Why Jim Rogers and Robert Shiller Aren't Buying U.S. Stocks Yet

Jim Rogers made a name for himself with outsized returns in the 1970s with long time friend and partner George Soros. Rogers has been outspokenly bearish on U.S. stocks for years. At a certain price though, things can change.

So at what price would Rogers buy? Rogers was recently quoted in Fortune magazine as saying, "historically, you buy stocks when they're yielding 6% and selling at eight times earnings. You sell them when they're at 22 times earnings and yielding 2%."

So the next question becomes what form of earnings multiple does he look at? Do you look at a period like now, where as-reported S&P 500 earnings are falling because the period we are in is a bust phase? I think the answer is probably not. In a year when times are good and corporations are facing booming profits, PE's look low, while periods where times are tough profits are small and PE's inflate to make things look overpriced.

That's why I think Rogers was using famous finance economist Robert Shiller's method of valuing the stock market. Shiller uses a cyclically adjusted PE ratio that smooths out those earnings over 10 years and adjusts those earnings for inflation. Shiller's book Irrational Exuberance brought into view the psychology of the masses creating massive bubbles in financial markets. The book published in March 2000 came out at the peak of the secular bull market that began over 20 years earlier. Shiller predicted a crash, or at minimum, dismal returns in the stock market. Shiller's website contains an amazing amount of stock market data that shows every month's cyclically adjusted price to earnings ratio since 1881.

In an interview with Henry Blodget recently, Shiller mentioned that although stocks are cheaper than average now with a CAPE of 13, he wouldn't buy until the ratio falls under 10. So I decided to check whether Jim Rogers was right about buying at 8 times earnings and selling at 22. I used Shiller's data to create a fictitious portfolio to buy when the ratio fell under 9 and would wait till the ratio rose from the previous month. I would sell when the ratio went over 22 and then fell from the previous month.

The results are as follows:

1. Sell at end of April 1899 with a CAPE of 23.15 and buy at the end of January 1918 with a CAPE of 6.64. The cumulative performance over those 18 years as represented by the Dow Jones was -8% nominally. There were 11 bull and bear markets over that time frame so the market didn't go straight down, just overall weak returns.
2. Buy at end of January 1918 with a 6.64 CAPE and sell at end of April 1929 with a CAPE of 27.57. The performance of the Dow Jones over that time frame was roughly 385%. That's an annual performance of 14% over an 11.25 year time frame.
3. Sell at end of April 1929 with CAPE at 27.57 and buy at the end of July 1932 with a CAPE of 5.84. Large caps dropped 71.7% during this period with an annualized return of –32.2%. The best performing index since 1926 has been the small cap value sector, that sector fell 81.5% for an annualized return of –40.5%. This was a blistering bear market that surprisingly still had 11 total bull and bear markets in the Dow Jones. A bear market is a 20% decline that was preceded by a 20% rally. A bull market is the opposite, a 20% rise that was preceded by a 20% decline. You didn't sell the ultimate secular bull market top in September 1929 by using my "CAPE method" but you were awfully close, and you did buy one month after the ultimate secular bear market low of 1932.
4. Buy at the end of July 1932 with CAPE at 5.84 and sell at the end of March 1937 with a CAPE of 22.04. The cumulative performance for the large caps was 267% and annualized return of 32.2% over a very short time frame. If you bought small cap value stocks you had a 550% return annualized at 49.4%. .
5. Sell at the end of March 1937 with a CAPE of 22.04 and buy at the end of June 1942 with a CAPE of 8.91. The large caps lost 36.6% of their value with a –8.3% annualized return over this time frame even though in 1938 the market ended up roughly 32%. Small value lost 48.4% at an annualized return of -11.8%.
6. Buy at the end of June 1942 with a CAPE of 8.91 and sell at the end of January 1962 with a CAPE of 21.2. The large caps returned 2042% during this period with a 16.9% annual return. Small value 3124% at an annual return rate of 19.4%.
7. Sell at the end of January 1962 with a CAPE of 21.2 and buy at the end of October 1974 with a CAPE of 8.74. The large caps had a total return of 61% with a 3.8% annual return over a 12.75 year time frame. Small value returned 126% over this time frame with a 6.6% rate of return but there were 6 down years in between and you would have done as well in fixed income without the tremendous volatility.
8. Buy at the end of October 1974 with a CAPE of 8.74 and sell at the end of August 1995 with a CAPE of 23.28. The large caps returned 1622% with a 14.6% annual return over this period. The small cap value sector returned 5,030% with a 20.8% annual return over this period.
9. Sell at the end of August 1995 with a CAPE of 23.28 and buy at the end of ??? The CAPE has not fallen below 9 yet so the secular bear market will continue. The market can rally from here and even have a 2003-2007 run, but until this ratio falls below 9 this will be a traders market, not a buy and hold market. The large caps are up about 78% with a 4.3% annual return from September 1 1995 to April 1 2009 so the data still proves weak returns. The small value sector has had a 212% return at an annualized rate of 8.7%. Many up and down years in between. This is a secular bear market like the 1899-1920 period or the 1962-1975 period that likely won't end until stocks are trading at 8 times earnings or as low as 5 times earnings like in 1932. The reason why I believe that bottoms are made when the CAPE falls below 9 is because CAPE basically tells you the overall average that you can expect for corporations to earn over a business cycle. So a CAPE of 8 would mean you are buying at a price where you get over 12 percent earnings for every dollar invested if the business cycle is normal. When CAPE hovers over 22 you are getting less than 4.5% earnings yield so your future returns should be lower until investors are so despondent that they throw in the towel on investing. At this point, it is the ultimate time to invest and shun timing advice and take a long term view.

