Sunday, November 9, 2014


Q&A with Guy Spier about his book, The Education of a Value Investor (LINK)

Buffett’s Private Analysis of Geico in 1976: ‘Extraordinary’ But ‘Mismanaged’ [H/T Lincoln] (LINK)

Aswath Damodaran on corporate break-ups, using EBay and PayPal as an example (LINK)

Common Sense Podcast 283: Dan Carlin discusses Ebola and Artificial Intelligence (LINK)

The Future of Cities: The Internet of Everything will Change How We Live [H/T Abnormal Returns] (LINK)

Hussman Weekly Market Comment: Do the Lessons of History No Longer Apply? (LINK)
Our valuation concerns don’t rely on any requirement for earnings or profit margins to turn down in the near term. Valuations are a long-term proposition that link the price being paid today to a stream of cash flows that, for the S&P 500, have an effective duration of about 50 years. In evaluating whether “this time is different,” it should be understood that current valuations are “justified” only if 1) the wide historical cyclicality of profits over the economic cycle has been eliminated, 2) the average level of profit margins over the next five decades will be permanently elevated at nearly twice the historical norm, 3) the strong historical advantage of smoothed or margin-adjusted valuation measures over single-year price/earnings measures has vanished, and 4) zero interest rate policies will persist not just for 3 or 4 more years, but for decades while economic growth proceeds at historically normal rates nonetheless. Believe all of that if you wish. Without permanent changes in the way the world works, on valuation measures that are best correlated with actual subsequent market returns, stocks are wickedly overvalued here. 

The charts below show several of the measures that have the strongest relationship (correlation near 90%) with actual subsequent 10-year S&P 500 total returns, reflecting data from the Federal Reserve, Standard & Poors, Robert Shiller, and valuation models that we have published over the years. The first chart shows these measures as the percentage deviation from their historical norms prior to the late-1990’s equity bubble. While it’s easy to lose sight of the extremity of the present situation, these measures are well over 100% above their respective norms, on average. On the most reliable measures, we estimate that S&P 500 valuations are now only about 15-20% short of the 2000 extreme, and are clearly above every other extreme in history including 1901, 1929, 1937, 1972, 1987, and 2007. Again, these measures are also better correlated with actual subsequent market returns than popular alternatives such as price/forward operating earnings and the Fed Model (which adjusts the S&P 500 forward operating earnings yield by the level of 10-year Treasury yields). 

As of last week, based on a variety of methods, we estimate likely S&P 500 10-year nominal total returns averaging just 1.5% annually over the coming decade, with negative expected returns on every horizon shorter than about 8 years.