Comments on: “For People Who Like to Take a 30,000-Foot View of Investing, This Is a Very Handy Little Tool”

By: “The Future Cannot Be Predicted Based on Historical Empirical Observations” | A Rich Life

Thu, 07 Aug 2008 13:05:03 +0000

[...] Today’s Passion: Felix Salmon, author of the Market Movers blog, said of the Predictor that: “For People Who Like to Take a 30,000-Foot View of Investing, This Is a Handy Little Tool.R… [...]

By: John Walter Russell

John Walter Russell — Sat, 12 Jul 2008 19:20:40 +0000

Here is what Dr. John Hussman estimates:

“Suffice it to say that the decline has improved prospective long-term returns, but the most likely 10-year return for the S&P 500 (standard method) is still only in the range of 3-6% (with -0.5% and 8.5% as the extreme bounds except in the event of a 2000-type bubble or a 1974-type trough).”

http://hussmanfunds.com/wmc/wmc080630.htm

When you include inflation, his estimate is very close to ours (the Stock Returns Predictor).

Have fun.

John Walter Russell

By: John Walter Russell

John Walter Russell — Fri, 11 Jul 2008 18:06:00 +0000

Regarding P/E10: I have checked out different smoothing periods. P/E10 is better than P/E5 and P/E15.

Have fun.

John Walter Russell

By: John Walter Russell

John Walter Russell — Fri, 11 Jul 2008 15:10:24 +0000

Outstanding! Both the main article and the article at the bottom of the page.

Filling in a detail: P/E10 uses the current inflation adjusted price and the average of the previous ten years of inflation adjusted earnings.

Why are earnings from ten years ago significant? It smooths the data. Single year earnings fluctuate all over the place. Smoothing begins to make sense with around three years of earnings (based on Ed Easterling’s findings at Crestmont Research).

Have fun.

John Walter Russell