Footnote: From 1929-2009 I used the IFA index return calculator

Disclosure: no positions

Comments

[Plan B Econ...:]

I'd say the markets are too low to short, but too high to be long. It sounds like a cop-out, but I wouldn't have conviction either way.

But what about the 'green shoots' that everyone's talking about? The data is not robust enough for any conviction. Both the US during the Great Depression and Japan during the Lost Decade had false starts that were preceded by 'green shoots'.

Besides...the 'green shoots' aren't saying there's a turnaround...they're saying things are declining at a slower rate.

www.planbeconomics.com.../

Apr 27 11:35 PM

[Alan Young:]

First, congratulations to Mr. Hayer for a fine piece of investigation and an undeniably provocative thesis.

As others have noted, describing or linking to the methodology for calculating the CAPE would be useful.

Apr 28 12:09 AM

[Jim Fink:]

If I read Schiller's spreadsheet correctly, the CAPE is currently still at 15 times! We have a long way to go down. Of course, this includes recent recession-level earnings, so it may fall quite fast when the economy recovers.

Apr 28 09:51 AM

[Jim Fink:]

The 13.10 CAPE estimate takes the average of the past 20 annualized quarterly figures, but includes the latest two quarterly figures which are zero?

Apr 28 10:03 AM

[David Van K...:]

I think a few people may have missed this, even though it is key to the whole discussion: The author is using a classic definition of "secular": Meaning "an age" or "a long-term time frame, usually at least 10 years" (Investopedia's definition). That's why the 5-year run-up of 2002-2007 gets ignored, or why one commentator stated that there's been no opportunity for the current generation to buy. The latter statement is correct only if your requirement for a rising market is 10 years or more.

I feel like I've been writing variations of this same comment for the past couple of weeks. So often on Seeking Alpha, authors and commenters talk right past each other, because they are working from different mind-sets regarding how long qualifies as an "investable" trend. One person who thinks 4 years is long enough (as I do) talks right past another who thinks that 8 years isn't long enough.

But almost nobody ever states their investable time-frame; they just seem to assume that everyone shares it. Then disagreements break out. The disagreements are inevitable given the unstated underlying investable time-frames that create the lenses through which each person is viewing the data.

OK. Now to the article: With the exception of a couple of zig-zags during the Great Depression, every time-frame mentioned by the author is 10+ years. At the end, he's looking for a theme that covers 1995-????. That's fine, it's one point of view. But for most of the rest of us, we see investable trends from 1995-2000 (up); 2000-2002 (down); October 2002 - October 2007 (up); and late 2007 to ???? (down). We can debate whether the market has turned back up since March 9, 2009.

But clearly, there are time-frames shorter than 10 years that are "investable" for some and unqualified for others. Different strokes for different folks.

Apr 28 12:59 PM

[BxCapricorn:]

Singapore's highest tax rate is 20%. London just increased theirs from 40 to 50%, and America is planning on doing something similar. If I could live anywhere, I'd eat chicken-n-rice in Singapore with my tax savings.


On Apr 26 05:14 PM JohnFC wrote:

> Who cares what Jim Rogers thinks. He's irrelevant. He abandoned
> New York for a life in Singapore. What's he running from?

