain on the ash heap.
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICdX%2bV0NVGN36BKEd%2fofEal42xb5FhOuMHIf6QU%2b7vg7UJtIeYOkXue%2bOb%2bUXUhuO08ZBMMF1ZmP98sWp3Zh09IBEEyuWGp9d5w3tXNKDBi1g%3d%3d[less]
Response by inonada
about 15 years ago
Posts: 8031
Member since: Oct 2008
Nothing's better than a pretty girl. But an ugly girl is better than nothing. Therefore, an ugly girl is better than a pretty girl.
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Response by Riversider
about 15 years ago
Posts: 13573
Member since: Apr 2009
And then you're married and this pretty girl comes along and you say wtf?
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Response by CLBbkny
about 15 years ago
Posts: 39
Member since: May 2009
Who's talking about getting married? Choosing equities or bonds isn't a lifetime decision.
When you arrive at a party, start flirting with the best-looking girl you can find. As the evening goes on, keep upgrading to new ones as you find more and more attractive girls. That way, you end up going home with the best. Same approach to investing.
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Response by Sunday
about 15 years ago
Posts: 1607
Member since: Sep 2009
CLBbkny, you can start with the best looking ones first, and as you get shot down by one after another, the ugly ones start to look better as the hours pass and your blood alcohol level increases.
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Response by truthskr10
about 15 years ago
Posts: 4088
Member since: Jul 2009
I think everyone's point is to just not get married.....or...hedge your bets.
Choose equities and bonds, lean heavier on what you feel has more to offer you near term.
If it's not your profession, I don't understand why anybody would stay in just one sector,burying their nuts in one hole.
See the squirrel, Feel the squirrel.....Be the squirrel
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Response by truthskr10
about 15 years ago
Posts: 4088
Member since: Jul 2009
Speaking of Cinderellas
What an incredible Cinderella story! This unknown, comes out of nowhere, to lead the pack at Augusta. He's at the final hole. He's about 455 yards away, he's gonna hit about a 2-iron, I think. [swings] Oh, he got all of that. The crowd is standing on its feet here at Augusta. The normally reserved crowd is going wild... [pauses] for this young Cinderella who's come out of nowhere. He's got about 350 yards left, he's going to hit about a 5-iron, it looks like, don't you think? He's got a beautiful backswing... [swings] that's- oh, he got all of that one! He's gotta be pleased with that! The crowd is just on its feet here. He's a Cinderella boy. Tears in his eyes, I guess, as he lines up this last shot. He's got about 195 yards left, and he's got a, looks like he's got about an 8-iron. This crowd has gone deadly silent... Cinderella story, out of nowhere, former greenskeeper, now about to become the Masters champion. [swings] It looks like a mirac- it's in the hole! It's in the hole!
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Response by Riversider
about 15 years ago
Posts: 13573
Member since: Apr 2009
Bottom line stocks are over-priced and allocating significant funds based on an attractive comparison to bonds which are also over-priced is buying into the Fed's very flawed stock model. Short duration bonds at least return nominal principal within the short time span. Stocks have the potential of dropping precipitously. While cash may not offer a good return at least it provides optionality or the ability to act when Cinderella comes along.
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Response by Sunday
about 15 years ago
Posts: 1607
Member since: Sep 2009
I disagree that stocks are overpriced. Some are just too focused on the increase in the past two years. I think many stocks are still cheap to fairly priced because of the drop in 2008. With that said, I did sold a large percentage of my holdings about a month ago, but that's only because I thought it needed a little break before moving forward. I will certainly buy some back on any significant dips on certain stocks, but I don't expect to be back to my February allocation until September/October of this year.
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Response by Riversider
about 15 years ago
Posts: 13573
Member since: Apr 2009
Stocks are not cheap based on the current CAPE ratio which is currently around 24. The long term average is around 16.
Stocks are up as because investors believe the Bernanke is supporting the stock market through Q.E. 2(Fed buys bonds and those funds formerly in treasuries go into stocks). Earnings are partly up because of cost cutting, inventory rebuilding, price increases and companies benefiting from inventory gaining in value as a result of commodity price rises( i.e. the T-SHIRT manufacturer who bought stocked up in order to get ahead of the cotton price rice). Gains from cost cutting while real are not to be counted on over time in the same way as sales gains. Inventory adjustments usually last a quarter or two are just the flip side of companies cutting inventories during the great recession. And inflation is ultimately not good for stock prices despite what people think as higher rates cause lower stock valuations.
And if you buy stocks now, you bought after a huge rise that more than discounts the improved outlook from say 2008 and coincidentally takes away any margin of safety buying at lower prices gets you. The only way you can say stocks are cheap is if you believe earnings and dividends will continue to increase at above average rates.
