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A CAPE Crusader
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A CAPE Crusader

A Defence Against the Dark Arts

James Montier
GMO, 2014
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Editorial Rating

7

Qualities

  • Innovative
  • Visionary

Recommendation

Investing has never seemed so confusing. A scant few years ago, investors could just balance the ratio of bonds and stocks in their portfolios to their desired risk level, include some geographic and industry diversity, and maybe spice up the mix with some well-chosen commodities and derivatives. Now, markets rise with bad news and fall with good news, except when they don’t. While getAbstract never offers investment advice, it recommends this paper’s methodical approach to assessing new thinking on valuations and expected returns. Any new valuation scheme faces two queries: Is the old one really broken and is the new one really better?

Summary

Stockbrokers – practitioners of the title’s “dark arts” – frequently question the methodology of traditional valuation measures and offer other, presumably better, metrics, which support their tendency to cast the market as undervalued. The Shiller Cyclically Adjusted P/E ratio (CAPE), which compares S&P 500 stock prices to “10-year moving average earnings adjusted for inflation,” is the current target of revisionist thinking. Critics contend that the Shiller P/E has almost continuously remained above average since the early 1990s – indicating that the market...

About the Author

James Montier, former co-head of Global Strategy at Société Générale, is with the investment management firm GMO. His books include The Little Book of Behavioral Investing.

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