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Why This Time IS Different

is a theory of finance that attempts to maximize portfolio expected return for a given amount
of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully
choosing the proportions of various assets.
8,192
208,192
408,192
608,192
808,192
1,008,192
1,208,192
1,408,192
1,608,192
1,808,192
2,008,192
1980 1985 1990 1995 2000 2005 2010
Growth Of $10,000 (8% Ann.)
Growth Of $10,000 (8% Ann.)
8,192
208,192
408,192
608,192
808,192
1,008,192
1,208,192
1,408,192
1980 1985 1990 1995 2000 2005 2010
Growth Of $10,000 (Actual)
Growth Of $10,000 (Actual)
Much, but not all of the shortfall in investor returns are due to psychological factors
such as Loss Aversion, Narrow Framing, Herding or Optimism.
There are actually three primary causes for the chronic shortfall for both equity and
fixed income investors:
Capital Not
Available, 25.00%
Capital Needed
For Other Things,
25.00%
Psychological
Mistakes, 50.00%
0
2
4
6
8
10
12
14
16
0
2000
4000
6000
8000
10000
12000
14000
1980 1983 1986 1989 1992 1995 1998
DJIA 1980-2000 Secular Bull
DJIA INT RATE FED FUNDS INFLATION DIV YIELD
-1
0
1
2
3
4
5
6
7
8
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
DJIA 2000-Present Secular Bear
DJIA INT RATE FED FUNDS INFLATION DIV YIELD
0
5000
10000
15000
-5.0
0.0
5.0
10.0
15.0
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
D
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Rising Debt Levels Used To Offset Declining Incomes & Savings
Recessions Household Credit Market Debt Outstanding
Gross Domestic Product Personal Income
Personal Saving Rate
0
5
10
15
20
25
30
35
40
45
50
64.00
128.00
256.00
512.00
1,024.00
2,048.00
Jan-1871 Jan-1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006
Real S&P 500 Index With Recessions
(Robert Shiller Real Price Data)
Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Price))
35
21
26
19
17
23
20
32
18
11
43
9
21
26
20
49
79
36
44
38
23
105
35
57
11
91
119
72
63
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9
Historical Economic Recoveries Average 39 Months
Recovery Length - No Of Months
-
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00
200.00
1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 2020
S&P 500 Earnings as of 06/01/14 EPS Growth Rate Lower Bound (5% Trough to Trough)
EPS Growth Rate (6% Peak To Peak) Earnings Growth Trend Line
2014 Estimates
Analysts NEVER saw
the earnings reversions
in advance.
2015 Estimates
2020 Estimates
The current slope of
estimated earnings growth
has never occurred in history.
0
5
10
15
20
25
30
35
40
45
50
-5%
0%
5%
10%
15%
20%
25%
30%
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
C
A
P
E
R
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l
l
i
n
g

2
0
-
Y
e
a
r

R
e
t
u
r
n
s
S&P 500 Real Rolling 20-Year Annualized Returns CAPE Valuations
64.00
128.00
256.00
512.00
1,024.00
2,048.00
1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Real S&P 500 Index With Record Highs
(Robert Shiller Real Price Data)
Real S&P 500 Index
Due to high computerized trading and the explosion of ETFs, highly correlated markets
are likely here to stay.
Diversification is no longer about small, mid, large and international stocks but rather
stocks versus bonds and cash.
Portfolio managers today need to be extremely aware of the impact of psychology
and behavior of investors.
Despite the plethora of commentary and studies that support buy and hold investing
over very long periods of time there are two simple realties:
Individuals cannot successfully navigate market reversions (panic sell)
They dont have 100 years to invest.
Time is the only commodity that no investor can get more of or replace.
Valuations matter, however, remember that price is the common denominator in almost all
valuation analysis: P/S, P/E, P/B, etc. Not paying attention to the trend of prices will lead
to a misunderstanding of the changing dynamics of the markets.
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1990 1994 1998 2002 2006 2010 2014
S&P 500 Stock Price Index
Time To Go
Time To Go
???
Not Here
Either...
Absolutely
Not Here...
Liquidity Bubble
Credit/Real Estate
Bubble
Nope...No
Bubble Here.
I Don't Need An
Advisor - I'm A
Genius
Tech Bubble
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