What's happened to my portfolio in the last 2 weeks?!

bowlhead99

Ryan_Futuristics wrote: »

At recent valuations (a CAPE ratio above 25) the US market's only returned on average 0.5% annualised over the following 10 years ... (that's since about 1927)

I've got a total allocation of about 3% in US markets now (I'm trying to lower it ... although it could still have a good run in the short-term with further stimulus, it's not good value)

CAPE like any other single measure is a bit flawed though. What you have in the last couple of decades, which you might not have had in the 60s or the 20s or whatever historic point you are going back to to say 'Buying with Cape at this level has only delivered 0.5% annualised over 10 years', is an extraordinary pace of technological change with newly valuable companies springing up.

Take Google for example. It's valued at 6x revenue, or 27x earnings. The high p/e ratio is somewhat justified by earnings growth. E.g., 2013 revenues $60bn, 2012 revenues $50bn. For this quarter (which will be announced later today and will probably disprove my point ), consensus estimate is for 22% y-on-y growth of earnings and 11% on revenue. A highlight of last quarter's earnings call was a 25% increase on paid clicks. Operating income was over a quarter of revenue, with net income a bit lower obviously. Definitely one of the strongest companies in the online advertising space. So, a decent company, though you can argue 27x earnings sounds a lot to pay, for any type of company, so it had better be a decent company, and those earnings should keep growing please because we don't want to wait 27 years to get our money back as an investor.

So what contribution does something like a Google make to CAPE? CAPE is price divided by average of last 10 years earnings (inflation adjusted). If its earnings were just increasing in line with inflation for the last 10 years, its CAPE would be the same as its current PE, right? And as a $350bn company, one of the very largest out there, it would be contributing its CAPE of 27 to the overall index with an effect 50+ times greater than the small companies at the bottom of the S&P500 which are contributing their more 'normal' CAPE of 10-15.

However, Google's contribution to CAPE is not just the relatively low figure of 27. Its earnings growth has been phenominal, well outpacing inflation. Back at launch in 2004 with only a $100 share price, it was on a PE of about 80. The actual earnings it made were positive, but much much lower than they are today. Eg, mobile ads would have been zero net income, so they've grown by infinity percent. Appstore purchases, Android licensing - infinity percent. Paid clicks - huge growth. Etc Etc. So, if you look at Google's earnings for the average of the last 10 years, and compare that to today's price, it gives you a much much much bigger ratio than 27. And it's a legitimately dominant contributor to the S&P500 and CAPE measures.

Maybe no all Google's shares are in free float so its weighting is not as high as implied by the $350bn market cap, but its very high figures will still be contributing to the indexes with as much or greater weight as the more longrunning names like Coke or IBM. Certainly if you look at the bottom end of the S&P500 scale, the P/E of 17 contributed by Urban Outfitters is an irrelevance as the market cap is under $5bn. The P/E of Google at 27, or its individual CAPE of very much more than 27, has a much greater effect, and the same can be said for other large groups like an Amazon or a Facebook or anything that has grown its performance over the 10 years since the CAPE clock started counting.

This is not to say that the price of Google or Amazon or whatever, as an individual company, is a good buy or a bad buy - I'm not trying to give stock tips. Maybe Google is overvalued and could fall from $550 to $500 in a heartbeat. Maybe Amazon which has fallen from $400 to $300 should really be $250 or $200. But a company of that sort of size with monster cape ratios would still be contributing a monster cape ratio, greater than 25, with a strong effect on the overall market's cape ratio, even if the price came off by a fifth or perhaps a quarter or a half.

So, the question is, if you go back to 1965, 1966 when you see that the US also had a CAPE ratio of 25, is that comparable with the drivers of CAPE today. Did you have companies coming from nowhere and appearing in the top 10 within a couple of years of listing and dragging the whole CAPE ratio up by its bootstraps?

In 1964-66 the Americans were sending people and things into Space, heading over to Vietnam to kickass, the Japanese got a bullet train, the Russians landing things on the moon. The Kennedy stock market slide and the Cuban Missile Crisis of '61,'62 was forgotten, the market was filled with exhuberance. Maybe they were a little bit too happy about everything and that contributed to relatively lower returns for the next decade as everyone chilled out and went to party at Woodstock But I'm not sure that the market's headline statistics then were being driven by corporations bringing massive gamechangers and efficiencies like everything suddenly becoming smartphone accessible, internet for everybody, social networking and broadcasting etc. The CAPE today has been propelled by that stuff but is not sitting in the dotcom bubble territory of 1999 when it was all totally unsustainable and the overall CAPE hit 40-50.

So, getting back on track... the idea that you should entirely shun the US markets and that even 3% of your portfolio in the territory is too much, seems a bit misguided to me. As CAPE is only one way of measuring value, and a flawed one at that because it penalises growth, you should not live your life by it IMHO, even if we're all well aware of correlation between historic results of buying at 40 CAPE vs 10 CAPE.

All CAPE is trying to do is even out earnings over a few years so the numbers are not so spiky. When those earnings are moving upwards, which is an inherent positive indicator of a successful company, it tells you the CAPE ratio is high. If you appreciate the risks of a market, there is nothing wrong with buying into an index where everyone is growing because the companies are doing well. You just need to remember that they won't all do well forever.

