I’ve posted Entry #341 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Effect that Valuations Have on Long-Term Returns Is Consistent Across the Range of Valuation Levels.
Juicy Excerpt: Valuations affect every aspect of the stock investing experience. Too often discussions of valuations are rooted in a presumption that the purpose is to guess when valuations are going to turn and to profit from the guessing game. That the one thing that Shiiller’s research findings do not help the investor to do; short-term price changes are highly unpredictable. The power of Shiller’s finding that valuations affect long-term returns is that it illuminates every question faced by investors other than the silly guessing-game one that garners so much attention.
Say that you were thinking of buying a car. You obviously would ask the dealer for the price. You don’t do that for a single purpose. Knowing the price serves multiple purposes. It tells you whether you can afford the car or not. It also informs you how you may need to adjust your desires to identify the car that is right for you; by comparing the prices of two cars, you can see how much one feature you like adds to the overall cost and assess whether that feature is worth the cost associated with it. Knowing the price attached to a used car with a specified number of miles on it signals how new of a car you can afford. Knowing the price of a car advances your car purchase project in many ways and the same is true with knowing the valuation level for stocks — identifying the P/E10 level tells you all sorts of things that you need to know to make an intelligent investment decision.