That article is highly misleading because it doesn't tell you squat about anytime prior to 1995. Prior to then, a CAPE in the 20s would have bad subsequent returns.See, here's what I'm trying to say...
See that chart in the website above?
It shows pretty high returns around CAPE of 25, because it includes all the years from 1996-2020 that had decent returns with a CAPE of 25.
But in 1996, there was only one data point for CAPE of 25, and it was BAD. The chart from 1996 was COMPLETELY different. The best-fit line hit 0% real returns at a CAPE of 25. Which is why Shiller predicted 0% 10-year real returns. The chart today shows 10-year returns in the 8% range (not sure if that's nominal or real)
The slope of the line was completely different in the past.. Even in 2012, the slope of the line was very different.
That chart in that article doesn't show that past predictions were "remarkably accurate". It just shows a best-fit line based on what we ALREADY KNOW HAPPENED. Do you see how that claiming a best fit chart (on old data) proves "predictions" were "accurate" is a lie?
Readers today who don't know any better will see the CAPE of 40 in the chart and assume it's a bad time to invest.
Had this exact article been done 30 years ago, with data from 30 years prior, the chart would show bad returns with a CAPE of 25 instead of 40 or whatever. And readers who didn't know any better would assume it's a bad time to invest. Well, surprise, it was a fantastic time to invest.
The only thing that's been remarkably accurate is that higher valuations, ALL ELSE EQUAL, generally mean lower subsequent returns. But, we don't know what high is and all else is not equal.
I don't know why this is so difficult. Invest in the broad market and enjoy your share of the profits.
Who cares if the top 30% have crappy returns? If they do, the bottom 70% will collectively move up. If Apple tanks, it's very likely BECAUSE a competitor or replacement came up, not because magically society suddenly stop using or needing all that Apple offers.
Regardless, companies constantly come and go. I don't care how much I make or lose on each of the 500 or 3,500 or 7500 stocks. I care how much I make on them collectively. Why would an index investor be talking about 7 companies? So they fall 50% and the other 70% will carry the load, and 7 from that 70% will become the new 30%. Who cares?
Statistics: Posted by Triple digit golfer — Sat Feb 24, 2024 5:29 am — Replies 48 — Views 2144