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.
1) Yes but the Shiller PE will be higher, thereby (incorrectly) reducing its estimate of forward returns.
2) No, I agree the market is at above average valuation, just less extremely so than shiller PE would suggest. Though it looks cheap on Equity Risk Premium measures.
3) Yeah my objection is to the methodology not the conclusion. However I think many of those other methodologies are silly as well; for example, P/R does not make sense from an accounting standpoint (it should be EV/R). Changes in the structure of the economy have made book value metrics less relevant than historically, but I agree they are somewhat concerning.
4) Looking at historical correlations with returns introduces lookahead bias. If the market valuation doubled from here, and then remained flat for 100 years while earnings grew at their historic rate, schiller PE would remain correlated with returns, except it would retrospectively advise us to buy here.
Also, I'm having trouble replicating your numbers. Using the schiller data, I get correlations of -0.54 for CAPE vs 10yr return (real or nominal), and -0.49, -0.47 for PE vs 10yr return (real and nominal respectively). This is a small enough difference that we should prefer to use the more theoretically justified measure.
Also forward earnings estimates are not available that far back so I am sceptical of any research into their ability to forecast long-run returns! For 1-year holding periods they do about as well as trailing earnings though.
However, if we use a lookahead bias free measure, and instead of using the absolute level of PE / CAPE, we instead use the percentile of that metric, relative to its own history, the results basically reverse. Using this better measure I get -0.54 and -0.51 for PE vs -0.48 and -0.43 for CAPE. (in both cases I started the correlation in 1900 so we had a few decades of data for the percentiles to stabilize in.)
I will send you the excel spreadsheet.
Also see this for a summary of the 'risk-aversion' measure:
http://www.hussmanfunds.com/wmc/wmc150413.htm