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More investing chatter

July 2nd, 2009 at 08:13 am

Please skip if you're not into this.

So, I've been trying to make sense of Robert's Schiller's PE theory. The basic, layman gist that I am currently understanding is that if the market always regresses to the mean, then it's a matter of calculating how far the market is currently off from the mean right?

Now, Schiller is a smart guy. I don't deny that. It's just that... well, there's a lot of controversy surrounding the question of HOW effective this sort of back-testing is. Could 10 years, or 20 years, or 30 years of historical market performance give us an insight as to whether the current market is over-bought or over-sold? (Remember me talking about a serious investment troll? Yeah, that's what this is about, and I hope he doesn't find me here.)

Ignoring the issue of what exactly does "predictiveness" mean for a second, I came across a study that suggests that while PE/10 (/20, /30) has some predictiveness, there is another measure, Tobin's q, that is much more predictive.

Now, if you do buy into this, both Schiller's PE and Tobin's q suggest that the market is supposedly, as of the month of June, over-valued at somewhere around 15%. Not exactly beaming news for traders. (I'm still buying and holding though.)

Anyways, here's the link to the PDF, so please feel free to peruse it and tell me what you think. I myself will try to sit down and read it over the weekend, if I get a chance.

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On the lighter side of the investing news, I just found out that there is an index that measures the consumer sentiment of millionaires and the "affluent" (those with net worth greater than $500k). Known as the Spectrem Millionaire Investor Index (SMII) and Spectrem Affluent Investor Index (SAII). You can find their June graph here.

Hehe, I guess there is an index for everything.

2 Responses to “More investing chatter”

  1. baselle Says:

    I'm affluent? Woo hoo! Big Grin

  2. Broken Arrow Says:

    Big Grin

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