Set forth below is the text of a comment that was recently posted to another blog entry at this site:
Does it concern you that there have been many market timing strategies that have been researched and peer reviewed but once discovered no longer work? PE10 would certainly fit into this mold as everyone is now well aware of the metric and its possible implication.
Does it concern you that the research you cite includes a huge chunk of time where implementing VII would have been incredibly impractical? In that sense a market inefficiency related to PE10 ratio could of existed but the cost of taking advantage of it at the time would have been too great to act on and thus correct the inefficiency.
Does it concern you that the research you cite doesn’t properly account for trading costs and tax implications at the time which again suggests that a PE10 market inefficiency could have existed without the ability to take advantage of it?
Does it concern you that the research you cite doesn’t properly account for trading costs and tax implications at the time so its comparisons to a buy and hold strategy are not perfect?
Does it concern you that you only use PE10 on the U.S. market and therefore are only informed about a single market? What is the plan for international stock allocation which isn’t informed by your PE10? Certainly a portfolio that totally ignores the entire rest of the world can’t be properly diversified and by your assessment less risky.
Does it concern you that the mean PE10 ratio could very well be trending upwards?
Does it concern you that there is no theoretical reason for the historical mean of PE10 and that it is nothing more than that the historical mean? The historical mean height of males throughout history is probably something like 5’3? foot. Should I expect a revision back to this historical mean?
Does it concern you that even if a PE10 over some historical mean represents a market inefficiency a market can remain inefficient for a very long time?