I’ve posted Entry #219 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Recent Comments Suggest That He Doubts the Value of His Own Research.
Juicy Excerpt: Shiller’s big insight is to show that long-term returns are predictable. To the extent that returns are predictable, risk is reduced. Shiller’s work has reduced risk dramatically. The peer-reviewed research that I co-authored with Wade Pfau shows that risk has been reduced by nearly 70 percent.
But only if we can say what the P/E10 value should be.
If Shiller is right in his recent comment that “you can’t derive what it should be,” his work is pointless. A high P/E10 value shows investors that they must lower their stock allocations. A low P/E10 value shows investors that they must increase their stock allocations. The P/E10 metric drives the Valuation-Informed Indexing strategy. If the proper P/E10 value cannot be known, there is no practical value to knowing that valuations affect long-term returns. If the proper P/E10 value cannot be known, there is nothing that can be done with Shiller’s findings to give them real-world value.