Replies to post #37925 on A.I.M. Users Bulletin Board (AIMUSERS)

[ls7550]

Re vWave stuck

Here in the UK market gains broadly continue to come half from dividends, half from capital gains. Some years back I believe the US changed taxation policies such that it was more tax efficient to retain more, pay less in dividends.

Generally in the UK we might anticipate a share price that broadly paces inflation, together with a dividend yield on top (in effect the real gain or risk reward amount). One of the measures I periodically review is how share prices (excluding dividends) are generally moving in real (inflation adjusted) terms relative to a start/base date of 1987. Generally prices broadly paced inflation (with some modest zigzagging around) up to the early 1990's, but then progressively rose up to 1.5 times inflation by 1999. Subsequently prices dropped (dot com bubble bursting) by around 33% back down to inflation pacing again by 2003. i.e. the 1999 1.5 times inflation figure was perhaps indicative that prices were at risk of declining 1/1.5 - which they did.

Real prices again rose progressively after 2003 up to 2.0 levels by 2007, and 2008 saw that crash back down again to 1.0 levels by 2009.

Again since 2009 real prices have risen = up to 2.5 times inflation pacing, and as such might drop 1 / 2.5 = -60% back down to 1.0 levels again.

If there's a chance of a 30% fall then its worth keeping 30% cash in hand. If there's a chance of a 60% fall its worth keeping 60% cash in hand. The vWave value of 60% cash is perhaps reflective of such risk. But could stay at such levels, perhaps even rise further until such a correction occurs (or inflation rises to close down the gap).

Since 2000 it would appear that micro-managing the markets (intervention, QE etc) could actually be inducing increased risk/volatility. QE and very low short end bond yields (0.5% or whatever) are an experiment and has induced investors to be more likely to take on risk that otherwise they might not have. It will be interesting to see how it all pans out in the end.

AIM might reasonably be expected to navigate you through such volatility, the vWave supplements AIM providing a broader feel for appropriate levels of cash at any one time.

I've no idea how long such zigzagging of beating inflation and then 'falling' (correcting) back down to a more reasonable inflation pacing levels again - will continue to be followed by subsequent quick 'recoveries' back up to former relatively high levels (and beyond). Its as though more than a reasonable amount is repeatedly being expected from the markets. At some time the markets might realise that the 'lows' are actually more fair-price levels. But that will also need the markets not to be manipulated by the likes of QE etc.

A reasonable return from short dated treasury bonds might be inflation pacing. Lend to the treasury for longer (10 years) and its not unreasonable to expect a little more - perhaps 2% real. Take on stock risk and a inflation pacing share price coupled with a 4% yield would also seem reasonable. Back in the higher inflation years of the 1980's that would have meant something like share prices rising by 8% inflation and paying a 4% dividend. Its as though the markets are expecting such high historic nominal rewards (12% or so total) to indefinitely persist - whilst in a 2% inflation world a 5% or 6% nominal (3% or 4% real) isn't a unreasonable reward relative to 0% real from short dated bonds, 2% from longer dated bonds.

Since 1987 total real gains have doubled up every 9 years pretty consistently, hitting such double ups in 1996, 2005, 2014. i.e. stock rewards are being manipulated by the likes of the Fed to continue to provide around 8% real 1980's type high inflation/interest rate years gains, even in the more recent relatively low inflation/interest rate years. Such expectations IMO are too high.

Over the years I've come to less follow AIM and more follow the likes of the vWave. AIM helps steer you to similar levels of stock/cash levels in a more automated manner such that you're more likely to actually follow such levels. AIM in effect trains you to be more inclined to profit take when high, add when low, whereas normal human nature tends to otherwise steer you to do the complete opposite. Relative to mathematical averages and you might actually just compare to that average, however that is often a lot more than what many other investors actually achieve - as often individual investors actually lag the mathematical average due to having followed their buy-high, sell-low emotions.