Timing the market

Thrugelmir

Deleted_User 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.

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

Which is why "Wealth Preservation" funds exist.They minimise the potential exposure to market volatility. Appears we've gone full circle.........

BritishInvestor

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

Thrugelmir

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

Be well under 5 years time. 

[Deleted User]

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

I have a small/value tilt.  And I limit US to 35 vs >50% of world cap.  But I allow for the possibility of being wrong.  Which is why I don’t exclude large growth and don’t take regional/sector bets. 

Linton

Deleted_User 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.

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

ISTM there is a fundamental error in that paper in the "proof" that volatility decreases return - one I have seen before.

The assumption is made and stated that volatility is a gaussian distribution about the trend mean.  In particular  that a fall of x% below the trend is as likely as a rise of x% above it. At first sight this seems obvious.  However lets take extreme cases with an assumption of a zero trend: is a rise of 100% as likely as a fall of 100%?  A rise of 90% as likely as a fall of 90%?  What about a rise of 200% matching a fall of 200%?  Does that correspond with your experience?  If not at what % does the assumption fail?

I think that the correct way of looking at % price changes is logarithmic  ie a rise of 100% (value changes X2) is as likely as a fall of 50% (value changes X  1/2).  

In a sense the basic maths error is linked to the following:

You have a 100 miles to drive in 2 hours.  Easy just average at 50mph.  However you soon get stuck in a traffic jam and you average speed for the first 50miles is 30mph.  So "obviously" you must complete the second 50  miles at 70mph.  However your whole journey takes 50/30 + 50/70 hours= 2.38 hours.

However if the jam lasts for an hour then the 70mph figure is correct.  The point is that if you are taking average rates you must be extremely careful.

Thrugelmir

Deleted_User said:

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

I have a small/value tilt.  And I limit US to 35 vs >50% of world cap.  But I allow for the possibility of being wrong.  Which is why I don’t exclude large growth and don’t take regional/sector bets. 

What's the regional breakdown of your portfolio? 

Linton

Deleted_User said:

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

I have a small/value tilt.  And I limit US to 35 vs >50% of world cap.  But I allow for the possibility of being wrong.  Which is why I don’t exclude large growth and don’t take regional/sector bets. 

Wow, you are even more wary of the US than I am (40%).  I thought you believed that "the market" by definition provided optimal returns?  You aren't trying to outguess the market are you?


The problem with reducing the US too much is that you can have problems with sector allocations as non US markets may have major omissions.  At least with the US you get some of everything. I limit the impact of the FANGs, Tesla etc with a high % of Small Companies.

[Deleted User]

Linton said:

Deleted_User 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.

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

ISTM there is a fundamental error in that paper in the "proof" that volatility decreases return - one I have seen before.

The assumption is made and stated that volatility is a gaussian distribution about the trend mean.  In particular  that a fall of x% below the trend is as likely as a rise of x% above it. At first sight this seems obvious.  However lets take extreme cases with an assumption of a zero trend: is a rise of 100% as likely as a fall of 100%?  A rise of 90% as likely as a fall of 90%?  What about a rise of 200% matching a fall of 200%?  Does that correspond with your experience?  If not at what % does the assumption fail?

I think that the correct way of looking at % price changes is logarithmic  ie a rise of 100% (value changes X2) is as likely as a fall of 50% (value changes X  1/2).  

In a sense the basic maths error is linked to the following:

You have a 100 miles to drive in 2 hours.  Easy just average at 50mph.  However you soon get stuck in a traffic jam and you average speed for the first 50miles is 30mph.  So "obviously" you must complete the second 50  miles at 70mph.  However your whole journey takes 50/30 + 50/70 hours= 2.38 hours.

However if the jam lasts for an hour then the 70mph figure is correct.  The point is that if you are taking average rates you must be extremely careful.

Good discussion but it’s certainly not an “error” and I don’t think the distribution is logarithmic based on historical  data.  Every book on asset allocation has similar examples with the same conclusion, many assume upward trending in their examples. If memory serves me right, Rick Ferry’s Asset Allocation provides a good example with an upward trend.

