Bull & Bear Debate

Stock market bear Robert Shiller debate stock market bull Jeremy Siegel here in an interesting exchange of arguments.

As long time readers know, I agree with Shiller. Beyond that, I could add that Siegel's argument that the 10-year P/E ratio shouldn't be trusted because it is affected by write-offs overlooks that over the long run, write-offs don't affect earnings.

What I mean by that is they reflect real world losses suffered by companies. While these losses often aren't created during the exact quarter when there is a write off, that only means that losses are overestimated that particular quarter, that only means that losses are underestimated by a similar quantity other quarters. As a result, it is simply not true that write offs distort 10-year earnings measures.

Another of Siegel's argument, where he looks at analyst expectations for future earnings is also invalid. "Analyst expectations" are in a quite systematic matter consistently extremely over-optimistic (when it comes to future earnings. "Estimates" are then conveniently and quietly revised down in time for the actual reports so that it will appear that earnings are "better than expected"), and are therefore useless for the purpose of stock valuations.