Non-financial S&P 500 sales have risen at only inflation + 1.54%/year so far this century, so, once you look past the ultimately bounded squiggles in interest costs and tax rates, that's roughly the amount the true very long term value of the S&P 500 index has probably risen (and will likely continue to rise, give or take). Add around 2%/year in value generation for the dividends.

Many people should pay attention to this above. The long term value gain is the gain in sales (immune to one off adjustments such as tax policy or margin trends linked to economic conditions) plus the dividend yield.

An important corollary is that intrinsic value gains are not, as many tend to think, independent to market price. The sales increase doesn’t relate to market price, but the dividend yield of course does. Historically the yield was around 4%, and with sales growth of 2% leads to the so called Siegel Constant of around 6% real for the total stock market return. Call this the “IV gain base rate”, which contrary to being a constant, is a variable that changes very significantly from one decade to another and is measurable

But most of this IV gain is from the dividend yield, not the sales growth. And with the yield down from 4% to 1.5% you are now getting a long term return of 3.5% instead of 6% *even if valuations remain indefinitely high*.

This underlines why entry price is so important. When entering the S&P500 at a low price (high yield) you not only have a much higher return (even with valuations remaining indefinitely low) but you have the added benefit of the multiple (valuation) increasing, so your return will greatly exceed the 6% “IV gain base rate”.

Now we have both a lower IV gain base rate of 3.5%, but your actual return will likely be markedly lower from the likely fall of the price to sales multiple.

It is sound to keep your expectations lower than usual, and make decisions accordingly.

Note the high correlation of all stocks with the broad market over 1 to 2 year periods - you generally need to look out 4+ years for individual value stock purchaes (whether that be Google or Brookfield Corporation) to become decoupled with the broad market.

Having cash aside, to enter into the market when the IV gain base rate is higher, is tricky because often 1
the valuations keep rising for too long, you become impatient and enter anyway at and even higher price; or 2 when the valuations are lower, the observation of the price falls makes you feel as they will fall further, so you wait perpetually and eventually it recovers and you miss the opportunity. But waiting with cash to pricier lower be done by some. The CAPE now is at a high valuation observed only around 2% of the time the last 170 years, so valuations can go higher but thr mean reversion is definitely down and not up.

I personally remain fully invested and select a concentrated portfolio that have the intrinsic value ten years away mich higher than the quotation today - and then attempt to apply the necessary, almost required as ludicrous, amount of patience, given the strong correlation between just about all stocks and the broad market over 1 - 4 year periods.

- Manlobbi