And that’s not even counting psychological advantages which are even more important than maths. Very hard to stick with the strategy if you get no return for 10 years (1970s USA or Japan since mid 90s).  Sure, US came back with a vengeance but how many people gave up before ot did?  Meanwhile people who bought the world have done great in every decade. 

Even getting the same expected return for less risk/volatility would be a huge advantage. 

[Deleted User]

Linton said:

Deleted_User said:

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

I have a small/value tilt.  And I limit US to 35 vs >50% of world cap.  But I allow for the possibility of being wrong.  Which is why I don’t exclude large growth and don’t take regional/sector bets. 

Wow, you are even more wary of the US than I am (40%).  I thought you believed that "the market" by definition provided optimal returns?  You aren't trying to outguess the market are you?


The problem with reducing the US too much is that you can have problems with sector allocations as non US markets may have major omissions.  At least with the US you get some of everything. I limit the impact of the FANGs, Tesla etc with a high % of Small Companies.

Well, more accurately 35% is the target with +-5% margin before rebalancing. Right now its 37.87%. And 30% of my US is in VBR (small value) which reduces Tesla a bit.

I also track sector allocations to make sure nothing is amiss. 

But that’s the point. Its ok to use factors (be it momentum, low vol, value, quality or small). You will probably underperform for a while but end up in the same place. Its ok to have opinions. But these “wealth preservation’ guys from Ruffer have 20% in US, almost 20% in Japan and 35% in UK.  And they have no technology.  Its not a tilt; its a major bet. In my book it translates to more risk. 

Thrugelmir

Deleted_User said:

Linton said:

Deleted_User said:

BritishInvestor said:

Deleted_User said:

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

It's going to be interesting to come back to this discussion in five-ten years. It might be very different from 1999, or it might not. 

https://alphaarchitect.com/2020/02/21/the-massive-performance-divergence-between-large-growth-and-small-value-stocks/

"As the chart shows, the massive divergence in the returns of the most extreme deciles of growth and value stocks has led to a massive jump in spreads for deep value that is only rivaled by the tech bubble—a period that was followed by the Fama-French U.S. Small Value Research Index outperforming the Fama-French U.S. Large Growth Research Index by 16 percentage points per year over the next eight years (16.2 percent versus 0.2 percent), producing a total return difference of about 230 percentage points."

"the most likely way to put the odds in your favor is to follow Warren Buffett’s sage advice, which is that if you cannot avoid market timing, at least buy when others are abandoning their plans and engaging in panicked selling. In other words, buy after periods of poor performance when valuations are cheapest and expected returns are highest"

Must try not to market time   

I have a small/value tilt.  And I limit US to 35 vs >50% of world cap.  But I allow for the possibility of being wrong.  Which is why I don’t exclude large growth and don’t take regional/sector bets. 

Wow, you are even more wary of the US than I am (40%).  I thought you believed that "the market" by definition provided optimal returns?  You aren't trying to outguess the market are you?


The problem with reducing the US too much is that you can have problems with sector allocations as non US markets may have major omissions.  At least with the US you get some of everything. I limit the impact of the FANGs, Tesla etc with a high % of Small Companies.

Well, more accurately 35% is the target with +-5% margin before rebalancing. Right now its 37.87%. And 30% of my US is in VBR (small value) which reduces Tesla a bit.

I also track sector allocations to make sure nothing is amiss. 

But that’s the point. Its ok to use factors (be it momentum, low vol, value, quality or small). You will probably underperform for a while but end up in the same place. Its ok to have opinions. But these “wealth preservation’ guys from Ruffer have 20% in US, almost 20% in Japan and 35% in UK.  And they have no technology.  Its not a tilt; its a major bet. In my book it translates to more risk. 

Have a listen. Very interesting speaker. 

https://www.investorschronicle.co.uk/podcasts/2021/10/27/hamish-baillie-financial-repression-is-going-to-be-the-path-forward/

Though being overseas perhaps not that relevant to you personally.