Phil DeMuth_

A Framework for Valuing Today’s Market

Hi Paul --

Thank you for your intelligent comments.

By the way, there are charts posted at the yesyoucantimethemarket... website for some of the other metrics.

From an efficient market perspective, I think price would be the most fundamental valuation measure, since buyers and sellers are presumed to distill all available information into prices. Price cannot disconnect from fundamentals. By the same token, the 15-year moving average of price is also rational.

Behavioralists would disagree, of course. But even they would argue that now the scale has tilted to contagious panic, just as it had swung to irrational exuberance in the late 1990s.

I believe the major difference between this approach and technical analysis is that technical analysis is focused on short-term trends. This often does not work because of the noise in the data. I make no prediction about short term trends -- that's the random walk. But long-term, when prices are low, long-term returns are generally better. Otherwise, "price" has no meaning in financial markets. All prices would have equal (zero) predictive validity -- whether you bought in 1933 or 2000.

That would be unusual. How can price be meaningful in all markets except financial ones -- noted for their transparency? As we tried to show in the book, buying when stock prices were cheap compared to a long-term average worked roughly as well using price as with using other metrics like P/E, yield, Tobin's Q, etc.

You might say that looking at current price vs. long-term price tries to combine the behavioralist with the efficient market point of view. It takes the long-term trendline as being closer to the "true" price, and today's price as being potentially and unduly "behaviorally-influenc... The profit or loss then comes from a long-term regression to the mean.

Thanks again for your response.

Phil