New Sunday Times Feature - Diary of a Private Investor

Far worse to be the guy hurling the accusation of Lucy-ism when in fact you don’t get the point being made.
 
Gordon Gekko said:
Far worse to be the guy hurling the accusation of Lucy-ism when in fact you don’t get the point being made.
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I don't think Lucy ever admitted to his clanger.

"(CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion." Let me parse and analyse this statement. The key link is the "i.e." which is Latin for "that is". I can see no other interpretation for this whatsoever than it is saying "CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."

You seem to be saying that this is not at all what you meant. So can I suggest that to resolve this semantic debate that you will accept that the statement in bold is entirely incorrect (but is not a reflection of what you meant)?
 
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Duke of Marmalade said:
I don't think Lucy ever admitted to his clanger.

"(CAPE) is a valuation metric which looks at the position relative to long-term averages; i.e. it’s based on the idea of mean reversion." Let me parse and analyse this statement. The key link is the "i.e." which is Latin for "that is". I can see no other interpretation for this whatsoever than it is saying "CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."

You seem to be saying that this is not at all what you meant. So can I suggest that to resolve this semantic debate that you will accept that the statement in bold is entirely incorrect (but is not a reflection of what you meant)?
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I will not accept that it is “entirely incorrect”.

You same incapable of understanding that something like CAPE is a nonsense without something to compare it to.

It’s the “so what” / “relative to what” aspect.

It is a nonsense for people to go on about ratios and valuations being high or low whilst simultaneously dismissing the idea that what’s coming down the tracks will mirror what’s gone before.

The kernel of my position is that CAPE are irrelevant unless the proponent embraces the idea that markets are inherently predictable over the long-term.
 
But CAPE isn't based on the idea of mean reversion Gordon. It's just a valuation metric.

If I said Wayne Rooney scored more goals per game this season relative to last season, that doesn't imply that I think he is going to score less goals per game next season.

Again, I raised the CAPE of the S&P500 in the context of a discussion about the current pricing of equities relative to bonds. Nothing to do with future price movements of either asset class.
Gordon Gekko said:
The kernel of my position is that CAPE are irrelevant unless the proponent embraces the idea that markets are inherently predictable over the long-term.
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Sorry Gordon but I have absolutely no idea what that is supposed to mean.
 
Valuation relative to what?!

The comparison with Rooney’s goals is ridiculous. A more apt comparison would be “Rooney scored 25 goals but I’m not going to tell you how many games that was over or how anyone else did”.

CAPE etc are only relevant when you’ve something to compare them to.

“The CAPE comes out at circa 32”

So what? Is that high or low or middling?
 
Gordon Gekko said:
I will not accept that it is “entirely incorrect”.
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So this is what you think has some validity:
"CAPE is based on the idea of mean reversion because it looks at the position relative to long-term averages."
Please don't take offence, none intended, but this statement has no validity. CAPE is no more an offspring of mean reversion theories than P/E, Dividend yield, 10 year bond yields, S&P index etc. etc. It uses long term averages of earnings in its definition but does not in anyway imply a reversion to such averages for prices.
moneymakeover said:
https://www.investopedia.com/terms/m/meanreversion.asp


Seems like gecko had a point
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What point is that? That there are mean reversion theories? No one is denying their existence, but really quite irrelevant to the semantic debate.
 
Duke, what you and Sarenco seem incapable of grasping is the idea that CAPE, dividend yield, P/E, etc are all USELESS unless they are viewed through the prism of mean reversion.

Because, without the idea of mean reversion, who’s to say whether 32 is high, low, or middle of the road.

To take Sarenco’s analogy further, it’s as if we’re trying to ascertain where Wayne Rooney stands relative to other strikers and you guys are claiming that data in relation to anyone other than Rooney is off limits!
 
Gordon Gekko said:
Valuation relative to what?!
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Valuation relative to valuations in the past; valuation relative to other stocks; valuation relative to prevailing interest rates, etc.

Absolutely nothing to do with mean reversion.

There is simply no validity to the statement that CAPE (or any other valuation metric for that matter) is based on mean reversion. None whatsoever. It just isn't true.

Why you can't simply acknowledge that and move on is beyond me.
 
Sarenco said:
Valuation relative to valuations in the past; valuation relative to other stocks; valuation relative to prevailing interest rates, etc.

Absolutely nothing to do with mean reversion.

There is simply no validity to the statement that CAPE (or any other valuation metric for that matter) is based on mean reversion. None whatsoever. It just isn't true.

Why you can't simply acknowledge that and move on is beyond me.
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Rubbish.

In order to opine whether valuations are high or low, one must compare them to something.

If one concludes that valuations are high, for example, it’s on the basis that the past will be replicated in the form of a reversion to the norm or average.
 
Gordon Gekko said:
In order to opine whether valuations are high or low, one must compare them to something.
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Of course.

But that has absolutely nothing whatsoever to do with any theory of mean reversion.

