No. of Recommendations: 24
I'd wager a small amount that to-the-degree extremes up in earnings will be met with similar down ones.
...
Maybe, maybe not. I know of a guy who refused to buy GOOG at 100.
Another guy who refused to buy AAPL until it came back down to 100.
That was before 40-1 splits in GOOG and 28-1 in AAPL.
That's split-adjusted 2.50 for GOOG and 5.00 for AAPL.
Though I don't have a dog in that race, I might add by the same reasoning that I know a guy who absolutely refused to buy the winning numbers 09 20 28 29 36 42 in last week's Ontario lottery. What a fool!
The moral being, Apple and Google aren't really examples of anything in terms of the advisability of buying at high valuations in the past, because you also have to consider what the odds are of winning when you buy at high valuations *without* knowing the future of the specific security in question. It's really easy to say with hindsight that they were obvious winners, but that can't be believed without a time machine and going back to see what all the OTHER obvious winners were.
More broadly, buying any given single stock at high valuations will give an incredibly wide range of outcomes (with a low average). But buying a broad market at extremely high valuations will pretty predictably give poor returns over a medium-to-long horizon.
The one thing that we can say for sure is that the broad US market, based on smoothed real earnings, is more expensive than it has been 95% of the time since 1995. It might go up a lot from here, who knows? But the omens are not very good. Starting on days when the valuation was in the highest 10% of weeks since 1995 (half of them pricier and half cheaper than now), forward returns were reliably poor. Looking forward 7 years with smoothing (to average end level 4-10 years later, annualized as a seven year rate), the average forward real total return was -2.6%/year for 7 years. The lowest figure was -4.1%/year, the highest -0.3%/year. I have no idea whether it's a good idea or not to buy any given firm at a P/E of 30. Usually not, but sometimes yes. But to buy the broad market at a P/E of 30 would be a poor allocation of capital.
I think one could make the very brave prediction that an S&P 500 index tracker fund will be 25% lower than today at some point in the next 10 years, after counting dividends and inflation. In case any future historian wants to find out whether that was so, CPI is at 335.123 and SPY closed at $728.99. So the thesis is that one would be better off holding TIPS till then. Five year TIPS current yield is inflation + 1.915%.
(weirdly, that TIPS yield is up hugely in the last 2 months, up from 1.15% around mid Feb-mid Mar. Since the expectation of inflation risk is rising, I'd have thought that buying TIPS because they offer protection would have driven the yield down, but the TIPS market is notoriously disconnected from economic expectations--it has been "risk on" all the way baby)
Jim
