Monday, December 15, 2008

Stocks are on sale - go and buy some..

The FT has a great article talking about two valuation measures - Q and "cape". Q is well known in finance as basically market value to book value. High Q can mean high valuations (although it can get a bit messy as there are other interpretations of this ratio). "Cape" is a "cyclically adjusted price earnings ratio" - but basically a P/E developed by Robert Shiller. Shiller is the guy who said that stocks were overvalued in the late 1990s, and houses were overalued in the 2000s.

Both these ratios point to valuations being below average since the late 1980s. Stocks, by these measures are cheap. Of course, prices could still fall, and even if they are cheap now, they could stay cheap for a long time. But, if you are a long term investor, now would seem like a good time to be buying.

HT: Newmark's door.