A great way to think about gold is to think of it as something that 'mixes' up with government bonds and creates a very powerful and resilient synthetic security that is extremely resilient to different enviroments. If grandma puts all of her money in bonds, she will of course get killed during inflationary periods. If she instead puts 80% in bonds and 20% in gold, that will fix that problem. She is long a mixed security that can survive inflation and deflation. She has a true store of value
Global Macro Trading Journal
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Here is a fun little backtest showing that. 1926-2016 real returns:
Not only gold added to returns (CAGR is actually a monthly return), it also improved risk adjusted returns (The Calmar is actually the MAR ratio CAGR/MaxDD, and it almost doubled). The added returns comes from rebalancing in the periods where gold does great but bonds get crushed. Buffett is wrong to talk shit about gold, it works for him because he's got the risk tolerance of a kamikazi. Not everyone can live with a 100%+ equity portfolio, furthermore, not every country in the world is a safe haven like the US. In many places, gold is what saves you (Greece)
Not only gold added to returns (CAGR is actually a monthly return), it also improved risk adjusted returns (The Calmar is actually the MAR ratio CAGR/MaxDD, and it almost doubled). The added returns comes from rebalancing in the periods where gold does great but bonds get crushed. Buffett is wrong to talk shit about gold, it works for him because he's got the risk tolerance of a kamikazi. Not everyone can live with a 100%+ equity portfolio, furthermore, not every country in the world is a safe haven like the US. In many places, gold is what saves you (Greece)
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Great piece by Damodaran on the Shiller PE
http://aswathdamodaran.blogspot.com.br/2016/08/mean-reversion-gravitational-super.html
And by email he told me :
"The Shiller PE is one of the most oversold metrics in the market. Cyclically adjusting (which is just a fancy name for averaging over ten years) is not going to make a crappy measure any less crappy."
It just makes little to no sense to compare valuations from 100 years ago to valuations today. Furthermore using 10 year averages also make little sense, what matters are conditions right now, thats what markets use to price things (as well as the forward outlook). Not what happened years ago. Damodaran uses a version of the gordon formula to estimate the equity premium at any given year, to me that makes a lot more sense than averaging out 10 year earnings and making decisions. Shiller says "but earnings can be volatile and negative sometimes", then lets deal with that problem. What makes no sense is to average things for 10 years (why 10, btw?) and think that will solve anything
People need to choose the academics they listen to better, more Damodaran, less Robert Shiller
http://aswathdamodaran.blogspot.com.br/2016/08/mean-reversion-gravitational-super.html
And by email he told me :
"The Shiller PE is one of the most oversold metrics in the market. Cyclically adjusting (which is just a fancy name for averaging over ten years) is not going to make a crappy measure any less crappy."
It just makes little to no sense to compare valuations from 100 years ago to valuations today. Furthermore using 10 year averages also make little sense, what matters are conditions right now, thats what markets use to price things (as well as the forward outlook). Not what happened years ago. Damodaran uses a version of the gordon formula to estimate the equity premium at any given year, to me that makes a lot more sense than averaging out 10 year earnings and making decisions. Shiller says "but earnings can be volatile and negative sometimes", then lets deal with that problem. What makes no sense is to average things for 10 years (why 10, btw?) and think that will solve anything
People need to choose the academics they listen to better, more Damodaran, less Robert Shiller
Damodaran might be an academic but I respect him a lot more than Shiller. He publishes his calls, he buys the stocks he says are undervalued and takes the flak/criticism when he is wrong (as he has been on VRX and TWTR). He also has been involved in the stock market for like 30 years (as a thinker, teacher and practioneer on the side). Shiller doesnt and has not done those things. As far as I know, all Shiller does is to buy ETFs on the side and teach finance
I rather pay more attention to current earnings and forward earnings (calculated by me or by analysts, with precautions around given that people can forecast wrongly. The chance of error is not much different from the chance that the Shiller PE is completely worthless).
The last earnings figure from Shiller is 100, vs 2440 on the SPX. That's a PE of 24.5, but maybe it was a very good quarter, so lets use 12 month trailing, then the PE goes to 27. That sounds really high but that is probably happening because of the expectations around tax reform, if it happens, EPS will rise.
In fact, Leon Cooperman is talking about an EPS of 130 for the SPX in 2018 (because of 2017 growth plus 2018 growth). That's a forward PE of 18-19. Of course, the forecast has to be right but this type of forecasting is the job of an active investor. And if he does it well, he will understand what is going on a lot better, he will be able to even get an edge (whether by going with expectations or fading them and shorting). Meanwhile with the Shiller, the person will be scratching their head for years. And thats all what is going to happen
The last earnings figure from Shiller is 100, vs 2440 on the SPX. That's a PE of 24.5, but maybe it was a very good quarter, so lets use 12 month trailing, then the PE goes to 27. That sounds really high but that is probably happening because of the expectations around tax reform, if it happens, EPS will rise.
