Are stocks cheap or expensive?
A popular metric to answer this question is the Shiller P/E ratio. The higher the Shiller P/E, the more expensive the stock market.
www.multpl.com/shiller-pe
At the moment, the Shiller P/E is 35, more than double the long-term historical average of 17. This at first sight suggests stocks are expensive.
However, over the past 30 years, valuations have risen. The stock market has traded at a 28 Shiller P/E on average.
Stocks have become more expensive for several reasons:
1. The economy tends to fall into recession less frequently.
2. Today’s market indices contain more technology stocks, which are more profitable, safer and less capital-intensive than the industrial companies of the past.
3. It has become easier and cheaper to trade and invest in stocks.
4. Interest rates have fallen.
5. Knowledge about the returns offered by the stock market has spread, which has increased demand for stocks.
6. Tax rates on capital income have fallen.
paulsenperspectives.substack.com/p/a-different-view-of-valuation
www.ft.com/content/62c362f2-0c58-42ed-a8ff-19ace3a11821
It would have been unwise to sell stocks simply because valuations were higher than the long-term average.
onlinelibrary.wiley.com/doi/abs/10.1111/jacf.12072
The failure of the Shiller P/E to provide actionable trading signals illustrates a general principle in investing: following simple rules (such as “if the Shiller P/E is high, sell stocks”) is often dangerous. Rules sometimes work, other times they don’t. There is no simple formula to success.
Because the stock market is so complex and the successful rules change from one year to the next, mental flexibility and judgement regarding what rules to apply when are important. In this kind of unpredictable domain, research suggests it is good to know a little bit about a lot of things, rather than a lot about just a few. Combining nuggets of information and being able to change approaches can give investors an edge. Investing is not just about crunching data: it is also a creative endeavour.
2024 performance
@triangulacapital +30.6%
$SWDA.L +9.6%
Portfolio changes
Bankinter and ASR Nederland were sold, Deutsche Bank and Shell bought.
