Aug

13

We know that historical earnings yield is highly unstable. The attached Shiller P/E [i.e. price divided by average earnings for the last 10 years] for SP500 (1880-2010) depicts a range from 5-45, which translates to a one order of magnitude range in yield; 2%-20%. There are several instances when we were near the current level (~20 P/E); some were good entries, others were not. Perhaps there are better valuation metrics, but it is likely they are unstable too.

If stock prices do not reliably track valuation metrics (or reliably mean-revert to them), how does one know when a given entry-point value is a long-term bargain? Is value better considered in context, such as current historically low bond yields (ie the FED Model says beg/borrow/steal to buy buy buy).


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