OT: Valuation of QQQE (Jim question)

Jim, based on your prior explanations and advice, I am going to use the equal-weighted Nasdaq 100 ETF for a decent portion of a portfolio I manage for my retired father-in-law. Last I saw, you said (IIRC) that it wasn’t significantly overvalued, unlike SPY and QQQ. The market is down further since then. Was wondering if you (or others) have any useful data you might share regarding the valuation of QQQE, in absolute terms or relative to its past history. Also curious, if you were in this situation (investing in it for a retired relative), would you hang out in T-bills waiting for a more attractive price, or jump in now.

Thanks.

2 Likes

The price is in a zone of reasonableness.
It’s not cheap.
But if it’s expensive, it’s not by much.

I most recently recalculated the “average” valuation level in late August.
Sundry squinting exercises give values in the range of $62 to $70, with my best single number probably $64.
Today’s price is $64.27.

That conclusion of normalcy implicitly assumes a lot of things.
That the historically average valuation level has been sane, and that it is reasonably representative of what might exist in future.
That the trend of real earnings within the group will be somewhat comparable in future to what has been seen in the past.

But, if those assumptions are close to being right, the prospects are pretty good.
Historically earnings have risen at a rate of about inflation plus 7.5%-8.2%/year.
Add half a percent for the average dividend yield.
That’s really good. If it happens.
If there is no change in valuation levels, a return of inflation plus 8% for something that can’t go bust is a good deal.
In particular, it’s a growth rate that dwarfs that of the S&P 500, and is also currently very much cheaper compared to its respective historical average.

As for waiting versus buying now…depends on your personality and financial requirements.
A person could buy it today and definitely not feel foolish at all.

If I were doing this and wanted to be fancy and hold some of the cash back waiting for a better entry, I’d probably wait for my next “major bottom signal”.
But if you don’t want to rely on hearing about that that, bookmark this chart.
https://stockcharts.com/h-sc/ui?s=%24NAHL&p=D&yr=5&a…
When the red graph spikes to a REALLY low level, that’s your buy signal.
You don’t need to know exactly how low “really low” is. Just wing it…most such moments are good entry points compared to the average day.

Given that things have been bad for the Nasdaq for the thick end of a year,
I might make the wild speculation that a blowoff plunge capitulation might yet be coming.
Ideally you want to be buying the day that most participants in this particular market are calling their brokers
saying “I can’t take the pain any more, I don’t care what the price is, just sell it all, now!”.
Note that this effect also happens with big money managers, not just individual investors.
Gut feel, I don’t get the impression that the bulk of the Nasdaq-investing money is at that stage yet.
The best day to buy is the absolute bottom, and that’s the day of peak revulsion.

But there are lots of other days that are perfectly fine entries.

Just a warning:
These are Nasdaq stocks. They will briefly become very unfashionable and probably cheap during any big recession or bear market.
But they’ll bounce back, so just ignore that and ride it out.
I think it’s a very sensible investment for a lot of people, but they have to remember not to look at their statements during those times.

In my view the biggest downside is that the 100 names include about four Chinese/VIE firms which might go poof, and also Facebook which I personally find distasteful.
By construction there are never any financials, though, which cuts out a certain class of risk.

Jim

31 Likes

Awesome.

Thanks, Jim.

As for waiting versus buying now…depends on your personality and financial requirements.

Well, it’s for my father-in-law. Age 80, fairly good health. Has enough money to be comfortable in retirement, but no more. Not enough to just hand out in US bonds, if we continue on this inflationary path.

1 Like

Well, it’s for my father-in-law. Age 80, fairly good health. Has enough money to be comfortable in retirement, but no more. Not enough to just hand out in US bonds, if we continue on this inflationary path.

Have you considered a tontine?!?

1 Like