Yesterday, I wrote a post on how asset managers and investment consultants seem to use mostly a CAPM with some bells and whistles to come up with long-term asset class forecasts. These forecasts are the key input to creating portfolio allocations and getting them right is of crucial importance. Yet, as I discussed yesterday, to come up with these long-term forecasts, most investors use a model that is empirically wrong. But what can you do if for some reason, all you have at your disposal is the CAPM and you still need to come up with long-term forecasts?
Standing back, do these precise valuation models give a false sense of ‘scientific’ accuracy? I can see that the Schiller CAPE is useful to assess the market - S&P500 over valued, FT-AS fair value. The Gordon GM is useful for stable Div paying companies. Otherwise is not the progress of the stock price down to ‘circumstances’ - for an individual company, and Macro changes for the market. We must always assess an individual stock by fundamentals; the flow of the market depends on Fed Reserve, economic environment, war/ pandemic, and so on.
Standing back, do these precise valuation models give a false sense of ‘scientific’ accuracy? I can see that the Schiller CAPE is useful to assess the market - S&P500 over valued, FT-AS fair value. The Gordon GM is useful for stable Div paying companies. Otherwise is not the progress of the stock price down to ‘circumstances’ - for an individual company, and Macro changes for the market. We must always assess an individual stock by fundamentals; the flow of the market depends on Fed Reserve, economic environment, war/ pandemic, and so on.
2023 Charles H. Dow Award Winner:
https://cmtassociation.org/wp-content/uploads/2023/05/The-5-Percent-Canary.pdf
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