Reread an old OID from July 31, '00 in which Jeremy Grantham summed up his four-year study of 200 years of bubbles in 38 different markets in various countries __stocks, bonds, commodities, real estate. Said every bubble, without exception, gave up 100% of its gains in the bubble period. Now, he was kind of vague on defining how he measured when a bubble started.
The point of interest to me. He tried to figure out where the S&P 500 would be in 2010 with mildly generous assumptions, rather than crazy bubble assumptions (p/e = 32 when he wrote). "We assume a P/E of 17 1/2 (up from the historical average of 14) and a profit margin of 6% (up from the actual historical average of 5.5%). Incidentally we assumed annual sales growth of 4% per year, although we actually believe the figure will be closer to 2%, The long-term trend has been only 1.8%. We're putting in 4% only because our clients can't stand anything less...The return contribution from the yield is 2.2% per year...It gets me to a total return of a negative 1.9%...If I assume 2% sales growth instead, I arrive at an estimated return of neagtive 3.9% per year. That starts to get more like it __closer to reality."
Later, he gives a more negative, but far from crazy, scenario. P/E = 12.6. Profit margin 5.2. Sales growth 1.6. Dow in 2010 = 3,600.
Jeremy also said that for the S&P and Nasdung to trade at fair value the S&P would have to go down -53% and the Nasdaq -70%. Pretty close.
What to buy in '00? Real estate. (Also, timber, inflation-protected bonds, emerging equity and debt.)
"Were we to return to the figures that prevailed in 1982 __perish the thought__ Dow = 1,450."
Grantham never specifically says, but I assume his starting point is the S&P level on 1/1/00 = 1469.25. If so, the S&P is down -35.6%. Or about -4.9% CAGR. Or is that Compound Annual Shrink Rate. Throw in even 2-3% inflation and real returns the last 8 3/4 yrs have been awful. Pretty close reckoning, JG.
[from russ_21401, 10/16/08]