Recent blog entries have reported on correspondence that I engaged in with people at the www.IndexUniverse.com site in an effort to get an article on Valuation-Informed Indexing published at the site. Set forth below are the texts of an e-mail that I sent to Matt Hougan on February 29, 2008, and one that he sent me on March 1, 2008.
As I have noted before, I am always happy to respond to any particular questions or concerns. But it is obviously not possible to put forward all of the data that supports the Valuation-Informed Indexing approach in a single concise article. Hundreds of issues have been examined over the course of the past six years.
For now, I’ll provide links to a small number of the data-oriented materials that address some of the key points.
Here is a link to the Robert Shiller article entitled “Valuation Ratios and the Long-Run Stock Market Outlook: An Update.” The article concludes: “Linear regressions of price changes and total returns on the log valuation ratios suggest substantial declines in real stock prices, and real stock returns below zero, over the next ten years.” In the event that there is any validity whatsoever to Shiller’s findings, they are of huge importance to indexers who have been advised to employ Passive Investing strategies. I think it would be fair to say that the Passive Investing argument has been voiced at least 50 times more frequently than the valuation-informed argument in recent years.
Here is a link to a recent thread at the Financial Webring Forum (a group that generally advocates Passive Investing) in which a graph is shown comparing how a buy-and-hold strategy compares with a Valuation-Informed Indexing strategy. The author concludes:
“VII is pretty clearly superior everywhere, although there are a few occasions ending in the last half of the 90s, i.e. starting in the last half of the 60s, where B&H has a small advantage. Recent differences appear to be quite minor, although I would point out that an extra 1/2% a year over 30 years is not chicken feed.” One poster’s reaction is to say that he finds this “fascinating.” That’s consistent with the reaction I have seen everywhere these ideas have been presented. Many indexers love hearing that there are alternatives to leaving their money in stocks at times when valuations are at sky-high levels.
Here is an article from John Walter Russell’s site entitled “Our Strong TheoreticaFoundations.” This provides an overview of the research that has been done:
This article describes the history of the research effort:
This article is entitled “The Stability of Estimates Based On Earnings Yield:”
Please let me know if there is any further help that I can provide.
Thanks for the information, Rob.