This post I made based on this study that I found in a German asset. As the former is a little long but very educational and very rich in detail, I think it is very worthwhile to read.
Here is the study link:
I hardly ever print anything in my life. I have to consider a lot of material before printing, and this study is so cool and full of details I printed it, I think it’s worth reading it quite quietly and understanding paragraph by paragraph. What I liked about the study was the possibility of including the CAPE and the price to book when considering the purchase of the ETF and include them in the fundamental analysis of the market and also the possibility in a macro context of these indicators can predict the Future returns of the asset. As you will see, analyzing an ETF or a market to buy is not like analyzing an action from an individual company.
An ETF, despite being a set of tens or hundreds of shares in a single package, can be considered as a whole, a single entity representing the weighted averages of its assets, and then it gains a valuation and a life of its own. With this ETF’s own life in hand you can see it as one, and you can compare it to all other ETFs in the same niche, such as comparing the German market with the English market, and the market often behaves like one It is difficult to get half of the companies to go up and the other half to fall, one or the other is going to row against the tide (maybe because it is difficult to profit a lot in a down market, or grow, it happens, but it is more complicated, especially for big companies). Micro and small enterprises have even more difficult to predict behavior and many close. For every successful example of a microenterprise we see, how many did not close? The problem is that we only see what works, survives in the city.
From time to time, studying these ETFs abroad and comparing them, I try to imagine that a market is like a tide with several boats, and when the tide goes up the boats go up as well, when it goes down, all the boats go down. And analyzing and comparing these ETFs is like comparing the tides in the world.
The bear market, or bear market (I’m going to call it a bear market) and bull market, or bull market (I’ll call the bull market) – in the Portuguese translation, it’s bad because the People do not find a cool word to translate directly.
The point is we have many up and down markets in the world all the time, and the B / W and CAPE analysis go in there. Let’s take a look at the study.
First thing, understand the CAPE.
What is CAPE? (Cyclically adjusted price-t0-earnings ratio)
The CAPE was created by Yale’s professor, Robert Schiller (Nobel Prize for economics). The CAPE seems to be an adequate indicator to study a market than the P / E (our infamous PL). Remember that an ETF can have all fundamental indicators of a common stock, including profit or loss.
The CAPE takes into account the variation of the profits of the last 10 years and also the inflation in its calculation. It puts the current value of the market price in relation to the average of the inflation-adjusted profits in the last 10 years. Remember that the PL calculation is very volatile, and in bad years of bad crises where profits fall a lot, it also drops a lot. I’ll be back to CAPE soon.
Look at this interesting figure:
In the US, companies paid a lot more dividends to shareholders. Nowadays the payout is falling considerably (and in the end, this is better for the shareholder). Same thing happens in Brazil. The result of this as seen is the GAIN in the growth of the profit per ACTION and also the increase of the CAPE (and this is one of the criticisms that the CAPE takes) it can be high today, but also the EPS growth is also greater. Wanting a low CAPE for a market that is much more profitable can be considered a small paradox in my view.
Looking at more general tables, we can get a very broad picture of how the CAPE can influence future returns in various markets.
First, let’s look at historical CAPEs:
These things are not definitive, the world is transformed, they are good things to know, both for the knowledge and the aid in the making of decisions. Finance is not an exact science like physics or mathematics. Now the main value I found for CAPE and for B / W or both combined comes from this kind of framework that I find nice and has a world of information. Imagine the work of researching and publishing this. And also how this company was cool to publish this because it could stay in the keys and produce a lot of content gradually.
The table shows the relationship between CAPE (at the time of purchase) and historical returns 10-15 years later. Notice that in a bear market with CAPE of 0-10 or even 10-15 the returns were much higher (it’s the thing to buy low) in the broader sense of the thing that gave good returns. Now do not expect you to open the swings of companies in a bass market and you will see something wonderful, quite the opposite. If the market was down, it’s because the thing must be ugly and everyone jumping out and complaining.
In high markets the euphoria dominates and the CAPE goes up, from 20-25 and greater than 25 as the returns were low (this is the current US case now). Look at Australia, in a CAPE of 10-15 gave + 8.5% (adjusted for inflation – I imagine that above inflation looking at the US data) and the same Australia in a bull market of 25-30 gave “only” 3,5 % Above inflation. In short, the higher the CAPE the higher the return, the lower the CAPE the greater the return. Please note that at this time we have several markets with several different CAPEs and we could make a pick ETF market based on CAPE (could be a strategy or part of the strategy) of course considering ALSO any other things you want.
Just as if you buy a bull market with CAPE greater than 30, expect up to 15 years of zero or even negative returns. With the exception of Denmark, we saw that even with CAPE of 30 it delivered more than 6% above inflation.
So at least here, you could compare: Do I buy an Australia in a CAPE of 15 or a United States in a CAPE of 26? Hmmm
It’s something to think about.
Look at Denmark’s CAPE, a very high, but also, in fact, the average annual gain per share is 3.2% in the period 1969-2015, well higher than the 1.8% registered by the S & P. In other words, investors are willing to pay more for more efficient companies. We can also see the most efficient markets by this chart below.
