I’ve posted Entry #332 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Never Before in U.S. History Have We Seen Today’s Level of Overvaluation Continue for So Long.
Juicy Excerpt: An exceedingly helpful paper on the topic of this column (the merit of valuations-based market timing) was recently published by Valentin Dimitrov of Rutgers Business School and Prem C. Jain of the McDonough School of Business at Georgetown University. It is titled: Shiller’s CAPE: Market Timing and Risk.
The paper states that: “We find that even when CAPE is in its ninth decile, future 10-year stock returns, on average, are higher than future returns on 10-year Treasurys. Thus, the results are largely consistent with market efficiency. Only when CAPE is very high, say, CAPE is in the upper half of the tenth decile (CAPE higher than 27.6), future 10-year stock returns, on average, are lower than those on 10-year U.S. Treasurys.” So the paper is not generally supportive of the Valuation-Informed Indexing concept. However, it provides a wealth of data and analysis that I believe should be reviewed by all with an interest in coming to a better understanding of many questions raised by Robert Shiller’s “revolutionary” (his word) 1981 research showing that valuations affect long-term stock returns.
I find it amazing that Valuation-Informed Indexers and Buy-and-Holders look at the same historical return data and come to wildly different conclusions re what it signifies. I’ll describe one way in which this is so in the words below.