Comments on: Jeremy Siegel is brilliant, uplifting and just plain wrong!

By: David Hodge

David Hodge — Tue, 31 Mar 2009 15:38:02 +0000

Oops – paragraph 3 – “demand FOR fixed income” not “demand FROM fixed income”

By: David Hodge

David Hodge — Tue, 31 Mar 2009 15:36:53 +0000

Sorry to come back to this so late but I keep thinking about this issue. If the index is cap weight, then the earnings should also be cap weight. Equal weight earnings are appropriate for equal weight index, right? This makes sense from a macro perspective also, since (generally) big caps have bigger earnings, so corporate earnings in aggregate more resemble the cap weight notion of earnings.

Regarding growth, if revenue & profit over the long term grow at the nominal GDP, implementation of a socialistic system of taxation and government spending could reduce US GDP growth from 7% historical (nominal, mind you) to the 3-5% range. Then we would see a big shift in the desirability of residual profit claims (equities), since leverage plays out well for equity assuming growth, the more the better. Therefore a lower PE is justified.

What we have now, though, I believe to be an increase in the demanded rate of return from equity due to a graying investor class and increased demand from fixed income – kind of preferred habitat theory spread across asset classes. Does not bode well for equitites but does make room for a return to stock picking and making money the old fashioned way. Indices are for the know nothings who are smart enough to say so, for those with the time and talent I believe stock picking will pay for the next generation.

Or maybe I’m hopeful because I’m a security analyst!

By: sarge

sarge — Wed, 25 Mar 2009 03:04:09 +0000

If I hadn’t had such a god awful experience trying to set up a paypal pro account for a side business/hobby I was establishing, I would totally agree w/Vitaliy on the eBay call vs mastercard and visa. Unfortunately I an not sure PayPal is up to the challenge.

By: David Hodge

David Hodge — Wed, 11 Mar 2009 12:12:33 +0000

The problems with cap-weight indexes noted, Vitaliy, do you support an equal-weight method?

By: mickeyc

mickeyc — Thu, 05 Mar 2009 05:15:08 +0000

All of Siegel’s research is deeply suspect or just plain wrong.
He has called bottom several times a month all the way down.

By: AJ

AJ — Thu, 05 Mar 2009 01:52:16 +0000

Vitaliy,

I think this is a well argued piece, but it obscures the real issue – should we even be looking at an index?

I’d argue that unless one takes Buffett’s advice and buys an S&P 500 (or any other) index, its a dangerous thing to do.

We should look at individual securities, and not at earnings, but rather at cash flows.

By: ajk

ajk — Thu, 05 Mar 2009 00:27:01 +0000

Additionally, he only calculated one data point!! Yeah, it showed a lower P/E for 4q08 compared to S&P’s methodology (or Shiller), but the only relevant comparison would be if he created a time series using that methodology. Then if the 4q08 P/E looks comparable to ’82 and ’74 using his methodology he might have a basis for saying stocks are cheap.

By: DWAnderson

DWAnderson — Wed, 04 Mar 2009 17:38:03 +0000

If you were to buy the S&P 500 today wouldn’t you expect to get $71 in earnings? (Or whatever the expected earnings are for the next year.) Hasn’t the shrinking size of losers already been reflected in the value of the S&P 500 itself? I don’t pretend to have first hand knowledge of this, but your post implies that the S&P 500 is weighted by market cap so that when stocks decline their weight in the S&P 500 declines by the same amount.

By: tom brakke

tom brakke — Wed, 04 Mar 2009 13:36:15 +0000

“Planning to live forever” indeed. This is the great disconnect between academic theory and the beliefs that have been mistakenly sold by the investment industry. Things are taken essentially as fact, when to even use them as approximations would require a longer timeframe than we have on this earth.

The rush to copy the big endowments was a great example of that. As wrong as they have proven to be in the short term, they are at least supposed to be investing for perpetuity. Such an approach does not make sense for mortals.

By: Jed

Jed — Wed, 04 Mar 2009 00:56:51 +0000

I had to read your post twice to figure out exactly what your beef is. Siegel is unarguably correct that one must to use market cap weighted earnings if to calculate the P/E ratio of a market cap weighted index by substituting the index value for P and using some sort of aggregated value for earnings “E.” It is obvious that if one correctly performs this calculation for the current year, historical calculations performed incorrectly will not be comparable. The solution is to obtain historical data and recalculate the ratio correctly for past periods. It is surprising to me that Siegel didn’t do this and it may be that he was intellectually disingenuous to the extent that he did, found the results not to his liking, and chose not to report them. We won’t know whether the present P/E of the index is actually historically cheap until someone publicly reports such results.