Theoretically speaking, that does make sense, .
Assuming a payout ratio of 40% and a nominal growth rate of about 5%, a 1/4% increase in the discount rate should decrease the P/E by about 11%, from 20.00, 40%/(7%-5%); to 17.78, 40%/(7.25%-5%).
Just think, all it would take is two consecutive 25 basis point increases to drop the P/E down to 16, 40%/(7.5%-5%), which would result in a 20% correction.
Correct me if I'm wrong, but wouldn't a P/E of 16 put WEB's 2007 US equity "put" near break-even?
1,503.35 on 6/29/2007,
1,520 (16 X $95).
The good news is, if you did NOT reinvest your dividends, you'd be $241.40 richer.
Nevertheless, that's still eight years lost, just spinning your wheels.
As always, just my opinion.
« ... you're whining & clinging to secular decline bow wows like off-the-charts payout ratio yield traps like T. »
Whoa, that was a low blow, Winsail126.
Admittedly, T under performed the S&P 500 over the last 52 weeks (8/29/2014 to 8/28/2015), which in turn was bested by VPU (my single largest holding, other than cash), but the real "bow wow" in this kennel was ... (drum roll, please) ... your beloved BRK-B ... (rimshot).
+1.57% ... VPU
+1.46% ... S&P 500
+0.57% ... T
-1.10% ... BRK-B
Yo, professor, search the following string to bring up a chart (144+ years) of the P/E:
« multpl S&P 500 PE Ratio »
Note that we are currently at a P/E of 20.04 and that the median is 14.60 (half the time the P/E was above, half the time the P/E was below).
IMO, anyone who believes the market is currently cheap has been bamboozled by the Fed and the sell side "advisors". Please correct me if I'm wrong, but isn't WEB indirectly liquidating (selling off) his BRK via the B&MGF? He has absolutely no incentive to talk high prices down.
IMO, some folks just WANT to buy equities, the money is burning a hole in their pocket, and they just have to spend it. They're looking for any excuse under the sun to justify paying a P/E of 20 today and they're gleefully using the FED's ZIRP to do it.
The point I'm trying to make is at some point in the future interest rates will rise and the P/E will fall. And when that happens, the folks who talked themselves into paying a premium today will feel that they were sucker punched on their buy.
If you buy the S&P 500 today at a P/E of 20, sell 7 years from now at a P/E of 20, the dividends per earnings ratio is 40%, and both earnings & dividends grow, on average, at an annual nominal (includes 2% inflation) rate of 5%, then you should make about 7.1% on your investment.
NATR = ( 1 + 5% ) * ( 1 + RATE( 7, 40%, -20, 20, 0 ) ) - 1
But if seven years from now the terminal P/E is 15, then your nominal annualized total return should fall to about 3.1%.
NATR = ( 1 + 5% ) * (1 + RATE( 7, 40%, -20, 15, 0 ) ) - 1
Of course, if your situation is similar to Sean's and you're willing to spread your loss over 40 years, then you can substitute 40 for the 7 in the equations above and you would likely earn 6.6% instead of 7.1%. This example assumes that dividends are taken (moved out of harm's way), not reinvested. My previous example assumed annual reinvestment at a ridiculously high multiple with a final, knock out punch, in the last year.
Again, as always, just my opinion.
If you have the time and the inclination, take a look at the following GMO white paper:
« Who Ate Joe’s Retirement Money? - Sequence Risk and its Insidious Drag on Retirement Wealth »
I believe it speaks to your situation.
By the way, how do you convert a 40 Year real return of 5.06% into 3.76%?
Answer: Make 40 bad buys at 50 times the dividend, 39 bad re-investments at 50 times the dividend, followed by one last reinvestment at 30 times the dividend in the very last year.
RATR = 1.03 * ( ( ( 1 + 50 ) / 50 ) ^ 39 * ( ( 1 + 30 ) / 50 ) ^ 1 ) ^ ( 1 / 40 ) - 1
Of course, if you took the "hit" (40% correction) in year #1 instead of year #40, you could have made 5.08%.
RATR = 1.03 * ( ( ( 1 + 30 ) / 50 ) ^ 1 * ( ( 1 + 30 ) / 30 ) ^ 39 ) ^ ( 1 / 40 ) - 1
As always, just my opinion.
