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A couple of interesting Shiller PE articles


racemize
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If we will not be buying the market indexes, why should the Shiller PE matter?

 

I pretty much agree, although keeping some tabs on overall market valuation seems useful, even if we largely ignore it.  For example, if I have a range of possible investment amounts, it might influence which direction I go in the range (which is a subjective call already), but would not affect the overall decision. 

 

I mostly posted it for the article on why the Shiller P/E for the last 10 years still applies, even though there were two recessions.  I previously thought the Shiller PE probably should not apply to these 10 years, but I am reevaluating that premise. 

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I believe the next 10 years of stock market returns will depend on corporate earnings for the next 10 years.

 

The Shiller PE10 argument suggests that if earnings were substantially lower in the recent past 10 years, then they'll undergo a period of weakness over the future 10 year period and that's what is going to kill stocks.

 

I take this attitude because the current year P/E is not all that dangerously high.

 

The argument rests on profit margins being at all time highs, or artificial stimulus, etc...

 

Things won't be that bad if the profit metrics don't unwind -- the PE10 argument is basically predicting that they will.  So it says, in effect, corporate profits don't suddenly "just up and get this good" so quickly.  Maybe it's right, but I think it's better to just have an argument over what is driving the currently high profits and take it from there.

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If we will not be buying the market indexes, why should the Shiller PE matter?

 

I think it should matter in the sense of being generally aware of the market.  If the market as a whole falls everything falls, not just the overvalued stocks.  So being aware that we're in high territory helps keep a sane head, likewise when everyone was panicking in 2009 the Shiller P/E was a helpful indicator to reinforce that stocks are cheap.  Sure they could get cheaper, but for all the dire outlooks they were cheap.

 

Also some of us aren't full time investors and are saddled with index or mutual funds in retirement accounts we can't control.  When the market as a whole gets higher I lighten my stock allocation, when the market's cheap I load up.

 

Shiller P/E doesn't drive any of my non-401k investment decisions, but it is a helpful stat to keep in mind.

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If we will not be buying the market indexes, why should the Shiller PE matter?

It's going to be a lot easier to make money in a low PE market than a high PE market, no matter what you buy. And for some investments it might be quite important. Think for example about the valuation of an asset manager: how profitable will they be in the future if the market goes sideways for a decade? Or what about BRK. They are invested in expensive stocks, and how much opportunities can they find to redeploy capital if valuations are at this level?

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I realize that investors on this board are not buying stock market indexes, but the reason I like race's post and the Shiller P/E is for the same reason that Mr. Buffett likes the total stock market to gnp ratio http://money.cnn.com/2009/02/04/magazines/fortune/buffett_metric.fortune/index.htm.

 

It's not an exact science, but it gives an investor a good idea of overall market levels.  There is nothing wrong with that idea. 

 

However, I completely agree with yours truly, in general if you are finding $0.50 dollars by all means invest regardless of what either metric shows.

 

 

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