Should people cheer a potential collapse in US stock market valuations?

D

Daal

Here is something I like to think about. When people project long-term returns from asset classes, especifically in stocks, they look at current yields (like dividend or earnings yields) and add a component for the path of valuations going forward.
So a typical calculation would be:
2.5% in dividend yields + 2% in earnings growth -2% per year in multiple contraction = 2.5% per year. They put in mean reversion in their models to be more realistic

But I think there is a big flaw in this, at least for most people. Since most people work and will be net savers during their lifetime (and net buyers of investments), they are "short" valuations. Higher valuations will hurt them big time as their savings get invested at smaller and smaller likely returns. But if valuations come in, that will be great for them as they invest at cheaper prices (both the savings from their income, as well as dividends/interest from their current investments) and compound their wealth at a greater rate.

Since they are short valuations, a negative contribution is actually a positive one. The final result of the formula is more along the lines of 6% per year (roughly). Its a weird form of accounting to do that though, I have never read anything on personal finance that explains to people things like that. The closest thing that I find is when Buffett says people should cheer lower stock prices and not be depressed by them

It might be a weird form of accounting but I believe its pretty accurate in a lot of situations

Of course, this is just mathematical theory, in the real world, people freak out and do dumb things when prices fall but for the smart disciplined investor, valuations improving should count as a positive

Other things that people are naturally short (as a result of being born)
-Real estate (you need to live somewhere)
-Real income (although, this is somewhat related to the short in valuations)
-Commodity prices
-Time

There could be others and some nuances around them but I havent thought about it more.
Figuring out how to close these shorts and manage a person's exposure to them should be a big part of modern personal finance, but sadly, it does not appear to be
 
depends where you are in life. If in the accumulation stage and routinely buying stocks then yes a big correction now makes life going forward just that much easier. But that is always the case. Nothing special about right now.
If in the imcome stage it's a moot point. You're getting the same check each monthe regardless of where the pincipal is valued.
However, those poor individuals otherwise known as instituitions who are always in the wealth preservation stage must always fear the crash. They don't even like a down day.
 
CyJackX said:
brb buying puts on time
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There is another one I forgot to mention, healthcare prices. It looks like that due pollution, poor diets, obsesity, people seem to be a short as they ever been on healthcare prices. No wonder they get so pissed off when Shkrelli, VRX or MYL pop drug prices. They know they are getting squeezed out of the market. How to close this short, is a more difficult to answer. But I think it would have to include a better diet, exercise and potentially certain investments in health care stocks (perhaps on the short side if the person has a currently incurable disease)
 
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Daal said:
There is another one I forgot to mention, healthcare prices. It looks like that due pollution, poor diets, obsesity, people seem to be a short as they ever been on healthcare prices. No wonder they get so pissed off when Shkrelli, VRX or MYL pop drug prices. They know they are getting squeezed out of the market. How to close this short, is a more difficult to answer. But I think it would have to include a better diet, exercise and potentially certain investments in health care stocks (perhaps on the short side if the person has a currently incurable disease)
More...

Socialize healthcare.
 
Daal, it all averages out over time. When valuations are high, just as when home prices are high, people are earning an outsized return on their assets, much higher then they should otherwise. When valuations compress, they earn negative returns. Over time they get the mean. Yes, some people get the benefit of being born at the right time. Being able to enter the workforce at the "beginning" if a bubble period is better then entering the workforce right before a recession. But in the end, most of this reverts to the mean. If you want to learn about this stuff, study economics. We all discussed this in school. But you are right, you won't find it in business school.
 
CyJackX said:
Socialize healthcare.
More...

There are other possibilities, but more expensive and complicated than single payer. Likely the pigs now feeding at the trough will eventually force socialized, single payer upon us. And who can say they wouldn't have deserved it.
 
Health care stocks typically go down a bit in election years depending on how much talk there is of medical care reform. Those of us who have hedged our outsized U.S. medical costs by buying into healthcare are living on borrowed time. But there is a lot of time to borrow! As long as Senators can afford their health care -- and they had no problem fehb because the taxpayer paid for 72-75% of their insurance costs, and they had great, plan options compared to what was available to most -- don't expect dramatic changes. The only way we would get single payer through immediately is if Senators and Congressmen -- roughly $16K/year on the family plan, less 72% that we pay -- had to pay the full, 16K load without any increase in compensation. Then we might see single payer so fast your head would spin!
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In addition, members of Congress also qualify for some medical benefits that ordinary federal workers do not. They (but not their families) are eligible to receive limited medical services from the Office of the Attending Physician of the U.S. Capitol, after payment of an annual fee ($491 in 2007). But services don’t include surgery, dental care or eyeglasses, and any prescriptions must be filled at the member’s expense.

http://www.factcheck.org/2009/08/health-care-for-members-of-congress/
"House and Senate members (but not their families) also are eligible to receive care at military hospitals. For outpatient care, there is no charge at the Washington, D.C., area hospitals (Walter Reed Army Medical Center and National Naval Medical Center). Inpatient care is billed at rates set by the Department of Defense."

See also: https://www.washingtonpost.com/apps...esentatives-have-signed-up-for-obamacare/646/
 
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Mathematics is all very nice but there's the contextual reality to deal with that breaks all the models. What happens if the downturn lasts decades and stays flat for a lot longer.
 
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