June 02, 2010
– Comments (2) |
RELATED TICKERS: UNH
My rebuttal to an earlier Fool article claiming the market may be cheaper than you think. I welcome all constructive, informed feedback.
I have favored the CAPE as the best way to value the entire market since I first learned about it. I believe the market's a bit overvalued. I agree, however, that there are stocks that are undervalued even in a market that's a bit overheated.
I believe the 10 year average smoothes out even the 2008 and 2009. Years before that, the real estate market went wild and fueled all sorts of record earnings for homebuilders, steel companies, banks, you name it. Taken together, I believe the good and the bad average out nicely.
I don't think I've added anything to the discussion except to say that I pretty much agree with your article.
Tobin's q ratio is another good valuation indicator; in fact, Andrew Smithers and Stephen Wright argues that it is superior to the CAPE in Valuing Wall Street. However, Shiller has made his data set publicly available, so it is very easy to calculate the CAPE and set current figures in historical context. To my knowledge, there is no equivalent data source for the q ratio (I do have a historical series put together by Wright spanning 1871-2002, but it contains only annual data points and reverse engineering the calculations isn't entirely straightforward).