mattee2264

Thanks for the thoughtful response Cigarbutt. In response to your questions: Questions: -When something is true most of the times, is there a risk that you end up thinking that it is true all the time? I'd definitely agree. Just because something has always happened in the past doesn't mean it will happen in the future. Obviously value investors are on safer ground using the broad sweep of past experience rather than extrapolating current conditions as the "new normal". But things do change and the past is not necessarily prologue. -Do you imply that we have reached some kind of plateau in terms of margins, multiples and interest rates? I think plateau is the wrong word to use as the economy and markets never reach a steady state. But arguments that markets are overvalued do seem to rely a lot on the notion that margins, multiples and interest rates will revert towards historical means. Bruce Greenwald has a pretty interesting viewpoints on margins: https://www.valuewalk.com/2016/11/columbias-bruce-greenwald-corporate-profits-sustainable/ Also you have companies like Amazon and other tech companies holding off on monetizing their market dominance as they try to become even more dominant and a lot of investments are going through operating expenses which depresses margins. Regarding interest rates technology and globalization have deflationary effects so could keep inflation below historical norms justifying interest rates not much above current levels. Commodity prices may also be kept low by efficiency improvements, shale technology, a more service oriented economy etc. Also if we are in a slower growth world that will also keep interest rates low. Lower more stable growth deserves to be valued a lot more highly than higher but more cyclical growth as it makes stocks more bond-like. Buffett made the comparison between a no-growth company selling for 40 x earnings (IE US treasuries!) and the current stock market valuation. As Greenwald points out in his article services are less cyclical than manufacturing. And the equity risk premium which depresses market multiples is influenced by psychology so as long as investors are comfortable with higher multiples and willing to accept lower returns (but still favourable with bonds) they can stay high. Also with the dominance of index investing there are perhaps far fewer valuation sensitive investors out there! And technology companies make up about a quarter of the market and sell for high P/E multiples because of things like operating expenses including investments in growth and these companies generally pursuing revenue growth over earnings growth sacrificing current profitability. Of course there are counter arguments you can make. And margins, interest rates and valuations are difficult to predict for this reason. But for the same reason it is difficult to say with any real certainty whether or not the market is overvalued or not. Or that even if it is overvalued that it will crash as opposed to treading water until earnings catch up. So saying no to the S&P 500 just seems a bit risky to me.

Dollar cost averaging is going to be suboptimal simply because over most 5-10 year periods the direction of the general market is upwards so your average cost is likely to be higher than lower than a lump sum investment. Plus you are missing out on dividends. The models that show the market to be overvalued tend to be based upon the idea we have to revert to mean profit margins and interest rates and valuation multiples. But even then they do not imply negative returns or that the market is going to crash or that cash is a better option. They just simply say it is a low return environment going forward and a valuation headwind means that returns on stocks might lag the returns on underlying businesses. But if the models are wrong and there have been structural changes in the economy that mean higher profit margins and valuation multiples and lower interest rates can be maintained then markets are probably fairly valued and prospective returns are healthy enough that if you sit it out in cash you may never get the chance to re-enter at a lower market level and by dollar cost averaging you would end up paying a much higher average cost than the current market level. And if the economy really takes off and people become very optimistic then we could easily see the market go up another 50% over the next 3-5 years which will be psychologically very difficult if you have a high cash allocation. And when markets are valued based on the prevailing psychology and difficult to predict economic fundamentals there isn't really a scientific basis for trying to time the market especially considering the risks of missing the market altogether if you are wrong