Bogle on valuing the market

Morningstar had an interesting video from the master of Common Sense Investing, Jack Bogle.  The video was called Speculation Dwarfing Investment and in it Bogle basically says that there is about 200 times more trading and speculation than there is investment.

In the previous video called Markets About Fairly Valued Today, he covers much the same ground, saying in effect that rather than endlessly trading stocks and trying to make money out of the buying and selling, investors should really make money out of the long term earnings growth of companies and of course their dividend payments.

It’s always nice when someone basically agrees with you and it’s nice to see Bogle using CAPE (or inflation adjusted PE10) to value the market.

The very sensible way he does this is to look at the current yield, add in the long term earnings growth rate and finally to factor in mean reversion of a long term valuation measure like PE10, which is just good old common sense.

For the UK you could say something like a 3% dividend, plus 5% earnings growth gives you 8% annual returns, plus the PE10 is about 14 from memory, and the long term average is somewhere around 15 or perhaps slightly higher.  So it’s not crazy to expect something between zero and one percent extra a year if the PE10 re-rates upward over the next 10 years.

9% a year nominal certainly sounds a lot better than we’ve seen in the last decade.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

5 thoughts on “Bogle on valuing the market”

  1. “9% a year nominal certainly sounds a lot better than we’ve seen in the last decade.”

    Works for me! I’d be happy with 9%. Interesting post.

    Interestingly, Seth Klarman doesn’t seem too keen on indexing, which he says “Index Funds: The Trend Toward Mindless Investing”. One can probably get a couple of extra points return by using an equal-weight, fundamental or value-weight portfolio.

    1. I agree, but does anybody do an equal weighted or value (whatever that means) weighted low cost fund though? There seems to be an S&P 500 equal weight index but nothing over here. I’m pretty sure I’d gradually move my passively managed pension into an equal weighted index tracker if it existed.

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