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I don't understand why so many investors think the entire planet is a good place for business. For example, some countries have far better protections for workers than we have here. Unemployment benefits are much higher, and paid for a longer amount of time. Some countries do not allow pay freezes or cuts. There is no reason to expect any reversion to the mean for investors... their systems simply give more to the workers and less to investors. I'm not passing any value judgement here, but it is different than how we do things in the U.S.
The answer to this, is that we have a historical record of these various factors. These are longstanding trends. Worker-rights and pro-business or anti-business policy generally have not changed much over the past 30 years, between one country and another. Sure, there are glaring individua counterexamples, such as Chile going from Allende to Pinochet, going from anti-busines to pro-busness more or less overnight. But Europe has been "European" since the post-war period, while the Tiger-nations of Asia have been "tiger".
What we've witnessed since the peak prior to the Great Recession - 2007 - is a stark decoupling between the US stock market, and that of neary everywhere else. This would have made sense if the US suddenly became even more pro-business while elsewhere became more corrupt and more opaque and more moribund. Has this actually happened? If not, then it's reasonable to argue for a reversion to the mean, that "mean" being the second half of the 20th century.
To reiterate, yes of course the US is a better place to do business, than most other countries. But that should already be baked-in, in stock prices, at all times. EMT claims this. Otherwise we have an emerging imbalance. So the question is, have we had this imbalance for 15 years, because the US has suddenbly become demonstrably better than it was in the 20th century? Or, are we going to revert to the prior mean?
To close, let me give an illustrative example. Bob and Bill are two weightlifters. Bob is a much bigger man, and he bench-presses 400 pounds. Bill can only benchpress 300 pounds. This has been happening for years. But recently Bob has been benchpressing 450 pounds, and Bill, only 250 pounds. What happened? Do we expect that Bob has gotten stronger and Bill has gotten weaker, in which case, this trend should persist? Or does Bob have a temporary advantage over Bill, which once concludes, restores their prior comparison? Mind you, nobody is asserting that Bill will ever benchpress more than Bob!
What we've witnessed since the peak prior to the Great Recession - 2007 - is a stark decoupling between the US stock market, and that of neary everywhere else. This would have made sense if the US suddenly became even more pro-business while elsewhere became more corrupt and more opaque and more moribund. Has this actually happened? If not, then it's reasonable to argue for a reversion to the mean, that "mean" being the second half of the 20th century.
To reiterate, yes of course the US is a better place to do business, than most other countries. But that should already be baked-in, in stock prices, at all times. EMT claims this. Otherwise we have an emerging imbalance. So the question is, have we had this imbalance for 15 years, because the US has suddenbly become demonstrably better than it was in the 20th century? Or, are we going to revert to the prior mean?
The European "mean" of the second half of the 20th century includes 30 years of rebuilding from almost complete destruction. The European economies, and stock markets, grew phenomenally during this time because they were starting from such a low base at the end of world war 2. I expect (and very much hope) that similar conditions will never happen again.
Similar for the asian "tiger" economies. Some had been wiped out by world war 2, others had simply not industrialized yet. Either way, they were starting from extremely low bases, and phenomenal growth was possible (and very likely with the right conditions).
There are still countries that aren't industrialized, and such growth is possible there (when they have political stability, property rights, and reasonable taxes). There will be opportunities, when conditions are right in those countries, to capture some of that growth through investments.
Mature, fully industrialized economies are a completely different situation. That's where the US, Europe, etc. are now. When there are no "special circumstances", when the countries under consideration are already fully developed, differences in property rights and taxes determine where the value creators go. If someone can invest, or grow a business from scratch, in a country that "let's" them keep 75% of what they create, or another country that only "let's" them keep 40%, there's a very strong pull to keep that 75%. Most (but not all) value creators are highly motivated to keep the value they create, rather than turning it over to governments.
Value creators don't make decisions randomly. While they are individuals weighing options each in their own way, when there's a strong trend among them in their decision making in one direction for a long time, there's a good reason for that trend. It isn't just a stochastic process that will eventually revert to some mean, independent of the favorability of business conditions. SpaceX (led by a native of South Africa, but based out of Texas) is currently worth $100B. It will easily grow into the $Trillions range. All of that value is being created in the US. There's no reason to expect economies or stock markets in other countries will grow "by some other means" to keep up with that. If you want that growth, you have to invest in the US.
Countries compete to attract value creators. Stock valuations are simply a reflection of their success at attracting value creators, because that small group of people has such an outsized influence on markets. As I mentioned earlier, there is nothing set in stone. Other countries could choose to become more hospitable to value creators, or the US could choose to become less hospitable to them. Each country gets to decide for itself how successful it's going to be through the policies it creates. Over the long term, the market is objectively grading each country's success. It's as simple as that.
(As an aside, I don't consider 6% annual return for the next 17 years to be conservative, I consider it to be high probability. Conservative would be 3-4%).
