How to determine if the general level of market prices is high?

[goponcho]

Looking to index while i learn about value investing.

Graham recommends a representative portfolio if the general market level is not too high.

How do we practically determine this for a whole market?

 

[pixel]

Looking to index while i learn about value investing.

Graham recommends a representative portfolio if the general market level is not too high.

How do we practically determine this for a whole market?

"not too high" implies a very discretionary approach. Meaning it depends on what you perceive as high or low, greatly depending on your intended planning horizon.
FWIW, I use a 5-year chart of the respective country's most relevant index; for Australia, it's the All Ords or S&P 200. Other countries I watch include Nikkei, Shanghai Composite, Hang Seng, CAC40, FTSE, S&P500 and Dow Jones.

For short-term snapshots of Australian conditions, I also use a watchlist that contains the GICS, which I then rank by %gain/loss to give me a feel for sectors coming in our going out of favour. Of course, short-term sector rotation is probably less of an issue for a value investor.

 

[goponcho]

What do you do with the charts though?
Not buy at all time highs?

I thought it was more not to buy when stocks are selling for large multiples of earning power, ie a speculative environment with bloated prices to underlying earnings?

My horizon is long term 20y+, want to buy an index for now while i learn then shift to individual companies in a few years when more equipped.

 

[pixel]

What do you do with the charts though?
Not buy at all time highs?

Not really, that's right. But if an index chart is low and becomes supported (implying a turn may be imminent) I'll look for undervalued stocks in that space.

I thought it was more not to buy when stocks are selling for large multiples of earning power, ie a speculative environment with bloated prices to underlying earnings?

Multiples are but one consideration. I know of an investor who keeps buying some stocks trading at 20+ multiples, but shuns others that are closer to 10-times earnings. The point being that the Market will have a reason for the discrepancy.

My horizon is long term 20y+, want to buy an index for now while i learn then shift to individual companies in a few years when more equipped.

If there was a remote chance that I'd live another 20 years, I might also look that far ahead. FWIW, my guess is that the world will be unrecognisably different, with technology stocks leading the way in fields not even on the map today. Biotech? Alternative Energy? Entertainment? Or more basic, like Food supply, personal security?

Guess right and set yourself up for financial security. Guess wrong and join the queue at soup kitchens...
:1zhelp:

 

[luutzu]

Looking to index while i learn about value investing.

Graham recommends a representative portfolio if the general market level is not too high.

How do we practically determine this for a whole market?

Fortune magazine/site has has some Buffett macro tracker to determine if the market is high or bubbly etc. Has something to do with overall market cap and GDP.

Can google it... but if you plan to set savings aside, maybe just put into index whenever you got the cash regardless of the market. Can't really predict market movement and I think it was Peter Lynch who said to try and time it while indexig and you may find yourself never getting in or getting in at the wrong time or after a big jump; that there's always something to scare or tell us to hold on a bit.

For my two cents, I think we just have to find a great business selling at fair or crazily cheap prices and buy them when we find them - maybe try to get a few further percent if we can from how unpopular it seems to be when we're buying... but the market usually know what it's doing and only get scared or greedy now and then. We can't really know, or I can't, when the market do what it does... could only hope to know the specific company I'm looking at and pray the market is getting it wrong at the moment and it's not me who's the patsy.

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In terms of PE as an indicator of value or growth... that's not always the case. Sometime things are just plain expensive and others when they're just cheap - has nothing to d with quality or potential; more with market perception and mood.

Some companies sell at high PE because the market believe it will grow, and for the happy investors it does grow and grow and is of great value; some high PE have hopes and dreams on them and it tank like a cheap knock-off then sink to low PE and is still of no value.