I can say that the valuation of a particular stock is high or low relative to its average historic valuation over the last 10 years. That doesn't imply or suggest that I necessarily believe or assume that the stock price is ever going to fall back in line with its historic valuation.

I actually suspect you know that is the case but you can't bring yourself to admit that you made a mistake. It would be nice to move on...
 
Sarenco said:
Of course.

But that has absolutely nothing whatsoever to do with any theory of mean reversion.

I can say that the valuation of a particular stock is high or low relative to its average historic valuation over the last 10 years. That doesn't imply or suggest that I necessarily believe or assume that the stock price is ever going to fall back in line with its historic valuation.

I actually suspect you know that is the case but you can't bring yourself to admit that you made a mistake. It would be nice to move on...
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No Sarenco. Now I’m convinced that neither you nor Duke is capable of getting the subtlety of the point. I have not “made a mistake” and your arrogance is breathtaking to be blunt.

I will give it one more go; a market is only high or low if one accepts that what’s constituted “high” or “low” in the past continues to do so. For example, a market might appear expensive, largely due to FAANG stocks for example, but that is when it’s viewed through a prism of historic valuations and mean reversion. Unless one accepts the principle of mean reversion, it is impossible to say whether valuations are high or low. The salient question is “relative to what”. For example, “but the CAPE ratio is X, run for the hills” only makes sense if one accepts that X is high relative to what has gone before and that markets should “revert to the mean”. That is the last that you will hear from me on this as I too am getting sick of the back and forth.
 
No Gordon.

I can say that stock valuations are high relative to their long-term average without accepting that they will inevitably revert to that long-term average.

There can be all sorts of reasons why stock valuations may be high relative to their long-term average. Historically low interest rates, for example.

I don't have to accept any theory of mean reversion to assert that a stock's valuation is high (or low) relative to something else.

Apparently my suspicion that you already understood this was incorrect. My apologies.

Let's move on.
 
Gordon Gekko said:
”. That is the last that you will hear from me on this as I too am getting sick of the back and forth.
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I am glad that you are conceding the last word on this. You singled out CAPE as relying on mean reversion because it uses long term averages. The term "long term averages" rang a mean reversion bell with you but as I have explained ad nauseam, the use of long term averages in the CAPE has nothing whatsoever to do with mean reversion.

Of course CAPE like any of the other indicators is relevant to the mean reversion debate, nothing at all subtle there that I have missed.

Okay, not a deposit selling moment but a mistake nonetheless.
 
Sarenco said:
No Gordon.

I can say that stock valuations are high relative to their long-term average without accepting that they will inevitably revert to that long-term average.

There can be all sorts of reasons why stock valuations may be high relative to their long-term average. Historically low interest rates, for example.

I don't have to accept any theory of mean reversion to assert that a stock's valuation is high (or low) relative to something else.

Apparently my suspicion that you already understood this was incorrect. My apologies.

Let's move on.
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Except I didn’t say that. Nice add of “relative to their long-term averages”. But then you and Duke love contending that people are wrong even when they’re right. You both love telling people “what they’re trying to say” like all golf club bores. The discussion is over, we agree on that; it is annoying to nit-pick, but it is even more annoying when you are wrong, as you both are. Duke, I find your comparison with Lucey offensive, but I’ll put it down to there possibly being drink involved on your side and give you the benefit of the doubt. Good luck with things fellas; maybe tone down the riding in like the horsemen of the apocalypse to tell people what they’re saying when you have no idea what you’re talking about.
 
Sunny said:
All we need is the Big Short to join this discussion and then we have a party....

Duke, a bit harsh comparing it to the deposit selling moment!! Ah, they were the good old days.....
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Surely, you would invite Purple:rolleyes:
Okay, not really a mistake, more a misinterpretation. I honestly intervened in what seemed a semantic debate with a view to settling the matter quickly. I suppose it is testament to my poor powers of explanation that it pushed GG even further along the curve.
 
Gordon Gekko said:
Nice add of “relative to their long-term averages”.
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Mean reversion is a financial theory suggesting that asset prices and returns eventually return back to the long-run mean or average of the entire dataset.

Perhaps you have a different understanding of the phrase?

You said that CAPE is based/built on mean reversion. It's not. It's a valuation metric.

Can CAPE (or any other valuation metric) be applied in executing a mean reversion trading strategy or to prove (or disprove) the existence of mean reversion? Sure - nobody suggested otherwise. But that's not the same thing as saying that CAPE is based/built on mean reversion.

CAPE can also be cited in any other number of other contexts. The idea that CAPE (or any other valuation metric) is meaningless unless viewed through the prism of mean reversion (or any other financial theory or trading strategy) makes no sense.

As it happens S&P500 CAPE has shown no tendency to revert to mean in recent decades. Does that make it a meaningless valuation metric? I don't think so but you are entitled to your own views.

Regardless, CAPE is not based/built on mean reversion.

It seems a shame that you feel the need to resort to ad hominem. Oh well.:(
 
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