The answer to this, is that we have a historical record of these various factors. These are longstanding trends. Worker-rights and pro-business or anti-business policy generally have not changed much over the past 30 years, between one country and another. Sure, there are glaring individua counterexamples, such as Chile going from Allende to Pinochet, going from anti-busines to pro-busness more or less overnight. But Europe has been "European" since the post-war period, while the Tiger-nations of Asia have been "tiger".
What we've witnessed since the peak prior to the Great Recession - 2007 - is a stark decoupling between the US stock market, and that of neary everywhere else. This would have made sense if the US suddenly became even more pro-business while elsewhere became more corrupt and more opaque and more moribund. Has this actually happened? If not, then it's reasonable to argue for a reversion to the mean, that "mean" being the second half of the 20th century.
To reiterate, yes of course the US is a better place to do business, than most other countries. But that should already be baked-in, in stock prices, at all times. EMT claims this. Otherwise we have an emerging imbalance. So the question is, have we had this imbalance for 15 years, because the US has suddenbly become demonstrably better than it was in the 20th century? Or, are we going to revert to the prior mean?
To close, let me give an illustrative example. Bob and Bill are two weightlifters. Bob is a much bigger man, and he bench-presses 400 pounds. Bill can only benchpress 300 pounds. This has been happening for years. But recently Bob has been benchpressing 450 pounds, and Bill, only 250 pounds. What happened? Do we expect that Bob has gotten stronger and Bill has gotten weaker, in which case, this trend should persist? Or does Bob have a temporary advantage over Bill, which once concludes, restores their prior comparison? Mind you, nobody is asserting that Bill will ever benchpress more than Bob!
In 2007, there was more of a balance between sectors in the market, and none were so dominant as to dwarf all others. In 2022, there is a sector -- tech -- that does (28% of the S&P market cap is tech). While very much a global thing, from a HQ/stock perspective, the heavyweights in tech are US-based. All but one $1 trillion+ company is US-based.
Some countries of the world might catch/keep up: China, South Korea perhaps. Many others will not.
You're right that how business is done hasn't suddenly changed in the last 15 years. But we now also live in a world where a business can exist everywhere and nowhere at once. People in Europe can and do work for US-based companies every single day. There's no reason to revert to the mean in this situation because it's a global economy. Where a business is based only matters for taxes and stock tickers anymore.
(As an aside, I don't consider 6% annual return for the next 17 years to be conservative, I consider it to be high probability. Conservative would be 3-4%).
Is your above expectation nominal return or real return?
To close, let me give an illustrative example. Bob and Bill are two weightlifters. Bob is a much bigger man, and he bench-presses 400 pounds. Bill can only benchpress 300 pounds. This has been happening for years. But recently Bob has been benchpressing 450 pounds, and Bill, only 250 pounds. What happened? Do we expect that Bob has gotten stronger and Bill has gotten weaker, in which case, this trend should persist? Or does Bob have a temporary advantage over Bill, which once concludes, restores their prior comparison? Mind you, nobody is asserting that Bill will ever benchpress more than Bob!
Allow me to propose what I feel is a better analogy.
Say Bob runs 10mph and Bill runs 15mph. In order to make it a fair race it might seem reasonable that Bob be given a head start. Okay, how much of a head start should Bob be given? A minute? Five minutes? Ten minutes? Obviously we would need to know the length of the race in order to arrive at an equitable head start.
A similar problem exists when valuing stocks. If AcmeCorp grows 5% annually and FancyCat grows 15% annually, what sort of valuation premium should FancyCat be assigned? Investors with different timeframes will have different viewpoints on this topic. Someone who is investing for only a year will be reluctant to assign a very large premium to FancyCat since he finds high PE's scary, and the difference in growth over a year is not much. On the other hand, someone investing for thirty years won't mind paying quite a high multiple of current earnings for FancyCat, since during their holding period it will grow more than 65-fold, while AcmeCorp will only grow about 4-fold.
So there is really no such thing as a universally agreed upon fair price. Inferior is inferior, and over time that disadvantage will become apparent. There's no way to "price it in" for all time.
...If AcmeCorp grows 5% annually and FancyCat grows 15% annually, what sort of valuation premium should FancyCat be assigned? Investors with different timeframes will have different viewpoints on this topic. ...
On this there is, or at least was, a straightforward rule of thumb. I forget to whom it is credited, but it was one of the veneral stalwarts.
A reasonable PE should be twice the percentage of annual earnings growth rate. So if Acme grows at 5%, their PE, at reasonable valuation, is 10. If Fancy grows at 15%, then a reasonable PE for them is 30.
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My guess is 6%, 4% real + 2% inflation .
I've been wrong before
But if I have 17 years to go till retirement-first use, I'd guess towards the low end of the range and hope for the high end.
You can never go wrong with Vanilla.
YicecreamMV
My guess is 6%, 4% real + 2% inflation .
I've been wrong before
But if I have 17 years to go till retirement-first use, I'd guess towards the low end of the range and hope for the high end.
You can never go wrong with Vanilla.
YicecreamMV
This would be about my guess too, but we all know no one really can accurately predict this type of thing.
Last edited by Lizap; 01-23-2022 at 01:03 PM..
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