Cliff Asness of AQR on the Current Shiller PE Ratio

Cliff Asness of AQR on the Current Shiller PE Ratio

From Cliff Asness of AQR, discussing the Shiller PE, also known as CAPE. Interesting third quarter commentary from the fund on market valuation levels. A brief excerpt followed by the full document in scribd:

It’s been a long-time since we’ve discussed this, but since it’s actually the source of some current controversy,1 now seems like a good time to re-examine the valuation of the entire U.S. stock market, and particularly the relevance and meaning of the Shiller P/E, a measure we have favored in the past. Recall that researchers have found that valuation measures have some power to forecast long-horizon (say 10- year) stock market returns. Of course, there is not one unique valuation measure known to be perfect, and most possible choices have their pros and cons. In particular, for many years, researchers and practitioners have made use of the price-toearnings ratio. For every dollar you invest in the S&P 500, how many dollars of earnings do you get (not that an investor actually receives all the earnings)? Now, while the “price” in price-to-earnings is well specified, there is generally no agreement on what to use for earnings. One can use operating or total earnings. One can use forecasted or trailing
earnings. One can use last quarter, last year, or even longer to measure earnings. Many other adjustments and methods are possible.

Michael Mauboussin: Here’s what active managers can do

michael mauboussin, Credit Suisse, valuation and portfolio positioning, capital markets theory, competitive strategy analysis, decision making, skill versus luck, value investing, Legg Mason, The Success Equation, Think Twice: Harnessing the Power of Counterintuition, analysts, behavioral finance, More Than You Know: Finding Financial Wisdom in Unconventional Places, academics , valuewalkThe debate over active versus passive management continues as trends show the ongoing shift from active into passive funds. Q2 2020 hedge fund letters, conferences and more At the Morningstar Investment Conference, Michael Mauboussin of Counterpoint Global argued that the rise of index funds has made it more difficult to be an active manager. Drawing Read More