Rules for buying the dip?

Investing / Others
43

As far as I know for S&P 500 , equity risk premium is calculated as follows

YE = earnings yield from S&P 500
YB = 10 year bond yield
Equity risk premium (ERP) = YE - YB

At this moment it’s negative or close to zero. This number used to be between 4-6%.
You can only say “risk” is still there if people ask premium to take on the risk. If people are buying stocks for same yields as 10Y Bonds, this actually means people are not really concerned or uncertain.

I am talking about people who invest in stocks (active investors or active funds). People who buy index funds are not really setting any price. They are merely providing liquidity to buy stocks based on what other active investors have decided to be the price. So we cannot really look at index fund flows as metric.

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I think this is result of long term strong performance by S&P 500. Investors are okay to get low ERP to buy these stocks. But I think then the same investors shouldn’t be surprised if their returns are similar to 10YR US bonds. That’s all

It can also happen that S&P end up delivering better than bond performance due to excellent earnings growth in future . But that’s the unexpected part of discussion.

44

Once I have some time to kill I’ll look into it more, mostly for educational purposes.

I asked chatGPT the question of correlation vs causation, and it came up with this:

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45

ChatGPT is new resource I see :wink:

46

Huh?

47

I don’t use it for financial stuff. Maybe I should

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48

I think it’s not bad for theory, finding references or for running numbers, or even giving formulas to plug in excel to set things up etc. That’s how I use it.

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49

IMO they are setting a price, this is pushing the price of equity investments as a whole (just not individual stocks).

50

But didn’t we say traders set the price?

51

The overall flows are still pushing the prices up, regardless of individual stocks.