Apr 28 02:06 PM

[Futurist:]

I thank the author for this nice article. Gets an investor thinking. I don't believe Mr. Shilling ever meant for anyone to be in the market for a period of less than ten years. He would advocate being "invested" all the time, just not in stocks all the time. I believe he proved one can do better in Bonds during the down cycles but maximize long term gains during the up cycle. If one invests in the stock market for less than ten years then that would be speculating according to Shillers theory. Unfortunately I don't have ten years left and love the stock market. I guess I have to call myself a speculator. Although, I did go to cash in late "05 and just started stepping back in after last October.

Shiller wouldn't be proud of me.

Apr 28 02:38 PM

[Missing_Link:]

> [Cetin Hakimoglu]
> up is still up. Markets surging. Ether get on board or sit on the
> sidelines watching everyone else make money in stocks again.

There is a trend!

Since trends never reverse suddenly, get on board before the party ends!

All it takes is confidence! Don't be a party pooper; ignore all that bad news and throw more money on the pile!

The market will continue upward indefinitely!

At the end of it, the market will reach infinity, and everyone will be given a magical unicorn that farts gold coins and poops vanilla ice cream!

Apr 28 03:22 PM

[Hot Richard:]

Still not cheap enough. Good article. Good message.

A lot of risk to factor in as we are still going down.

Apr 28 03:35 PM

[Hot Richard:]

Although I haven't seen him around here, Mr. Rogers shares my love of Singapore. I just wish I could stay year round.

Apr 28 03:37 PM

[mikebrah:]

What about Richard Dreyfuss? He just hid on the ocean floor the whole time and let the Chief do the work. That was the better strategy :-)

MM


On Apr 27 12:55 PM williemo wrote:

> I am reminded of the famous classic movie, 'Jaws', specifically
> the ending where the sheriff was holding onto the last dry pole,
> with the boat all but under water. Just before this scene, both
> the Police Chief and the Captain were on the sinking boat, but it
> was stablized for a time........ they conversed as if all was ok.........until,
> suddenly and without warning, the shark made a final leap to sink
> the boat and eat it's Captain. This scene should still be vivid
> in anyone's mind, even after 30 years. Although not an exact analogy,
> the current 'lul' in which we find our economy reminds me of the
> 'lul' just before the shark came in for the final, violent 'pull
> down'. The good news, and the other analogy I like, is that we
> will somehow end 'above' water and survive, just like the Police
> Chief.........but he was more defensive than anyone (and creative)
> , and survived them all. Being defensive and creative at this juncture
> seems the best strategy, when all the technicals and fundamentals
> are considered.
> Just because your boat is under water 50%, doesn't mean it is rally
> time. We all know from history that 70% +is highly possible, especially
> in the credit meltdown we've only partially experienced to date.
> What makes us so naive that we think it can't happen? Survival
> and 'captain' preservation seems best until we see CAPE's of below
> 10, at least. Not bad advice from original author.

Apr 28 07:48 PM

[Positroll:]

No buying opportunities for this generation? Pff ... I started investing in stocks in 2007. That was a bad idea, with 20/20 hindsight. But on the other hand, being able to buy WFC at $10 and GE at $7 in march was a unique buy and hold opportunity ... just like Siemens at 40 EUR or CRAY at $2.50.
Right now, many junior miners (e.g. TC, ML.to) are dirt cheap, if you believe that the world economy will recover one day. Lots of stocks are down due to irrational fears and misunderstandings, especially in disliked sectors (e.g. PNCL).
Be bold when others are fearfull (just don't forget to sell part of your shares when they double ... ;-) ) !!!
PT

Disclosure: long on all mentioned stocks

Apr 29 07:43 AM

[hatarakiman:]

Instead of listening to what they teach you to invest, it's better to see what they really invest in. Some strategy sounds really great, but it doesn't really make (big) money in the long term.

I doubt we can get stock investment advice from Mr. Rogers and Mr. Shiller. Regarding stocks, I prefer Peter Lynch, Warren Buffett, Burton Malkiel, and John Bogle.

Apr 29 08:13 AM

[NJSteve:]

I liked this article, and I thank the author for taking the time to research and write this. However, it does have problems, not the first which is the long time frame involved. Who is going to wait 10+ years for the right time to invest? Past experience of the market shows that you could have invested in and out during much shorter periods and have made superior returns to the ones shown here. However, actually being able to do that is another story entirely. But none the less, it does show how P/E level at buy and sell time does impact your returns greatly.

However, its major flaw as I see it, is that stocks may never again go down to a CAPE below 8 or 9. Historically, stocks never got anywhere near a CAPE of around 40 until recently near year 2000. The whole premise here of when to buy and sell relies totally on historical data. But it could be that people are now willing to pay more for stocks (as seen by the higher max CAPE value) and we may never see a CAPE below 10 again. If that is the case, it might be that you should buy at a CAPE under 15 and sell when CAPE is over 27 (just hypothetical values). If that turns out to be the case, you will be waiting for the cows to come home to buy stocks, if you were to follow the authors advice.

