“One of the big debates around the Bonner & Partners office is over valuations… and what they tell us about the prospects for the US stock market returns.
A lot of folks wrongly see valuation metrics, such as price-to-earnings (P/E), as market timing tools. That couldn’t be further from the truth… as anyone who tried to short grossly overvalued stocks in the late 1990s will tell you.
But understanding the relationship between price and value is still hugely important.
There are shelves of academic literature on the subject. But in a nutshell, if stocks are priced above their historic average, long-term returns are likely to be lower than average. And if stocks are based below their historic average, long-term returns are likely to be higher than average.
The more extreme valuations get (high or low), the more extreme long-term returns are likely to be.”
Right now, the CAPE ratio for the S&P 500 is 27.6 (66% above its long-term average). Warren Buffett’s favorite long-term valuation indicator, market cap relative to GDP, is 58% above its long-term average. And Tobin’s q is 72% above its long-term average.
But Chris reckons there are still opportunities to earn “alpha” – the returns you get in excess of the overall market return from owning individual stocks.
Chris Mayer, editor of Capital & Crisis and Bonner & Partners Family Office strategic adviser on value investing agrees:
“There are always stocks that are cheap for one reason or another. There are always stocks that, if you can commit to holding on to them for a number of years, promise excellent returns.“