In fact, Leon Cooperman is talking about an EPS of 130 for the SPX in 2018 (because of 2017 growth plus 2018 growth). That's a forward PE of 18-19. Of course, the forecast has to be right but this type of forecasting is the job of an active investor. And if he does it well, he will understand what is going on a lot better, he will be able to even get an edge (whether by going with expectations or fading them and shorting). Meanwhile with the Shiller, the person will be scratching their head for years. And thats all what is going to happen
The Shiller CAPE seems very dangerous in 2 situations. One is when a market is 'expensive' and then goes through a profit boom
Lets say a index is a 1000, the 10y avg profit is 50 (20 Shiller PE). Then something happens and profits soar. The index might go to 1500 but the avg profit only to 55. The PE goes to 27 and the person thinks 'you know, this is too expensive, I'm out'. But what they are missing is the fact that the "true" PE might not have risen all that much once you account for the profit boom, its possible that the market is still cheap. As years passes and more of the profit boom becomes part of the 10 year average profit (and the less of the old and low profits are part of the 10t average), all of the sudden the Shiller PE changes and signals that the market is not that expensive. This could be what is going on right now in the US, although it depends on whether the Trump agenda adavances. Pop example: imagine analyzying AAPL by looking at 10y avg earnings, you would be thinking is overvalued for like decades
Another situation is where there is a collapse in profits and the Shiller PE keeps telling you to buy. Lets say the same index is at 1000 with 10y average profits at 50 (20 Shiller PE). Then there is a economic depression, profits start to collapse. Stock investors (a lot smarter than academics) will take the index down to 400. A dumb investor will look at a 400 index vs 10y avg profit at 45 and think 'this market is a 9 times earnings, time to buy', but he doesnt get it that the index is only that low because smart investors see that the old profits are gone and there is a new reality where profits will be much lower. This was the Greece scenario where CAPE investors got killed as the index dropped 95% and profits dissapeared. Pop example: Imagine analyzing VRX by looking at 10y avg earnings, you would miss out that the future will have a lot lower profitability
The Shiller PE has this implicit 'mean reversion' in the profit mentality that can be very dangerous. In the Greece scenario is not that bad because at least you can only lose what you put in when you invest in equities and usually, in most capitalistic economies, that profit mean reversion tends to happen (although it will fail in the tail scenarios like it did in Greece and Venezuela). But when we are talking about profit booms, it can easly lead someone to stay out of market during a huge exponential run.
Stocks are a forward looking market, it is not appropriate to use a backward looking, slow to adjust indicator created by an academic that is not experienced with the stock market
Lets say a index is a 1000, the 10y avg profit is 50 (20 Shiller PE). Then something happens and profits soar. The index might go to 1500 but the avg profit only to 55. The PE goes to 27 and the person thinks 'you know, this is too expensive, I'm out'. But what they are missing is the fact that the "true" PE might not have risen all that much once you account for the profit boom, its possible that the market is still cheap. As years passes and more of the profit boom becomes part of the 10 year average profit (and the less of the old and low profits are part of the 10t average), all of the sudden the Shiller PE changes and signals that the market is not that expensive. This could be what is going on right now in the US, although it depends on whether the Trump agenda adavances. Pop example: imagine analyzying AAPL by looking at 10y avg earnings, you would be thinking is overvalued for like decades
Another situation is where there is a collapse in profits and the Shiller PE keeps telling you to buy. Lets say the same index is at 1000 with 10y average profits at 50 (20 Shiller PE). Then there is a economic depression, profits start to collapse. Stock investors (a lot smarter than academics) will take the index down to 400. A dumb investor will look at a 400 index vs 10y avg profit at 45 and think 'this market is a 9 times earnings, time to buy', but he doesnt get it that the index is only that low because smart investors see that the old profits are gone and there is a new reality where profits will be much lower. This was the Greece scenario where CAPE investors got killed as the index dropped 95% and profits dissapeared. Pop example: Imagine analyzing VRX by looking at 10y avg earnings, you would miss out that the future will have a lot lower profitability
The Shiller PE has this implicit 'mean reversion' in the profit mentality that can be very dangerous. In the Greece scenario is not that bad because at least you can only lose what you put in when you invest in equities and usually, in most capitalistic economies, that profit mean reversion tends to happen (although it will fail in the tail scenarios like it did in Greece and Venezuela). But when we are talking about profit booms, it can easly lead someone to stay out of market during a huge exponential run.
Stocks are a forward looking market, it is not appropriate to use a backward looking, slow to adjust indicator created by an academic that is not experienced with the stock market
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Its implicit on the Shiller PE that something will happen to profit margins and profitability (either good or bad). People can rely on Robert Shiller to do that work for them or they can do it themselves, but that forecasting work will be done and a bet will be made whether the person admits or not. I rather do my own work and make my own decisions
I do think the Shiller PE has SOME value when it comes to telling when a market is cheap because as I mentioned, the long side has limited risk (you cant lose more than what you put in) and most of the time you buy a market that is down a lot and has a low Shilller PE, it will work and things will mean revert. Ocasionally you get bagged like on Greece but whatever, usually it will work. I still wouldn't overly rely on it but it can be helpful to look at it when dealing with countries that have limited stock market information (and StarCapital does a good job of listing countries by the Shiller PE)
But when assesing how much upside stocks have, the CAPE is extremely unreliable. Its not only because stocks have unlimited upside (that too) but also because profits have no upper bound to them, they can go anywhere in terms of upside. Linear thinking /risk averse bond people like Jeffery Gundlach don't understand that, thats why he came out last year and said 'stocks have 2% upside and 20% downside', and then markets popped 20%. SPX could go to 3000 or much higher in the coming years, it all depends on profits and expectations around those profits. Using backward looking indicators when dealing with markets is already dangerous, at turning points, its even more
But when assesing how much upside stocks have, the CAPE is extremely unreliable. Its not only because stocks have unlimited upside (that too) but also because profits have no upper bound to them, they can go anywhere in terms of upside. Linear thinking /risk averse bond people like Jeffery Gundlach don't understand that, thats why he came out last year and said 'stocks have 2% upside and 20% downside', and then markets popped 20%. SPX could go to 3000 or much higher in the coming years, it all depends on profits and expectations around those profits. Using backward looking indicators when dealing with markets is already dangerous, at turning points, its even more