Sunday, August 31, 2014

Burton Malkiel is Alive! (his latest advice for investors)

Economist Burton Malkiel's "A Random Walk Down Wall Street" influenced a generation of theoreticians.
He is 82 years old.
It is the strong version of the Efficient Market Hypothesis that is dead.
From Morningstar:

Burton Malkiel's Latest Advice for Investors 
Patience, emerging-markets stocks, and municipal bonds. 
Bait and Switch
In yesterday's Wall Street Journal, Burton Malkiel asked, "Are Stock Prices Headed for a Fall?" Surely a tease, I thought. This past December, in the same space no less, Malkiel wrote that "nobody can foretell what the market can do in 2014." Has he had a revelation? Has he realized that he is The One?, he doesn't. The article completely avoids the question.

It does, however, discuss three other items.

All Things Considered...
While Malkiel won't touch the stock market's immediate future, he does speculate about its long-term prospects. Like many, he is wary. The cyclically adjusted price/earnings ratio, or CAPE ratio, is 25, well above its average level of 15. Malkiel writes that while the "CAPE is not useful in predicting returns one or two years into the future"--what indicator is?--that it "does a reasonably good job of predicting 10-year equity returns."

Of that I am not certain. To my mind, London Business School professors Dimson, Marsh, and Staunton have convincingly demonstrated that the CAPE ratio has been predictive after the fact, but not beforehand. When the trio simulated what the ratio would signal using only information that was available at the time, they found that the forecast had little power....MORE
HT: Abnormal Returns