Tuesday, June 19, 2012

Is the stock market over-valued?

Business Insider reports that one of the world's-most-famous value investor's favorite valuation metrics is turning bullish.

I have a better question: why is this a good metric? My favorite investment advisor (not Buffet) has some answers:
if more and more of a country’s business is conducted by public companies rather than private ones, that ratio will change over time. There’s an implicit assumption in it that the proportion of a country’s output that is made by public companies is constant. I doubt that’s true! ...
For fun I just looked the total return on the S&P 500 performance from11/30/2001 to 5/31/2012, and the annualized total return of the index, which bears no expenses and includes the effect of both dividends and stock price movement. It was 3.4% per year.
Not sure exactly what that means (among the possibilities are that one could interpret as saying stocks were higher than Buffett thought back then, or that they are too cheap now, for example).
We report, you decide.


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