, Scott Barlow suggested that value investing no longer works and turned to research by Morgan Stanley consultant Michael Mauboussin for an explanation. The theory is that many modern companies no longer invest in bricks-and-mortar assets, which are depreciated over time, but invest in intangible assets which are immediately expensed and therefore depress reported earnings.
But is the CAPE ratio as it stands still one of the best tools for value investors to seek earnings, or does it need revisiting? All of this changed in the early nineties. Using a statistical test which is beyond my expertise, the Quandt Likelihood Ratio test, Mr. Fandetti demonstrates that the break point occurred in August, 1991. That degree of precision is perhaps unnecessary for our purposes: all we need to know is that after 1991, the CAPE ratio no longer has a tendency to mean-revert. In other words, waiting for a market collapse based on a downdraft in the CAPE ratio has left many value investors on the sidelines.
Britain was the biggest bargain with an excess yield of 10 percentage points, Europe and Japan came in at around six percentage points, while the U.S. trailed at a little below five percentage points. In my opinion, it is difficult to derive meaningful conclusions from this period of economic history. At a time of negative interest rates, any appreciating asset becomes wildly attractive – as urban house buyers will confirm.
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