Reconciling the experts
Buffett is buying. Soros is gloomy. Who is right? Probably both.
Schiller’s 125-year historical record suggests the broad index reverts to a long-term mean P/E ratio of about 16.5. Today, it’s 32% below that, about 11. So there is no question the market is cheap by historical measure.
But when will it turn? There is the rub.
There is historical precedent to go much lower (in the 1970s, broad index P/E bottomed out at only 6 or 7 albeit while competing against much higher interest rates), so it would not be surprising to see a further market decline of as much as 40% — particularly if the Fed loses control of long-term interest rates.
But for a very long holding period (15 years), mean reversion alone argues for buying now.
Thus your strategy now depends upon your holding period. This reconciles the conflicting public statements of famous investors. Buffett holds forever, so he is buying. Soros, Rogers et al play much shorter time frames, so they are staying out. Both are rational, given their specialization.