Cover of MoneyWeek magazine issue no 505

Prescribing profits

24 September 2010 / Issue 505

China's healthcare revolution

PLUS:

  • The best bet in the renewable energy sector
  • The bold billionaire who loves big cats
  • Why gold's bull market is far from over

Excerpt

Is it time to buy shares?

Earlier this week, I tried to take on the thorny issue of whether equities are cheap or not.

The answer? Depends what you call cheap. There aren’t many indicators with a good history of telling us when we should and shouldn’t buy the market. One that does is the cyclically adjusted p/e ratio (CAPE). Look at that today and equities are definitely not cheap. Indeed, as CSLA’s Russell Napier points out, “despite a decade of dire returns”, CAPE, while well below the nonsensical peaks of the late 1990s, is still not far below the “dangerous peaks seen in 1901 and 1966” (around 24 times).

The 30% drop in the S&P 500 since 2000 has made equities less expensive, but not cheap. Napier concludes, much as I did, that “long-term investors should not consider investing in equities”. At some point there will be a final lurch down, one that will bring CAPE back to cheap levels and make the water safe for the long-term investors most of us claim to be. But what is true for the long-term investor is not always true for the short-term investor.

• Read the full editor’s letter here: 
Is it time to buy shares?