About three months ago, I heard a recent Nobel Prize winner propose an incredibly stupid idea on the radio.
The program itself was a good one — a Boston-based financial radio show was asking the question: How do middle-aged people saving for retirement get good advice about their investments?
After all, we all know that the average 401(k) representative is just a salesman. (Hey, more power to him — it’s great to see a recent college grad take whatever job he can get.)
And while this entry-level dude may be exactly who you want to talk to about submitting a change-of-address form, do you really want to hear what he has to say about how a spike in energy prices will affect the Emerging Market ETF you have $58,000 in?
So, as you might expect, there was no end to callers into this show — regular people who had worked for 15 or 20 years and had managed to sock away a couple hundred grand in their company 401(k) plans but didn’t trust the advice they were getting about how to grow it and protect it like they wanted.
After all, if you’ve raised a family and worked your 40- to 50-hour weeks, who has time to learn the money-management ropes?
You basically have three choices: get bad advice, pay high fees for access to a financial advisor, or pay high fees and get bad advice. That’s how Wall Street works — fees can run as high as 2% and take thousands of dollars of your savings every year.
And the callers knew it. They were well aware that they were prisoners of Wall Street’s fees, and they were looking for an answer.
So this Nobel Prize winner suggests that there should be hourly rates with financial advisors. Hourly rates…
Sure, hourly rates for investment advice would be less expensive. But can you imagine planning 10 or 20 years of strategy by sitting down with an advisor for an hour?
It’s so ridiculous that it’s not even worth consideration. It’s also a prime example of how little the powers that be really care about the welfare of the average American.
His Name is Robert Shiller
You may have heard of Robert Shiller. He created a handy index that tracks home price gains in cities around the country called the Case-Shiller Index. Last year, he won a Nobel Prize in Economic Sciences.
You also might know him for his CAPE P/E ratio. The CAPE P/E ratio (also known as Shiller’s P/E) is supposed to give a clearer picture of whether stocks are expensive or not.
Well, Shiller’s P/E has been up around 26 for the last six months or so, and Shiller himself is making the rounds on CNBC and Bloomberg, telling anyone who will listen that stocks are very expensive and a significant sell-off is coming soon.
But I’ll tell you right now: Shiller is giving bad advice. His Shiller P/E doesn’t measure what it is supposed to, and if you (or anyone else) sell on his advice, you will miss out on gains. Here’s why…
The current P/E for the S&P 500 is about 19, and the forward number (based on earnings estimates) is about 17. The average trailing P/E is about 16.
So, once again, we can’t really say that stocks are grossly overvalued. The notion that we are in a bubble just doesn’t seem to fit.
To emphasize that point, here’s a table of historical valuation metrics that you might find useful. (Please note: The table is from July 31, so some of the “current” metrics may be a bit higher. The takeaway from the chart, though, should remain the same: stock valuations are within historical norms.)
You may note that the one measure that suggests stocks are overvalued is the Shiller P/E ratio. The Shiller P/E uses the average of 10 years of trailing earnings to calculate a price-to-earnings ratio.
Basically, you add each year of S&P 500 earnings for 10 years, divide by 10, and use that number to calculate the S&P 500 P/E.
This measure for P/E is supposed to “normalize” earnings because it gives you a better look at the trend for earnings. Also, the Shiller P/E, because it is an average of 10 years, is intended to smooth out earnings downturns.
But is that actually a good idea? Do we really want to smooth out earnings? Or is it better to zero in on times when earnings are accelerating quickly?
Also, I just can’t get over the fact that the current Shiller P/E includes earnings from 2008 and 2009 — and concludes that stocks are very overvalued. Do you know what the total earnings per share for the companies in the S&P 500 was in 2008?
$16.86.
That’s right — 500 companies, and all they could earn was $16.86 per share.
Do you know when it was that the companies of the S&P 500 last earned that little?
It was the fourth quarter… of 1947! (And if you adjusted earnings for inflation, you might have to go back 100 years to find earnings so low.)
2008 was an anomaly. It’s well known that it was a generational low for earnings. It just doesn’t make sense to say stocks are currently expensive when your formula is skewed by a once-in-a-lifetime event.
Here’s the Briton Ryle P/E
If we recalculated the Shiller P/E assuming more normal earnings for 2008 and 2009 and included what’s likely to be full-year 2014 earnings, the Shiller P/E drops to 22.
And if we calculate a forward Shiller P/E using 2015 estimates, we get 20. Yes, that would still put stocks in the “overvalued” category, according to Shiller.
Of course, let’s not forget, the Shiller P/E was hitting 44 when the Internet bubble blew up.
Now, here’s the thing that really bugs me: In a New York Times article from Sunday, Shiller admits that his Shiller P/E has been above 20 for most of the last 20 years!!
And this man is still telling people that stocks are wildly expensive and are headed for a crash.
This man is dangerous to your wealth. Please, don’t listen to him.
If you want sound advice for your retirement savings, try The Wealth Advisory. The Wealth Advisory is a dividend and income newsletter, with stable and reliable stocks like these:
- 127% on Boeing Company
- 80.66% on Bank of America
- 36.37% on Medical Properties Trust
- 70.9% on Starbucks
- 77.6% on the iShares Nasdaq Biotechnology ETF
- 36.2% on Pfizer, Inc.
- 134.9% on Omega Healthcare Investors, Inc.
The Wealth Advisory‘s portfolio is up 36% so far in 2014, and the four stocks we’ve sold this year averaged 40% gains. Yeah, we’re making money while Shiller’s telling people to sell.
Who would you rather team up with?
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