My hunch is that the author's CAPE number of 9 to buy at is now too low, but I think the theory behind choosing a P/E number to buy and sell at is correct, but just with higher numbers. This is also shown by the fact that 1995 was way too early to sell and you should have waited for a higher CAPE number before selling. Returns actually got better between 1995 and 2000 (which was when you should have sold for max returns). Also, maybe if you waited for two straight months of lower values, or a total decrease of more than .5 before selling, you might get better results. Using a slightly different rule might apply to buying also.

I believe, there is probably a better than 50/50 chance that we saw the bottom of this market already. If that is the case, than we probably are looking at close to the lowest CAPE number we will see in this cycle, and the author's entire premise to wait for a CAPE of 9 to buy will be wrong.

For those wondering how to calculate the CAPE value, buy Shiller's book, or look at the formulas in the spreadsheet and figure it out.

Apr 30 01:37 AM

[Maxe Paul:]

If you want to grow old before buying staocks you can follow Jims advice. Or you can buy into bear market rallies and make one years returns in a month.

Jim has been telling everyone to buy commodities non stop for years , look where that ended, in tears!

Apr 30 02:49 AM

[marketman54:]

Hey Cetin, if you are day trading to make some bucks, go buy some stocks. This is not the time to buy and hold by any means.

There will still be bank failure due to more unemployed causing more mortgage default, more credit card default, more auto payment default, the tsunami of commercial real estate default coming at us, existing credit default swaps, voo doo accounting, total lack of clarity, Bernie Madoff Stress Test results......

Our government is lying to us about our financial markets, there is no way that they are healthy or will be healthy in the next two years.

Home sales are down and the new home builders are not selling anything at a profit. You can't sell your existing home to move up and what first time buyer has a 20% down payment? Additionally, from 2005 to 2009 they all used the Chinese drywall. All of the home builders will be sued by 10's of 1,000's of home owners which will bury them!

Retail sales continue to fall. Unemployment is now at an all time high and will continue to climb. People will still only purchase what they need, non-discresionary spending will be a thing of the past.

Do you know anyone that bought a new car in the last 9 months? Her comes 100,000 to 200,000 unemployed with the shrinking of GM and the bankruptucy of Chrysler. What will this do to all the banking problems??

GE Capitol will make Jack Welsh look like a fool. This company will fall harder than the banks with all their second tier lending consumer credit portfolio and their less than stellar mortgage portfolio.

Dow Chemical net income -96%, BASF net income -68%, Office Max profits -79%, Starbucks profits -77%, Tyco loses $2.57 billion..

When will these numbers and dismal basic conditions mean something to the morons buying in this market? There are very few companies that are performing.

The time is very near that all this reality will cause a correction of massive proportion. I'm putting the market at 5,500 by the end of August. There is no excaping reality.

The FED, our President, Cramer and all the Financial news makers, except RICK SANTELLI, are all sugar coating what is going on and basically lying to us about any type of improvement.

You wanna make some money, short this market when Chicken Little finally yells "THE SKY IS FALLING"

On Apr 26 01:18 PM Cetin Hakimoglu wrote:

> up is still up. Markets surging. Ether get on board or sit on the
> sidelines watching everyone else make money in stocks again.

Apr 30 07:20 PM

[john s. gordon:]

bxcapri -

singapore doesn't have to pay for wars in iraq & afghanistan. helps to keep their tax rate low.
> jack

May 08 02:54 PM

[Freya:]

Jimmy Rogers, one of the stars of this article was on Bloomberg this AM. He has covered all of his shorts, there is nothing out there to Short, especially the Financials. He is in cash, Agriculture and Oil and waiting for the Market to move up so that he can find something to short.

Apr 28 11:28 AM

[Freya:]

EJ1234: I see you were just making a "joke".

You really do agree with me. Otherwise you would not even think about investing in a stock which sports a PE of 14 and has a yield of only 1.5%, Walgreens, WAG.

But if you really believe the entire premise of the Article, do you think I should wait until WAG's price drops to $7, yield of 6% while the PE goes to 3.5?

Apr 28 03:44 AM

[Freya:]

EJ1234: I'll pit my calls against yours anytime.

Pick a stock or commodity, Make a prediction.

Better yet, avoid the market altogether, that way you'll never be wrong.

Apr 28 03:01 AM