If 5% is good enough for you, then you can pay up to 20.6 times earnings. But when the day comes that you do have to sell, if the S&P 500 is then trading at 15, you will suffer a loss, you won't make your 5%. The good news is that you can spread that loss over 40 years. I don't have that luxury. I would prefer that the market trade at a fair multiple for most folks, not just those with 40 year horizons.
Years ago, Value Line used to publish a chart titled: "A Long-Term Perspective - Dow Jones Industrial Average, 1920-2005". I once asked them why they stopped, and their reply was, we had to, we were told we were in violation of someone else's copyright. Anyway, for the 85 year period (1920-2005) the average P/E for the DJIA was 14.5. I suppose if you want to make the same historical return that your predecessors made, you can't, on average, pay more than they did.
My guess is a P/E of 15 on the S&P 500 would get you the historical real total return of 6.5% (GMO's value), assuming that 40% of earnings is paid out as dividend, another 40% is used to buyback stock ( creating faux growth, PER SHARE), and the remaining 20% is retained to grow the business organically (i.e., generally speaking, capital expenditures exceed depreciation, and we do need to feed the greed of the insiders).
Real ATR = ( 1 + 40% / 15 ) / ( 1 - 40% / 15 ) * ( 1 + 1% ) - 1 = 6.5%
« Ultra cheap, ... »
A P/E of 19 is not cheap.
Maybe it's time to change your ID to "yacheerleader" - yet another cheerleader.
« Just a guess: SPY will drop another 25% from here. »
I've tried to reverse engineer your thinking on that and it does look like your projection is certainly within the realm of possibility.
My guess is that you posted that around noon today when the S&P 500 was trading around 1936. A 25% drop would lower it to 1452 and dividing that by net income of about 95 would put the multiple, P/E, around 15. Seems reasonable.
Yes, day over day (8/20/2015 to 8/21/2015) the price per share fell 2.84%, but year over year ago (8/21/2014 to 8/21/2015) the price has fallen 31.26%, from $9.47 to $6.51.
Why, other than wishful thinking, would you expect 8/24/2015 to be better?
I see my favorite quote (20Sep2010) didn't make the list:
‘Suck it in and cope, buddy. Suck it in and cope.’
Charlie showed his true colors on that one.
I threw my copy of "D*mn Right!" out shortly thereafter.
That's for just one month and it captured only the dividends of those companies that paid one during that time period.
You'll have to sum twelve consecutive months to get a true picture of the yield.
My guess is the monthly dividend will bounce around a bit, but will AVERAGE, net of expenses, about $0.058 per share per month, ( 3.28% - 0.48% ) * $25.00 / 12.
Waaaaay too early, dude!
"Buy It Like Buffett " ©® --- wait for Berkie to fall within spitting distance of 1.20 X Book.
Divide $0.78, the annual distribution (12 X $ 0.065); by 0.1316, the loss adjusted discount rate expressed as a decimal; to get $5.93, an estimate of the net present value of the investment.
If you still don't understand that, give up. You will probably never understand how to value an investment using the discounted cash flow methodology. Valuation is, apparently, just not your thing.
« please tell me why bad choice for 0.85 cent divvy ? »
The current DISTRIBUTION PER SHARE PER MONTH IS $0.085 or 8.5 cents.
Do some independent research.
Go over to the AllianzGI Convertible & Income Fund II (NCZ) website, click on the DOCUMENTS tab, and read some of the current fillings.
Here's a question for you: If for the quarter ended 31May2015, you earned (Net Investment Income) $0.19 per share per quarter, and your slush fund (UNII) is now negative, and you want to avoid returning capital (it reduces assets under management and thus, your fee) what is the most you should have paid out per share per month for that quarter? (Hint: divide $0.19 by 3).
As always, just my opinion.
« Wow, you are just brilliant. »
No, not really.
It's a comparative thing.
A very average person standing with a crowd of incredibly stupid folks just looks brilliant.
Clearing up Math Questions for par7551:
« .065x12=.72 »
In words, twelve (for your general information there are twelve months in a year) times (we're multiplying here!) six and a half cents a share per month is seventy EIGHT cents per share per year, not seventy TWO.
« whats this//? 7%+6.16=13.16% »
First, percentage means "parts per hundred", so 7% and 0.07 are the same thing.
Second, when you subtract a negative number from a positive number the absolute values add, e.g., +0.070 - -0.0616 = +0.1316.
Maybe it's time to work on earning your GED.
Oh, and by the way, the word you can't even misspell twice in a roll is teeter totter, a child's seesaw.