Bull Market Turns 7yrs Today

[coc]

JBTC,

 

I haven't had a chance to do that, but I suspect it comes out close. I'd love to find out though. (I don't have the data.) I get a little skeptical of the 10% number that gets thrown around because it depends highly on starting and ending points. Also, the equivalent of an S&P 500 index or broad-market index didn't exist for the entire period. The best proxy is the DJIA, which, as you all know, is a pretty flawed look at market returns.

 

Precisely because of the problem with starting/ending dates, it makes sense for you to test your formula over a longer period (than just 1995-2015). That should be done before you speculate on future returns.

 

Yes the indexes may be flawed or inconsistent. That does make your exercise difficult.

 

I hope you can see that why it's not easy to draw conclusions based on macro data. Macro data can often be bad data, because it's simply too tough to add up the efforts by hundreds of millions of people and compare them over many decades.

 

In contrast, company specific numbers are infinitely better, even though they can be flawed too.

 

Hmm, this may be a source of misunderstanding. It's not a formula and I'm not looking to get "the answer" on future returns. I'm trying to work out the parameters. Buying an index fund means buying the underlying companies, plus or minus whatever comes and goes from the index while you own it. So analyzing the companies in aggregate is not very different from analyzing any one company. It'll still come down to what's being earning relative to price paid and how the market decides to value that over time. Sales, margins, valuation, dividends will almost definition get you there, plus or minus something for buybacks and options, other smaller things.

 

Of the relevant variables, valuation and profitability will drive returns over shorter periods, but those things tend to do some mean-reverting over time. (How much is up for question.)

 

Check out Warren Buffett's pieces on equity returns from 1999 and 2001 -- he gets at similar points. I'm more or less trying to recreate that today.

 

[JBTC]

JBTC,

 

I haven't had a chance to do that, but I suspect it comes out close. I'd love to find out though. (I don't have the data.) I get a little skeptical of the 10% number that gets thrown around because it depends highly on starting and ending points. Also, the equivalent of an S&P 500 index or broad-market index didn't exist for the entire period. The best proxy is the DJIA, which, as you all know, is a pretty flawed look at market returns.

 

Precisely because of the problem with starting/ending dates, it makes sense for you to test your formula over a longer period (than just 1995-2015). That should be done before you speculate on future returns.

 

Yes the indexes may be flawed or inconsistent. That does make your exercise difficult.

 

I hope you can see that why it's not easy to draw conclusions based on macro data. Macro data can often be bad data, because it's simply too tough to add up the efforts by hundreds of millions of people and compare them over many decades.

 

In contrast, company specific numbers are infinitely better, even though they can be flawed too.

 

Hmm, this may be a source of misunderstanding. It's not a formula and I'm not looking to get "the answer" on future returns. I'm trying to work out the parameters. Buying an index fund means buying the underlying companies, plus or minus whatever comes and goes from the index while you own it. So analyzing the companies in aggregate is not very different from analyzing any one company. It'll still come down to what's being earning relative to price paid and how the market decides to value that over time. Sales, margins, valuation, dividends will almost definition get you there, plus or minus something for buybacks and options, other smaller things.

 

Of the relevant variables, valuation and profitability will drive returns over shorter periods, but those things tend to do some mean-reverting over time. (How much is up for question.)

 

Check out Warren Buffett's pieces on equity returns from 1999 and 2001 -- he gets at similar points. I'm more or less trying to recreate that today.

 

Yup, you are doing what Buffett does.

 

One difference is that Buffett made his rare market call in 2000 after 18 years of the biggest bull run in history. You seem to be looking into a relatively bleak future after 16 years of the market having gone nowhere.

 

While he was cautious in 2000, in the past 16 years he loaded up assets pretty much all the time. He's busy loading up Phillips 66 and Precision Cast Parts just now.

 

There is no misunderstanding. Of course valuations and margins are important. I get that.

 

The difference is how to go about it.

 

Studying Phillips 66's profitability is tough enough. With oil prices moving so much, it's probably not easy to think about the spreads. Precision Cast Parts? Will it be able to make more acquisitions? Will the two key customers pressure on prices? Is there more cost-out?

 

Buffett's main focus is on studying individual companies' margins, which is hard.

 

You seem to be lumping 500 companies of varying sizes and geographies and industries together and trying to guess where their margins will move. The thing is when you compare across periods, you are not even comparing the same 500 companies. 20 years ago, none of Google, Facebook, and Apple are in S&P 500. The only thing comparable here is the number 500.

 

Just seems you are trying to do something awfully hard. Good luck. Do post when you figure it all out. And I hope you have saved enough of your time and effort on individual companies like Buffett does.