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« Transocean, Inc. -- A Case Study of Risk and Reward | Main | International Exposure: A Challenge for Investors »

April 23, 2007



While the market may be very different over history as defined by our age, the earnings yield history runs not only from 1980-present but also from 1801-1980. What might those in a post-agricultural economy have been saying? It's worth a thought.

Bullish Jim

Great post. Equities don't trade like they did in 1990, much less like they did in 1890.

Bill a.k.a. NO DooDahs!

My take on "Siegel's constant" of earnings yields is that monetary policy is completely different today than it was in the past, and part of the corporate earnings (esp. re: financials) is due to Cantillon effects of monetary policy decisions. Any mean-reversion of earnings model that fails to take into account the changes in monetary policy (and monetary flow and growth) is inherently flawed, as the "mean" of one time period doesn't necessarily have the same "meaning" in another time period.

I think my favorite is "Prediction #27: Few drugs will be swallowed or taken into the stomach unless needed for the direct treatment of that organ itself." Lots of pills taken into the stomach for "organ" treatment nowadays.


RB -

Thanks for the pointer. I am going from a "knowledge@wharton" podcast from a few weeks ago. (Yes, that is the kind of thing I sometimes listen to when walking the dog!) Experts like Prof. Siegel are so often cited and context is important.



Did you see David of UTX on CNBC a few days ago talking about how productivity was always rising? Seems like margins in aggregate can be competed away but that is because the better mousetraps get more mice. Mean reversion is moving target so how far back to go?


Yes, but Siegel also said that stocks were not cheap on an absolute basis. I presume he was comparing with a historic earnings yield. This is the link I could find:


Thanks for the comments and questions.

RB's raise points of current interest -- a topic on my "list." I need a full article to do it justice.

Meanwhile, you can search the site for Hussman, where I have prior comments. Siegel recently stated that stocks were undervalued on an earnings/interest rate basis. The mean reversion profit margin argument has not been carefully analyzed -- how, when, why, what effect on final earnings. That's a project.

Stay tuned --



What is your opinion on the "Siegel's constant" of earnings yields between 6% and 7% or mean-reversion of earnings yields which has been observed over more than hundred years and on which much of the bears' arguments such as those of Grantham or Hussman is based? Grantham likes to say that if this doesn't hold, "capitalism is broken". Further, based on trailing normalized earnings, the market is fairly valued against corporate bonds. I suppose this is where the disagreement between the inside (Fed model) and outside (normalized PE) comes in. Your thoughts on comparing these two long-term models?


Reading financial history as opposed to looking for meaning in charts is useful although I don't think these historians who attempt to make projections like David Hackett-Fisher and Niall Fergusson are likely to be prescient eventhough they write well and are fine historians.

Barry Ritholtz

Its clear that both individually as well as a group, Humans are bad at predicting the future.

Its especially important for investors to understand this. See:

The Folly of Forecasting

for specific details.

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