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The astonishing accuracy of long-term stock market valuation

I have been giving this presentation explaining how we can tell, with a high degree of accuracy, what stock returns will be over the following 10-15 years from any point in time. In the short-term the market is a voting machine, but in the long-term it is dependable weighing machine, and what it weighs is value.

Price is what you pay, and value is what you get. What you get, when it comes to stocks, are sales, profits, and net worth. Sales and net worth for the market in aggregate don’t change all that much year to year, and profits are also quite steady once you account for the business cycle by applying a 10-15 year running average. Individual companies are another story, but when it comes to indices, there’s no real mystery about what you’re buying: a stream of cash flows that tends to compound at roughly 4-5% over inflation, which as it turns out, is exactly the multi-decade return on stocks all over the world.

Draw a line going up at that rate on a long-term chart and overlay real stock market returns. When stocks have lagged by a lot, they tend to overperform to catch up, and when they have overshot, they lag. Value is the tortoise, price is the hare. Timing is as simple as not betting on the hare for the coming decade when he’s already far ahead.

See my presentation for more details and lots of nifty charts.






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