Timing the market

Diplodicus

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Exactly right, Prism, and I think this was agreed upthread: diversification is likely to bring return closer to the average. But it won't "improve returns for a given level of risk." Any level of risk. It is not a free lunch. 

Thrugelmir

Deleted_User said:

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster

I think its more to do with the moat that S&P500 companies have.  Red tape has been proliferating.  Governments make it difficult for new entrants to jump in and outcompete.  The regulations require huge pockets, not to mention connections. 

 And technology.  Massive corporations are hard to compete with as up front technology investment is so high.  And the largest US companies are sitting on so much cash they can and buy any new entrant before they become a threat.  And they can scoop up the best brains by paying them off.  You don’t need a lot of employees if you are Google, Microsoft or Facebook, so they can afford to buy the best brains. 

And accountants. And lawyers. They can buy better ones than the  government.  China can and has attacked big tech when the latter didn’t follow government priorities. US governments can’t - not for the lack of trying.

As a result of all this top companies have stayed dominant, profitable and immune from competition  for far longer than has been usual historically.  And because of this moat the risk is seen to be lower  which pushes valuations up.  

Not to say it won’t change but betting against Mr Market is usually bad for your pocket. In that respect nothing’s different. 

And forward P&E ratios are not particularly high at around 21 (I think).  Not as high as they have been by any means.  Profits have been growing very fast. 

Schiller’s ratio has been telling us stocks are overvalued for as long as it existed.  As a result the author has been fiddling with the ratio.  Its the kind of academic work which looked great but has been debunked by reality and is basically useless. 

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

MarkCarnage

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

Which is very possibly reflective of forward earnings growth prospects of their constituents. 

Thrugelmir

MarkCarnage said:

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

Which is very possibly reflective of forward earnings growth prospects of their constituents. 

The negative mantra towards UK companies is well established.  Retail investors at the moment appear to prefer growth stories to the more fundamental style of investing which targets hard profits and cash generation. 

Linton

MarkCarnage said:

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

Which is very possibly reflective of forward earnings growth prospects of their constituents. 

I wonder how many of the enthusiastic investors in Tesla or other high growth tech stocks have ever heard of forward earnings growth never mind taking it into account in their buying decision.

Prism

Linton said:

MarkCarnage said:

Always best to check first, Rather than to assume anything. SP500 is currently 29.5. 

For comparison the FTSE All Share is 14.4 and the FTSE250 16.3. 

Which is very possibly reflective of forward earnings growth prospects of their constituents. 

I wonder how many of the enthusiastic investors in Tesla or other high growth tech stocks have ever heard of forward earnings growth never mind taking it into account in their buying decision.

Well since it requires knowledge of the industry plus some form of model to estimate a variety of scenarios over the next 10 years or so I very much doubt it. I work pretty closely with one of those big tech companies and I don't have a clue what might happen in the next 10 years.

BritishInvestor

Deleted_User said:

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster

I think its more to do with the moat that S&P500 companies have.  Red tape has been proliferating.  Governments make it difficult for new entrants to jump in and outcompete.  The regulations require huge pockets, not to mention connections. 

 And technology.  Massive corporations are hard to compete with as up front technology investment is so high.  And the largest US companies are sitting on so much cash they can and buy any new entrant before they become a threat.  And they can scoop up the best brains by paying them off.  You don’t need a lot of employees if you are Google, Microsoft or Facebook, so they can afford to buy the best brains. 

And accountants. And lawyers. They can buy better ones than the  government.  China can and has attacked big tech when the latter didn’t follow government priorities. US governments can’t - not for the lack of trying.

As a result of all this top companies have stayed dominant, profitable and immune from competition  for far longer than has been usual historically.  And because of this moat the risk is seen to be lower  which pushes valuations up.  

Not to say it won’t change but betting against Mr Market is usually bad for your pocket. In that respect nothing’s different. 

