I’ve posted Entry #196 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Folly of Making Use of “Indicators” of Future Stock Returns Other than P/E10.
Juicy Excerpt: I think that it is because people are worried that if they say risk is sky-high when the P/E10 level is at 25 and then it rises to 35, as Shiller properly notes it might, they will be blamed by investors for being “wrong.” Reporting that stock-market risk is sky high today is right and not wrong and it doesn’t matter whether the P/E10 level rises to 35 or not. The risk is what it is. No amount of price rises can retroactively change the reality that risk is sky-high today. People need to know that and the experts in this field who fail to tell them this reality are not doing their jobs.
The problem on the part of the investors is that they have a short-term focus. They want to know how stocks are going to perform over the next year or so and that’s something that we just do not know. We shouldn’t fail to tell people how stocks are going to perform over the somewhat longer term just because we don’t know how they are going to perform over the next year or so. We should make the necessary distinctions and tell what we really can tell.