Note the growth in Denmark, Hong Kong, Norway, Singapore, and Sweden. Especially Sweden and Hong Kong since 1871. Also, note the number of stocks in the index of each country. Realize that there are large differences in the number of stocks in each index and it is clear that the lower the number of stocks in the index the higher the volatility of the index, it is as if you had a portfolio with only one share, which is the truth in fact. Even so, small markets like the Belgian or the Norwegian continue to be subject to high volatility due to the low total number of shares. This is what I had thought, with less than 50 stocks as is my case in Brazil, the volatility of the portfolio is immense, as would the portfolio of someone who wants to make a stock pick with 50 shares. Now I am calmer because my 25 shares of Brazil will join the rest of the faithful, RF, and ETFs abroad to lower the beta of my portfolio (volatility)
Also go to the portfolio Drawdown, the possibility of falling and negative returns according to the CAPE you buy:
This chart is that of MSCI World which is an index that mirrors the global economy, something like the US with 50% of the whole and the other countries according to their weight. For those who want to invest in the SWDA ETF (which is my case) is worth the memory. Buy papyrus with CAPE greater than 30 gave up to -28.8% in 3 years and up – 39.5% in 15 years. Once again see how dangerous it is to buy with CAPE alto. With the CAPE low between 0-10, the drawdown was -5.7% for three years and -5.2% for 15 years. Of course, after all, if you have already bought CAPE low, it will drop more where?
As I had said the larger payout showed greater inefficiency of gain for shareholders. So let’s see two things, the CAPE adjusted by the payout in the US and then the rest of the world. In the US, when you adjust for the payout the CAPE goes up a bit, which is fair. CAPE was also very low in the post-crises of 1929 and 1971. Already after the.COM crisis in the year 2000 the CAPE fell to realistic levels before the market was really overvalued (bullish).
Now let’s see the CAPE adjusted by the rest of the world:
Now imagine just the trolley that you would take buying Japan in a CAPE of 96 or Sweden in a CAPE of 86 when the average of that is 25 and the one of 45. Even with 45, the Japanese market is very strange, neither Peter Lynch understood why Japanese people bought a company with a PL of 100 or 80 as legal, they would never see that money back. Was it the Japanese neighborhood? Fear of investing outside? Unbridled pride? Mother earth love? As you know the Japanese people are very disciplined and have very high savings rates (on average more than 50%) of the entire population (imagine here in Brazil everyone saving and investing 50% of what they earn … it is. It is 60% of the population indebted and with negative equity.And here I want to alert the reader to increase their rate of personal savings and live with less.Very difficult in times of facebook and Instagram in the competition of the ostentation we see there.
Now we go to the P / B (price to book) – this would be our P / VPA.
O P/B is a legal indicator even for studying an individual action. It shows how many times more you are paying for an asset. For example, if a factory costs $ 1 million and you are paying 2 million for 100% of its stock, you are buying at a PB of 2.
The studies report values and metrics very similar to the CAPE. The important thing here is to know a little of the history of each market and see the values that were there, what happened and learn a little to think better in the future. Most medians are less than 2. So something tells me that if I buy a market with PB greater than 2 I am already buying at an above-average amount. Just like the CAPE, buying above average brought results and big falls (most likely) and buying with low PB brought better returns than dropping well less (less likely to take a big tumble).
The table below is very similar to that of CAPE.
The best returns in 10-15 years were buying with low PB, between 0-1 ie the markets were depressed and discounted (but do not think that the media, the internet, and people will be speaking well of a market when PB They are actually being squeezed, but everything goes by and they come back to average). It is here that it is difficult to invest with nerves of steel. Do you remember lately when Petrobrás was in R $ 5? All the covers of magazines talking badly about the PT and Petrobrás and everyone running out, the paper is currently at 15 reais, more than 100% return in just one year, I was so in the face right?
Also watch out for the low returns on buying with PB> 2.5 or> 3, close to zero or negative. When I bought Berkshire I looked at PB and it was at 1.3. It seemed very good, I can expect a return of about 9-11% for the next 10-15 years.
It is interesting how PB and CAPE are very similar in that sense.
It makes me think that in a bull market it is better to cash in on an LFT or to buy Fixed Income.
On the other hand researching around the world and in a global brokerage firm I can look for markets with CAPES and smaller PB to invest in than to be restricted only to the US that currently have very large multiples.
Now facing the global MSCI that I mentioned above we will see two more images:
Similar to CAPE, buying at a low PB gave you a much lower drop than buying at a high PB. In fact from what I read a PB> 3 is a nice invitation for a lunch with Dr. Iron.
And now, what to expect for the next few years with current valuations?
Of course, people, nobody is psychic and this is not science. It is an exercise of imagination based on past data, we have to have common sense. The only thing guaranteed in this world is death and taxes. I just wanted to introduce you to thinking and looking to look at the CAPE and PB of the markets you are considering buying to take them into consideration and not buy a very bullish market having better options out there.
In the table below we have the combination of the forecast of results by buying the markets in the current values COMBINING the CAPE and the PB in one thing (in the last column) to the right. The thing is not that bad, I see very good returns in many markets, in developed countries, with good human capital (something that Brazil does not have and will not have in the next 50 years), with a stable policy and good structure for industry and Such as Singapore and Hong Kong at this time, as well as Australia. Italy is currently in an astral inferno (the bear market) and Brazil is a pity not to enter the study (but consider it as in Emerging Markets – and the ETF has it). Actually, I think it has ETF for each country below except Belgium (I’m not sure if ETF exists in the Belgian market).
At least for me, when in doubt of the doubts I go to SWDA which is the MSCI World index.
I hope the article has clarified a bit more.