Nobel winner Robert Shiller confesses that his own math theory has him thinking about investing in Russian stocks.
Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013, considers American stocks to be expensive.
Shiller developed the cyclically adjusted price-earnings (CAPE) ratio market valuation measure, which is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation.
The CAPE ratio shows a hefty overvaluation, CNBC explained.
While the U.S. has the highest CAPE ratio, "the lowest CAPE ratio of the 26 countries [analyzed] is Russia," Shiller told CNBC.
"I'm thinking about" investing in Russia "when [the ratio] is this low," said Shiller, who also helped develop the widely-followed S&P/Case-Shiller Home Price Indices.
However, Shiller explains that hs is "not going to advocate" investing there.
"I might do a little Russia, but I haven't yet," he said.
But Shiller admits that long-term valuation measures make poor short-term market timing tools.
"I don't really want to encourage people too much to put a lot into the most expensive market in the world, but I wouldn't pull it all out either," he said.
"Europe is generally low, the U.K. is low, and they're great countries, so why not. Why would you put all of your money in the U.S.?"
Meanwhile, Newsmax Finance Insider Lance Roberts recently took Shiller's CAPE to task.
Shiller’s measure, created with Harvard University economist John Campbell in the 1990s, is called the “cyclically adjusted price-earnings,” or CAPE ratio. The index, sometimes called the “Shiller P/E,” essentially divides share prices by the average of 10 years' earnings adjusted for inflation. It compensates for extreme volatility by valuing share prices based on 10 years of earnings, rather than one year.
But the debate over the value, and current validity, of the Shiller’s CAPE ratio, is not new. Critics argue that the earnings component of CAPE is just too low, changes to accounting rules have suppressed earnings, and the financial crisis changed everything," Roberts wrote for Newsmax Finance.
Roberts explained that this was a point made by Wade Slome previously:
“If something sounds like BS, looks like BS, and smells like BS, there’s a good chance you’re probably eyeball-deep in BS. In the investment world, I encounter a lot of very intelligent analysis, but at the same time I also continually step into piles of investment BS. One of those piles of BS I repeatedly step into is the CAPE ratio (Cyclically Adjusted Price-to-Earnings) created by Robert Shiller.”
(Newsmax wires services contributed to this report).
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