 Good day, film investors! Welcome to the stock market news with a long-term fundamental twist. There is so much news about what happened yesterday, who tweeted what and very little news about the long-term fundamentals of the stock market and that's what you're going to get today. Today, we're going to discuss irrational exuberance, a book that Professor Noble prize winner Yale professor Robert Schiller wrote in 1999 saying that the market is extremely overvalued and that you should be very careful. Imagine the balls he had to come out with something like this in 1999. And look at the chart at page 6 of his book. This is the SAP 500 index when he came out the book and he was called crazy and a lot of other things for saying that it is overvalued. I don't need to tell you what happened next. However, in the book, he offers indications of what do you need for long-term investing, behavioral, there is a lot of sentiment in the market, always trends and everything. But what do we need to know to invest over the long-term and do that safely? These are the factors he uses to establish whether it was a 2019-99 stock market bubble. I remind you before the bubble burst, so earnings, valuations, dividends, the economy and long-term expected returns. And we are going to compare the 1999 situation with the current 2018-2019 situation. So let's start comparing and let's start to see whether what he was very prescient about in 1999 can be applied again today. Inflation adjusted SAP 500 just went up from the 1980s-1982 and we see that, okay, the SAP 500 is just a little bit higher than where it was in 2000. However, it is higher. And I consider even this bubble as just a continuation of the 45-year bubble that started in 1983. To quote Schiller from the book, we need a better understanding of the forces that shape the long-run outlook for the market and it is such an understanding that this book is intended to provide. So such an understanding is what this video is intended to provide. And if you have such a long-term perspective, if you know what are the factors that are important for your portfolio, for your long-term investment returns, then investing is really easy no matter what happens in the exuberant market. Tweets, Tesla investigations, all of that is just noise. Focus on the fundamentals and you do well in time. Another quote from the book from 1999, these results, he means record high stock prices, have created a sense among the investment public that such high valuations and even higher ones will be maintained in the foreseeable future. And then again, yet if the history of high market valuations is of any guide, the public may be very disappointed with the performance of the stock market in coming years. Again, 1999, 2018, 2019, people think that these valuations are here to stay forever, that's the predominant sentiment. Invest in index funds, markets are efficient. Similar story, if you read the book, to what it was the case in 1929 and 1999. Let's dig a little bit into the details. Schiller discusses how the Dow Jones went from 3,600 points in 1994 to 11,000 in 1999. So it tripled, but the American economy didn't triple at all. If we look at it from a 1987 perspective, the SAP 500 went from 287 points to 2,884 points, so it became a 10 beggar in 40 years. However, the American economy did not increase 10 times, it increased 4 times. If I would put that into the SAP 500, then the SAP 500 would be at 1,136 points. Imagine the pain if the stock market would converge back to the growth of the economy. Similarly, earnings rose from 38 to 144. So what's that? Increase 3.2 times. So imagine that earnings grew 3.2 times in the last 40 years. The economy grew 4 times, so earnings are there in line, a little bit lower than the economy, growth in earnings. But stocks are up 10 times. Bubble bells? I don't know. Let's continue to look at this. One reason for exuberant stock prices is high growth in earnings, and people like to extrapolate from the past. In 1991, earnings were very low because of the recession at 27 points, I think, for the SAP 500, but they grew extremely fast to 70 in 2000. So people were looking at this, extrapolating this in the future, and were exuberant about long-term prices, stock prices. So if I take the earnings from the last 10 years, we can see that from 2008 also earnings were very low, and the growth was staggering till today when we are at 120 with the tax fiscal stimulus, it will probably go a little bit higher. So again, we have a similar situation like the 1990s. Really fast earnings growth, faster than the economy, but it starts from a lower base. If I just add two years to the earnings chart, we can see how earnings practically didn't go anywhere, especially if accounted for inflation, then earnings would be negative. So that's another sign of irrational exuberance. As people like to look at the growth, you can sell that growth. If I tell you earnings grew, I don't know, from 30 to 120 four times in the next years are still growing at 10-15% per year, then I can get you excited about investing in stocks, especially index funds, which are no risk, great diversification, and then I can sell you that. If I tell you earnings have been negative when adjusted for inflation over the last 10 years, then you would say, why would I invest in something that doesn't grow? That's the human mind, that's the behavioral part of our mind, and that affects our finances and that leads to exuberant valuations and bubbles. Let's talk about valuations. So this is the Schiller PE ratio that uses 10-year average earnings as Graham and Dot did describe in their 1934 book Security Analysis. So Schiller gives credit to Graham and Dot. So I omitted that in a last year's video, I think. Look at valuations. The CAPE ratio is at 32, is higher than 1929, and it's not higher than 1999, but still extremely high when compared to history. And now let me show you the most important chart for the video that puts everything all the fundamentals into place. Long-term returns related to valuations for the stock market. This is what you should expect when investing. On the X-axis we have price earnings ratio for January of a year indicated from Schiller's book, and then we have annualized 10-year returns. When the price earnings ratio is close to 5, annualized 10-year returns are close to 20%. When the price earnings ratio is close to 25, annualized 10-year returns are often negative. If the PE ratio is below 15, then there are no negative returns. There are a lot of positive returns. If the PE ratio is above 20, then the negative 10-year returns start to emerge. So from a valuation perspective, from a fundamental market perspective, you have to understand that it is really exuberant. And with that news, that's news to a lot of people in the market, it's not interesting too. It's not sensational because that's how it is. And that's what investing is. Investing is boring. If you are having fun when you're investing, then trust me, you are in the wrong place at the wrong time and you will highly, probably lose a lot of money. Investing is boring, boring, boring. Investing is like watching paint dry or looking at grass grow. That's how Munger would say it. And then that is when investing is good. So let's look at another factor that a lot of people are excited about, dividends. If we look at dividends in history, when the dividend yield was low, long-term returns were bad. And when the dividend yield was high, long-term returns were good. The current dividend yield of the SAP 500 is 1.81%. The average historical is 4.45%. Yes, compare it to interest rates, compare it to whatever you want. History, statistics, significance are telling you what your long-term returns will be. 2000 also dividend yield very low and we are still in the same bubble. So if you want to continue with the book, there are some very interesting chapters about how the mind of the community works that affects the markets. We're going to, when I have time, go through those chapters too. So please subscribe if you want to see a different perspective on investing that takes account the fundamentals and that tries to diversify in order to prepare us for whatever will happen, for what happens if the SAP drops to those, let's say, economic SAP 500 at 1,136 points, then please subscribe to the channel if you want to see my portfolio, stock market, please check my stock market research platform where I share all my in-depth research and where I'm building a model portfolio that is, let's say, prepared for whatever happens in this environment that is, as we have seen from Schiller, extremely risky and will lead probably to a negative 10-year annualized return. So please discuss this with your banker before he is trying to sell you index funds or ETFs. Thank you for watching and I'll see you in the next video.