And forward P&E ratios are not particularly high at around 21 (I think).  Not as high as they have been by any means.  Profits have been growing very fast. 

Schiller’s ratio has been telling us stocks are overvalued for as long as it existed.  As a result the author has been fiddling with the ratio.  Its the kind of academic work which looked great but has been debunked by reality and is basically useless. 

I'm referring to just US large growth, so for example the MSCI USA Large growth is on a PE of >40

https://www.msci.com/documents/10199/436a61f4-8386-407e-9c23-2c7c4a538bd7


"Not to say it won’t change but betting against Mr Market is usually bad for your pocket"
Yep, agreed. 

BritishInvestor

Diplodicus said:

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Exactly right, Prism, and I think this was agreed upthread: diversification is likely to bring return closer to the average. But it won't "improve returns for a given level of risk." Any level of risk. It is not a free lunch. 

Might be misunderstanding what you are saying here, but if you have:

Portfolio A: Stock A

Portfolio B: Stock A + Stock B, with the stocks having a correlation of -0.8


Do you not agree the risk has been reduced? If the long term returns of A and B are broadly similar, the return per unit of risk has increased.

[Deleted User]

BritishInvestor said:

Deleted_User said:

"When I ask investors why they believe large growth has outperformed, the answer typically revolves around the notion that “this time it’s different” because technology is moving faster

I think its more to do with the moat that S&P500 companies have.  Red tape has been proliferating.  Governments make it difficult for new entrants to jump in and outcompete.  The regulations require huge pockets, not to mention connections. 

 And technology.  Massive corporations are hard to compete with as up front technology investment is so high.  And the largest US companies are sitting on so much cash they can and buy any new entrant before they become a threat.  And they can scoop up the best brains by paying them off.  You don’t need a lot of employees if you are Google, Microsoft or Facebook, so they can afford to buy the best brains. 

And accountants. And lawyers. They can buy better ones than the  government.  China can and has attacked big tech when the latter didn’t follow government priorities. US governments can’t - not for the lack of trying.

As a result of all this top companies have stayed dominant, profitable and immune from competition  for far longer than has been usual historically.  And because of this moat the risk is seen to be lower  which pushes valuations up.  

Not to say it won’t change but betting against Mr Market is usually bad for your pocket. In that respect nothing’s different. 

And forward P&E ratios are not particularly high at around 21 (I think).  Not as high as they have been by any means.  Profits have been growing very fast. 

Schiller’s ratio has been telling us stocks are overvalued for as long as it existed.  As a result the author has been fiddling with the ratio.  Its the kind of academic work which looked great but has been debunked by reality and is basically useless. 

I'm referring to just US large growth, so for example the MSCI USA Large growth is on a PE of >40

https://www.msci.com/documents/10199/436a61f4-8386-407e-9c23-2c7c4a538bd7


"Not to say it won’t change but betting against Mr Market is usually bad for your pocket"
Yep, agreed. 

P/E ratio is always higher for growth companies, by definition. Popularity of buybacks makes this more pronounced when you look backwards. But even for large growth forward PE is around 30. Its the forward P/E that matters.  And analyst have been underestimating. 

Its looking A LOT better than a year ago for S/P500 forward PE. https://ycharts.com/indicators/sp_500_pe_ratio_forward_estimate

[Deleted User]

Prism said:

Diplodicus said:

MK62 said:

.....but then, collectively, they haven't diversified anything.....collectively they still hold the same investments, so how could they get a better collective return?

They cannot, by any sample. Even if every investment were diversified through every investor, it would not improve the collective return. No free lunch.

You seem focused on return. Overall return is not the most important factor for many people. Diversification reduces the risk by bringing the return closer to the average.

Its more than that.  Diversification reduces risk AND improves compounded returns. Smoothing returns makes you wealthier.  Here is an example. 

https://www.cfasociety.org/calgary/Documents/Professionals_3.%20The%20Benefits%20of%20Diversification.pdf