I’ve posted Entry #42 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Do Not Offer the Same Value Proposition at All Times.
Juicy Excerpt: There has never been a time when stocks performed poorly in the long term starting from a time of low valuations or starting from a time of moderate valuations. Start from the premise that the value proposition of stocks varies with changes in valuation levels, and you are led to a conclusion that the riskiness of stocks is concentrated: Stocks are insanely risky at times of high valuations but are not nearly as risky as most perceive them to be at all other times.
This reality (that the value proposition of stocks varies) explains why investing advice became so messed-up not long after stock analysis became an object of academic study. The benefit of systematic analysis is that it drills deep. We have learned more about how stock investing works in the past 40 years than we did in the prior 140 years. Unfortunately, most of what we have learned is wrong. Deep drilling is not such a good thing when you are drilling in the wrong place!
Our mistake was in coming to a hasty conclusion in the 1960s that the value proposition of stocks is a stable thing. Now that we (well — some of us!) know better, we can get to work drilling at spots where there really is a good chance of hitting a gusher. The value proposition of stocks varies according to the valuation level that applies. Once all researchers adopt a practice of considering the effect of valuations in all studies they perform, analysis of the historical return data will begin bearing good fruit at last.