joetaxpayer recently linked the following on the "Cyclically Adjusted Price Earnings RatioP/E10 or CAPE":
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Once one realizes this applies to every stock, not just the S&P 500, does author Rob Bennett have a point in saying that this is a great time to be an investor, 'cause one can use the CAPE values to decide when to buy and sell?
Or is this 'strategy' as vulnerable to failure as any other, since increasingly people will use CAPE in their decision to buy or sell a stock (or short or whatever a stock), hence CAPE may become less and less useful.
An investment strategy needs to cover times when the P/E ratios are high in addition to when they are low. Other studies have shown that it is difficult to time the market.
The recent drop in the price of gold shows that there isn't any sure thing in investing. The return on CDs is too low thanks to government policy for people that can't afford to take risks on their investment.
I examined the aforementioned article more closely along with the Shiller historical data on CAPE for the S&P 500. The author has emphasized at the joetaxpayer site that it was geared more towards the run-of-the-mill working john/jane who was saving for retirement and wisely using index funds to do so. Given the latter, what should John or Jane do?
I talked about this at joetaxpayer.com. After a lot of analysis, I cannot decide how to use CAPE even for the S&P 500. How useful is the observation that the S&P right now is kinda overvalued (CAPE at 20) relative to history? 20 is not so terrible.
Ron, I agree there is no sure thing. Add in the peculiarity of interest rates on bonds. Ben Bernanke is a genius if only because he has made the decision making so uncertain via never-before-seen record low rates. If one of my acquaintances asked me about a savings plan, I think I would say 'live within your means; work like heck; save like heck. Have good skills for surviving in addition to your day job, like fixing cars; growing vegetables; fishing (Skip, I'm talking to you) and staying mentally and physically healthy via same.' Then diversify any savings to the tune of 60/40 stocks and high grade bonds, all in index funds. I would add that no one can forecast but that, historically, the 60/40 allocation has been a pretty low volatility, decent return one.
George, maybe your succinct response does say it all.
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