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Response by Riversider
about 15 years ago
Posts: 13573
Member since: Apr 2009
Well four days later... This piece could not have come out at a better time.
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Response by Riversider
about 15 years ago
Posts: 13573
Member since: Apr 2009
I mean six days later. Piece was clearly written pre-japan which is 100% the point.
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Response by somewhereelse
about 15 years ago
Posts: 7435
Member since: Oct 2009
Of course, the logic doesn't stop people from dating the dog dressed as a woman... Manhattan RE.
> I mean six days later. Piece was clearly written pre-japan which is 100% the point.
Actually, its the furthest thing from the point. Stocks being overvalued (which might be true) doesn't have much to do with crisis pricing.
Nothing's better than a pretty girl. But an ugly girl is better than nothing. Therefore, an ugly girl is better than a pretty girl.
And then you're married and this pretty girl comes along and you say wtf?
Who's talking about getting married? Choosing equities or bonds isn't a lifetime decision.
When you arrive at a party, start flirting with the best-looking girl you can find. As the evening goes on, keep upgrading to new ones as you find more and more attractive girls. That way, you end up going home with the best. Same approach to investing.
CLBbkny, you can start with the best looking ones first, and as you get shot down by one after another, the ugly ones start to look better as the hours pass and your blood alcohol level increases.
I think everyone's point is to just not get married.....or...hedge your bets.
Choose equities and bonds, lean heavier on what you feel has more to offer you near term.
If it's not your profession, I don't understand why anybody would stay in just one sector,burying their nuts in one hole.
See the squirrel, Feel the squirrel.....Be the squirrel
Speaking of Cinderellas
What an incredible Cinderella story! This unknown, comes out of nowhere, to lead the pack at Augusta. He's at the final hole. He's about 455 yards away, he's gonna hit about a 2-iron, I think. [swings] Oh, he got all of that. The crowd is standing on its feet here at Augusta. The normally reserved crowd is going wild... [pauses] for this young Cinderella who's come out of nowhere. He's got about 350 yards left, he's going to hit about a 5-iron, it looks like, don't you think? He's got a beautiful backswing... [swings] that's- oh, he got all of that one! He's gotta be pleased with that! The crowd is just on its feet here. He's a Cinderella boy. Tears in his eyes, I guess, as he lines up this last shot. He's got about 195 yards left, and he's got a, looks like he's got about an 8-iron. This crowd has gone deadly silent... Cinderella story, out of nowhere, former greenskeeper, now about to become the Masters champion. [swings] It looks like a mirac- it's in the hole! It's in the hole!
Bottom line stocks are over-priced and allocating significant funds based on an attractive comparison to bonds which are also over-priced is buying into the Fed's very flawed stock model. Short duration bonds at least return nominal principal within the short time span. Stocks have the potential of dropping precipitously. While cash may not offer a good return at least it provides optionality or the ability to act when Cinderella comes along.
I disagree that stocks are overpriced. Some are just too focused on the increase in the past two years. I think many stocks are still cheap to fairly priced because of the drop in 2008. With that said, I did sold a large percentage of my holdings about a month ago, but that's only because I thought it needed a little break before moving forward. I will certainly buy some back on any significant dips on certain stocks, but I don't expect to be back to my February allocation until September/October of this year.
Stocks are not cheap based on the current CAPE ratio which is currently around 24. The long term average is around 16.
Stocks are up as because investors believe the Bernanke is supporting the stock market through Q.E. 2(Fed buys bonds and those funds formerly in treasuries go into stocks). Earnings are partly up because of cost cutting, inventory rebuilding, price increases and companies benefiting from inventory gaining in value as a result of commodity price rises( i.e. the T-SHIRT manufacturer who bought stocked up in order to get ahead of the cotton price rice). Gains from cost cutting while real are not to be counted on over time in the same way as sales gains. Inventory adjustments usually last a quarter or two are just the flip side of companies cutting inventories during the great recession. And inflation is ultimately not good for stock prices despite what people think as higher rates cause lower stock valuations.
And if you buy stocks now, you bought after a huge rise that more than discounts the improved outlook from say 2008 and coincidentally takes away any margin of safety buying at lower prices gets you. The only way you can say stocks are cheap is if you believe earnings and dividends will continue to increase at above average rates.
Well four days later... This piece could not have come out at a better time.
I mean six days later. Piece was clearly written pre-japan which is 100% the point.
Of course, the logic doesn't stop people from dating the dog dressed as a woman... Manhattan RE.
> I mean six days later. Piece was clearly written pre-japan which is 100% the point.
Actually, its the furthest thing from the point. Stocks being overvalued (which might be true) doesn't have much to do with crisis pricing.
I'm sure Japanese RE is doing fantastic though...