At the moment, on a 10-year averaging period, good earnings from 2014/15/16 are coming in to replace poor earnings from 2003/4. That will help to bring CAPE back to 'normal' levels. Later the good earnings from 2019, 2020 will come in to replace the bad earnings from 2009, 2010. At that point, CAPE would get even lower as the bad earnings drop off and average earnings for the 10 year period tick up. So there is plenty of 'headroom' for share prices to grow over the next 4-5 years without pushing CAPE through the roof.

So, investing at all levels of CAPE is not a big deal even if you might prefer to slightly skew towards lower CAPEs. If you choose to invest into successful companies with growing earnings at commensurately high valuations, rather than investing into the dogs in another economy that look cheap but have much lower prospects of sustaining their earnings as deflation takes hold, that is fine. You just have to recognise that no growth period will go on forever because markets do move in cycles.

Despite some unsettling economic stats in the last few weeks, the US is at least on course to grow its GDP pretty well according to domestic and IMF projections, which can't be said for a whole bunch of emerging economies and Europe generally. So, while it's not at all unnatural for any index to correct downwards from a new 'all time high', as the S&P500 has done in the last month, it doesn't mean it's all doom and gloom and we should run for the hills and pile into low CAPE locations

That said, I am far from 100% equities in my longer term portfolios as I do like to engage in some market timing as I'm a natural gambler. I also have some money in Eastern Europe/ Russia, EM and frontier funds generally; I am not avoiding the cheaper parts of Europe either, just not piling all of my money into them. Investing, as with life, is about finding some sort of balance - there is no 'right way' to do it, so you can't answer every question with a CAPE graph, IMHO.

C_Mababejive

I'm no expert so take no heed of me but i have engaged in a round of profit taking and wealth preservation in the last few days as i think that this murmur has now become a panic which could spread. Maybe buy back in another time? There is nothing worse than seeing share profits dwindling,not taking action then being stuck with a huge loss and for how long..?

Kraftskiva

Reading the thread with interest - thanks for all the info.

I'm tempted to invest a small proportion of my cash savings into a FTSE 100 Acc Index tracker if/when it breaches 6000 and then start regular monthly purchases of ~£200 - any thoughts?

The tracker I've looked at is an OEIC through HSBC and seems to have reasonable fees - ISIN GB0000412477.

I'm trying to move away from individual shares (which has served me reasonably well) and more into funds.

sydenhambased

Kraftskiva, why wait until it breaches 6000? The FTSE 100 could rebound from 6095 (where it seems to be as I type this post) or it could fall all the way to 5000.

My crystal ball doesn't seem to be working well at the moment, but I'm guessing yours isn't faring much better

Kraftskiva

sydenhambased wrote: »

Kraftskiva, why wait until it breaches 6000? The FTSE 100 could rebound from 6095 (where it seems to be as I type this post) or it could fall all the way to 5000.

My crystal ball doesn't seem to be working well at the moment, but I'm guessing yours isn't faring much better

That's true.

You're right to point out that it's not entirely rational - just a psychological point I guess!

sydenhambased

Incidentally Kraftskiva, where I'm looking (Hargreaves Lansdown) your choice of tracker costs 0.1% plus 0.07% other expenses.

I've just put £1000 into Legal & General UK 100 Index Trust - ISIN GB00BG0QPG09. Net annual charge 0.06% plus 0.03% other expenses.

That's 0.09% rather than 0.17%.

I'm NOT recommending Hargreaves Lansdown - for most portfolios other platforms are cheaper. It just happens to be reasonably cost effective for my portfolios.

Kraftskiva

Thanks sydenhambased, I'm not with HL (Halifax after a poor experience with iii) but understand what you're saying.

Thanks for the pointer also - I will take a look at the L&G fund.:)

sydenhambased

Eesh! £12.50 per fund trade? £12.50 per share trade seems OK, but any decent platform will trade funds for NOTHING.

Even if you put £1250 in, you're down by 1%. If you put £200 in as a one off, you're down by 6.25%. If you're on their regular savings thing that costs £2 a pop - your £200 is down by 1% instantly!

Move away from Halifax.

Kraftskiva

sydenhambased wrote: »

Eesh! £12.50 per fund trade? £12.50 per share trade seems OK, but any decent platform will trade funds for NOTHING.

Even if you put £1250 in, you're down by 1%. If you put £200 in as a one off, you're down by 6.25%. If you're on their regular savings thing that costs £2 a pop - your £200 is down by 1% instantly!

Move away from Halifax.

I do the £2 regular investments.

Completely agree - to be honest though at the moment and taking into account transfer fees I'm not sure I can face another S&S ISA transfer after the pain it involved with iii.

Looking into opening a new funds S&S ISA elsewhere in the new tax year.

noh

sydenhambased wrote: »

Eesh! £12.50 per fund trade? £12.50 per share trade seems OK, but any decent platform will trade funds for NOTHING.

Even if you put £1250 in, you're down by 1%. If you put £200 in as a one off, you're down by 6.25%. If you're on their regular savings thing that costs £2 a pop - your £200 is down by 1% instantly!

Move away from Halifax.

Depending on the value of your fund portfolio and the number of trades you make Halifax can be much cheaper than HL.
There is no percentage based annual fee with Halifax.