What P/E ratios tell us … or don’t

  • “The market is way over-priced.’’ – Yale Economics Professor and Nobel Laureate Robert Shiller, who developed the cyclically adjusted price-to-earnings ratio (CAPE), a widely used stock-market valuation metric. Shiller was quoted on Bloomberg.com on 3/14/17, pointing out that the CAPE, while still about 30 percent below its high in 2000, shows stocks are almost as expensive now as they were on the eve of the 1929 crash. Read more.
     
  • “Using a simple average treats radically different periods equally, which is simplistic, naïve and wrong.” - Charles Lieberman, Chief Investment Officer at Advisors Capital Management, writing in the Bloomberg View blog on 3/2/17. Instead of looking at today’s market in light of long-term average P/E ratios (as CAPE does), he argued it is more appropriate to compare it to other periods when inflation and interest rates were low. Viewed through that filter, he said stocks today “seem to be reasonably close to fair value.” Read more.
     
  • “Just like the children in Lake Wobegon, if this was easy, everybody would be an above-average investor.” – Barry Ritholtz, writing in his The Big Picture blog on 3/3/17 that it is a mistake to place too much importance on P/E ratios. He said many other variables need to be considered when determining whether stocks are cheap or expensive. Read more.

An under-appreciated benefit of saving money

  • “…trying to increase savings actually has a dual positive effect on reaching retirement: not only does it mean there’s more in the account to grow, but saving more reduces your retirement-savings need. The reason, simply put, is that…if you don’t spend as much to maintain your lifestyle, you don’t need as much saved up to replace it!” – Michael Kitces, writing on his Nerd’s Eye View blog on 2/15/17. Read more.

If only we made it a priority to save money sooner

  • “If we spend money today, we can’t spend it tomorrow, let alone in 30 years. If we’re rational, we would care more about the future when we’re younger, because there’s potentially so many years ahead of us. But ironically, it seems our concern for our future self grows as we get older.” – Jonathan Clements, writing on his Humble Dollar blog on 3/25/17 about what it takes to be a saver. Read more.

lnvesting essentials

  • “Long-term returns are the only ones that really matter, but you have to figure out how to survive the bad times long enough to ensure a good process can see you through to make it to the long-term.” – Ben Carlson, writing on his A Wealth of Common Sense blog on 3/12/17 about how an investment process built around hitting singles and doubles can be more effective than one geared toward hitting home runs. Read more.
     
  • “While five years might be enough time to decide whether or not to terminate a basketball-coach’s contract, you should not judge an investment plan or an asset class based on five years of returns.” – Patrick Lach, Associate Professor of Finance, Eastern Illinois University, writing in MarketWatch.com on 2/22/17. Read more about his reasoning.
     
  • “At its essence, diversification is applied humility in the face of an uncertain future.” – Dr. Daniel Crosby, from his book, The Laws of Wealth, an excerpt of which is featured as this month’s cover article.
     
  • “…bad news smashes your face against an amplifier, while good news just plays quietly in the background.” Michael Batnick, writing on his The Irrelevant Investor blog on 3/20/17. He said, “Doing nothing should be the default setting for most investors,” but the long history of ingenuity among businesses represented in the stock market gets too easily overshadowed by the negative headline of the day. Read more.