Altruists who don't care too much about risk (and young people in general) should plausibly use leveraged investing. What's the best way to get leverage?
- Margin borrowing seems like the default solution. I might try it if there's nothing better.
- Theoretically options could be used, but I'm unsure whether they work in practice.
- Supposedly futures offer massive leverage, but I haven't explored the details, and they seem hard to trade yourself. I'd like something I can just buy and hold for a long time.
- Something else?
Ideally, there should be a fund that you just buy into to get leverage, with someone else handling the details. But leveraged ETFs don't work because they're optimized for day trading and as a result lose money for buy-and-hold investors.
The US market is slightly more expensive on a forward PE basis. However, Schiller PE is nonsense. For example, buybacks have become much more commonplace since the early 1980s, which increase the secular EPS growth rate (by reducing the dividend yield). The schiller PE does not adjust for this however; it assumes EPS will revert to their previous level, rather than profits reverting to their previous level. It also ignores the effects of dilution. Many companies issued a lot of equity during the crisis (especially banks). These companies now have much lower EPS as a result, even if profits returned, yet schiller PE implicitly assumes that their EPS will magically revert to their previous level. Hopefully this is clear; if not I can explain when we skype.
(There are several other problems with schiller PE).
Yes many investors can't re-allocate between markets but there are some whose entire job is this. I'm not sure about the end result of this.
I agree with your other points.
Larks, could you explain a bit more?
1) If the EPS growth rate is higher but dividend yield has been lowered a corresponding amount, then aren't expected returns unchanged?
2) If you make the adjustment you propose, is that enough to show normal valuations? My understanding is that according to Shiller PE valuations are about 2x historical norms.
3) Also, there's many other alternative valuation models that currently give similar results to Shiller PE e.g. P/R, Tobins Q ratio, P/E with normalized profit margins.
4) These models are all correlated ~0.8 with 10... (read more)