Wednesday, June 2, 2010

Equity Valuation and Forecasting Future Returns and a Gift for our Readers

A subject near and dear to my heart. I may be the only person I've ever met who read every page of The Cowles Commission's Common Stock Indexes 1871-1937. [you must be a blast at parties -ed]
(links below)
Lifted in toto from EconomPic Data:

Following my post Equity Valuation Matters, I received a request to show the results in real terms (presented here).

As I said then:

Please note this still misses a HUGE sources of return (dividends), which accounts for a much larger share of actual returns than people think. An almost identical amount as change in index in fact (dividend yield has averaged 4.49% since 1871, while returns on the index have averaged 4.45% over that same time frame). It makes the current ~2% dividend yield look awfully small.

I will look to show results of total S&P 500 return vs. the Fair Value method next week.
Here goes...

Source: Irrational Exuberance

That's Prof. Robert J. Schiller's Irrational Exuberance webpage. Here's his Yale homepage. When he took on Efficient Market Hypothesis back in the early '80's I decided I liked the guy. Publishing IR in March 2000 with the Nasdaq hitting 5048 (subsequent low 1114) pretty much convinced me. In addition to his professorships he's on the research staff of The Cowles Foundation for Research in Economics.

Mr. Cowles is quite explicit as to the reasons the Commission didn’t go further back than 1871. (pg. 4)

A big one is the paucity of publicly traded industrials.
My favorite tidbit is the listing, among the pre-1871 industrials, of New York Guano.
Some things never change.
Here’s Yale’s (and my) gift:
It links to a big ‘ol hog of a PDF.

See also:
Does Stock-Market Data Really Go Back 200 Years?
US stock market returns – what is in store?
Yikes! In Policy Shift, PBGC Turns to Stock MarketFormer Head of Pension Benefit Guaranty Corp. Pleads the Fifth (Oh, there's a $33 Billion shortfall too)