June 8, 2015
Ivy League Battle: Princeton vs. Yale
If there were a mood to this year’s market, it might be apprehensive. Despite modestly positive year-to-date returns across most asset classes, many in the popular press seem fond of suggesting that there is “another shoe” out there, a stock market correction, just waiting to drop.
Are stocks overpriced? It depends on who you ask. Recently, the CAPE ratio, which stands for “cyclically adjusted price-earnings”, has been frequenting the financial headlines. Co-developed by Nobel laureate, and Yale professor, Robert J. Shiller, the CAPE ratio is meant to measure how high or low current prices are compared to long-term stock prices. In an August 16New York Times column, Professor Shiller declared the CAPE ratio to be “hovering at a worrisome [high] level.”
But before we conclude that stocks are overdue for a take-down, consider another article in the August 27 Wall Street Journal by Princeton University professor of economics and author of the classic finance book, “A Random Walk Down Wall Street” Burton G. Malkiel. Professor Malkiel compares the CAPE camp’s “worrisome level” with a capital-market camp viewpoint that the higher stock prices may be warranted based on today’s low fixed income interest rates. In assessing which camp is right, Professor Malkiel proposes that “both may be.” Shiller himself notes, “The CAPE was never intended to indicate exactly when to buy and to sell. The market could remain at these valuations for years.”
So which Ivy school is correct, do we believe the professor from Yale or Princeton? With such varying opinions from our country’s finest scholars, it’s no wonder many investors are confused! I have my own proposal to make. I am glad that scholars from Sharpe to Shiller continue to study market pricing theory. Through the years, their findings have shaped the principles that guide my investment strategy to this day.
But abandoning your own, carefully constructed investment portfolio based on the clash of the academic titans as they debate real-time market pricing is like purchasing a new home and forsaking your former residence every time a new, potentially improved flooring material is released. It’s stressful, expensive and unlikely to make you any happier in the long run.
Instead, whether stock prices are over-priced or fairly valued in the near term (or even if they have dropped by the time you read this post), We remain confident in the solid structure we’ve built for you in the form of your personalized, low-cost, globally diversified portfolio. If you are considering a “remodel” at any time, please let us know.
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