When to be in short term cash or stocks, and the accuracy of Robert Shiller's data?

Very interesting data. Do you know how often he updates it?

-HW "Skip" Weldon Columbia, SC

I consider myself to be a value investor, but I have doubts that the market can be timed. Why not be a stock picker?

Reuters.com will give the S&P 500 ratios when looking at the ratios for a stock. It currently gives the p/e ratio as 21.43.

Not exactly. I think the ratio is of the price of the S&P 500 to the average 10-year real (inflation-adjusted) earnings of the S&P. When real earnings have been rising, the P/E computed this way will be higher than the usual P/E computed using 1 year of trailing or forward earnings. Shiller deliberately smooths the earnings data with a 10-year average to avoid problems such as temporarily low corporate earnings leading to an artificially high P/E in a recession. I think he has found the P/E with a smoothed "E" to be a better predictor of future stock market returns than the P/E with raw "E". Shiller's book "Irrational Exuberance" has details.

Burton Malkiel has recently studied a market timing strategies based on the Fed Model and Shiller's P/E ratio. I read the article, and given the data Malkiel presents, I came to the conclusion (different from Malkiel's)that market timing DID add value over the 1970-2003 period, since market timing reduced risk more than it reduced returns.

Models of Stock Market Predictability BURTON G. MALKIEL Princeton University - Bendheim Center for Finance; National Bureau of Economic Research (NBER) Journal of Financial Research, Forthcoming Abstract: I briefly review the success of past studies purporting to explain equity valuations and predict future equity returns. The Campbell-Shiller mean reversion models are contrasted with an expanded version of the so-called "Federal Reserve" model. At least over the

1970-2003 period, "Federal Reserve-type" models do somewhat better at predicting long-horizon returns than a mean reversion model based on dividend yields and price-earnings multiples. However, timing investment strategies based on any of these prediction models do no better than a buy-and-hold strategy. While some predictability of returns exists, there is no evidence of any systematic inefficiency that would enable investors to earn excess returns. Keywords: Equity valuation and stock market predictability JEL Classifications: G12, G14

People who are knowledgable about corporate finance and have much time to spend on investments may be more successful as stock pickers than at "tactical asset allocation", but stockpicking is a LOT more work, and bad stockpickers can lose heavily.

Earnings data for an individual company has more noise than for the overall market, so I think one can state that the S&P 500 is over- or undervalued relative to its earnings (and interest rates) with more confidence than for an individual stock. To give two examples, WorldCom's earnings were fictional, and GM recently looked very cheap on a P/E basis -- until the earnings estimates tanked.

Check out the articles by Carl Swenlin in Top Addvisor's Corner on

as he covers three P/E measures. E.g.http://www.decisionpoint.com/TAC/SWENLIN.html. Personally, I see cash like this: the governments/central banks are diluting its value constantly so staying in cash is stupid (but I'm there myself for lack of anything smarter!). E.g. take out an ARM and once you consider inflation you may be living for free! Central banks can - and do - always print more currency [and make loans unbacked by assets] so cash is losing value constantly. Holding cash is alot like investing by buying a car. Company valuations may account for the expected loss of cash value; that is, investing in cash versus investing in something like a company that should not depreciate with inflation (cash dilution). If one stays in cash one has a 99.9% chance of losing value every year and every day.

As to P/E, I suspect this is an advertising number. I mean of course the executives and accountants of company X know how it is doing so P/E is simply a historical record of past performance. Is insider trading more predictive?

Philosophically, maybe intentional inflation is good as it forces us to put our money to use.

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