The discussion provides an overview of the key concepts and insights relating to long-term

market forecasting during the class session held on Monday, October 14, 2024. Here's a
summary of the main points, derived from AI from students’ “What We Learned”
comments:
Key Concepts and Insights:
• Tactical Asset Allocation (TAA):
o Shifts asset allocations to capitalize on macroeconomic conditions.
o Requires accurate market timing, which is challenging.
o Has not consistently outperformed long-term strategic asset allocation.
o Requires identifying exit and re-entry points, allocation size, and low-cost
execution.
• Strategic Asset Allocation (SAA):
o Focuses on maintaining a predetermined asset allocation over time.
§ Changes are not made to the asset allocation based upon valuation
levels of the market, or economic occurrences or trends.
§ Changes are made to a strategic asset allocation if an individual
investor’s circumstances change. For example, an SAA that is
appropriate for a person 20 years away from retirement might be
changed to become less risky as the investor enters retirement. Or if
an investor inherits a large sum, or loses his/her job, the SAA might be
changed.
o Generally considered more reliable and less risky than TAA.
• Valuation Ratios:
o Price-to-book (P/B) ratio compares a company's market price to its book
value.
o Price-to-sales (P/S) ratio compares a company's market capitalization to its
sales revenue.
o Price-to-earnings (P/E) ratio compares a company's market price to its
earnings per share. The problem is that the P/E ratio can become wildly
distorted around sharp declines in the market, as earnings is measured for
the prior 12-month period (TTM) (Trailing Twelve Months).
 o Price-to-cash flow (or price-to-free-cash-flow) is another ratio. It su\ers from
similar problems as the P/E ratio. It also relies upon analysts to examine a
company and make adjustments to its income statement to reflect
necessary cash reinvestments in the business enterprise – this introduces
the potential of biased judgments.
o Shiller P/E ratio uses 10 years of inflation-adjusted earnings, providing a more
reliable valuation metric for assessing the valuation level of a market.
§ Given changes in accounting standards and dividend payout ratios,
many market observers believe a Shiller P/E ratio of 20 to 25 is a
reasonable level of valuation.
• Market Overvaluation:
o Bu\et indicator compares the total U.S. stock market value to U.S. GDP.
§ A value above 100% suggests overvaluation.
§ Current market valuation is significantly above 100 (209%), indicating
overvaluation.
o Warren Bu\ett's cash position in Berkshire Hathaway has grown significantly.
o The Shiller P/E ratio for the S&P 500 Index is above 38, near its all-time high.
§ Currently it appears that U.S. large cap stocks are overvalued by 30%,
or much more.
• Other Insights:
o Emerging markets are expected to outperform U.S. stocks in the future. This
is due to the expected growth of emerging markets economies over future
decades, relative to the U.S.
o Population declines in China, Japan, and Europe will impact economic
growth, and may well cause the developed markets stock index (such as
EAFE) to decline, as a result, over the long term.
o Diversification: Investing across di\erent asset classes and geographic
regions can help reduce risk.
• Follow-on discussion of use of economic trends to suggest sectors or asset classes
to invest in:
o Dr. Rhoades does not believe he has su\icient knowledge of economics, as it
relates to the e\ects on the returns of various asset classes, to accurately
predict which sectors to invest in.
 o Humility can be a good trait for an investment adviser to possess.
o The potential positive impacts (on productivity) of robotics, AI, continued
deployment and enhancement of other forms of software, and (perhaps
even) quantum computing, are very di\icult to predict at present.
• We Discussed A Hypothetical:
o Should a 50-year old couple, with no substantial stock market experience,
invest in the stock market? The couple has no personal debt, a home that is
paid for, a $75,000 cash reserve. Both are working full-time for another 10
years. The couple has $4,000,000 of real estate holdings, which has $2m of
debt associated with it – at 4% fixed rate. The couple has $1,000,000 of cash,
and will generate (from the rental real estate holdings) another $80,000 in
cash each year.
§ They could pay o\ the debt. Given the ability to deduct the interest for
tax purposes, the cost of the interest is e\ectively about 2.9%.
§ They could invest in U.S. Treasury securities, using a ladder from 1
month to about 7-8 years. This would likely earn 4% before-taxes, and
2.9% after taxes.
§ They could invest in stocks, or a portfolio of stocks and bonds. By
tilting heavily to mid-cap/small-cap value stocks (with profitability
factor also), and by diversifying among U.S., foreign developed
markets, and emerging markets stocks, the substantial over-valuation
of U.S. large cap (growth) stocks can be avoided. However, if U.S. large
cap stocks decline, all stock asset classes will decline (at least to
some degree). If they invest, their investment adviser (Dr. Bear) would
charge fees of 0.66% a year, and mutual fund fees and costs would
likely be about 0.28% a year.
o The teams in the two classes were split:
§ About 40% the teams suggested paying down the debt.
§ About 40% of the teams suggested investing in U.S. Treasury
securities.
§ About 20% of the teams suggested investing in a balanced stock /
bond ETF allocation. If stocks were to fall, this would permit
rebalancing to occur (i.e., sell bond ETF shares, buy more stock ETF
shares).
o What will Dr. Bear recommend?
§ Dr. Bear will present all three recommendations to them. He favors
paying down the debt, which would increase their cash flow to about
$110,000 a year (after taxes). Then, dollar-cost average into the
market, by adding to their investment portfolio each year.
§ By paying down debt, personal risk is minimized. Any time you
can decrease debt payments, and make your personal cash
flow more positive, you make yourself more resilient to adverse
events that could impact you.
§ The opportunity cost is the possibility (and one might say,
probability) of higher investment returns, on an after-tax basis,
over the next 10 years.
o Given the couple’s limited experience with stock market investing, Dr. Bear
will likely spend a lot of time with them, educating them about stocks, their
historical returns, their valuation levels currently, expected returns over the
next 10 years, the inherent volatility of stock market investing, and the
possibility that – even with the use of multi-factor investing – they may not be
able to secure a positive real (inflation-adjusted) return in stocks over the
next 10 years.
o Dr. Bear's Approach:
§ Emphasizes a conservative approach by prioritizing debt reduction to
minimize personal risk.
§ Acknowledges the opportunity cost of potentially higher returns from
stock market investments.
§ Stresses the importance of education and understanding the risks
associated with stock market investing.
o