Well if the admonitions weren’t loud and proud enough for you re: getting long US equities at these levels, the latest tongue-lashing of the bull case comes from none other than James Montier, who is out with something called “S&P 500: Just Say No.”
This is a white paper and it reads like the damn warning label on the side of a cigarette pack.
Here are some choice cuts:
- Shouldn’t we agree with Trustee Smith and throw in the towel, index all of our equity exposure to the S&P 500, and call it a day? If our goal is compounding capital for the long term, which it is, we would not just say “No,” but something akin to “Hell no!”
- From our perspective, one has to make some fairly heroic assumptions to believe that the S&P is even remotely close to fair value.
- A simple perspective, which we believe to be useful, is a Shiller (or Graham and Dodd or Cyclically Adjusted) P/E. This represents a straightforward way of normalizing earnings from their current value to something that approximates trend by using a 10-year moving average of earnings. As even a cursory glance at the chart reveals, this is the third most expensive market in history. The only times we have seen more expensive US equity markets were 1929 and 1999.
- Please do not mistake us for members of that species known as permabears. We don’t always hate US equities as a matter of principle.
- As more and more investors turn to passively-managed mandates, the opportunity set for active management increases. A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation.
Suffice to say, what you’ll read below (if you have 10 minutes) amounts to a rather forceful effort to dissuade investors from falling into what GMO quite clearly thinks is a trap.
And as you might imagine, we agree with (pretty much) everything they say – especially the bit about the pitfalls of passive investing.
Here is the full letter, submitted for you (dis)approval…
Thank you for loading that to scribd H