052. Shiller Price/Earnings Valuations of Investment Sectors

Prof. Robert Shiller of Yale University invented the Schiller P/E to measure the market's valuation. The Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles. This is similar to market valuation based on the ratio of total market cap over GDP, where the variation of profit margins does not play a role either.

GuruFocus calculates the Shiller P/E ratio of individual stocks and different sectors. Here you can see the Sector Shiller PE that shows you which sectors are the cheapest.

CONCLUSION: Healthcare, the favored sector in the past, should be invested in only on a highly selective basis. The mean value of the Shiller P/E is 16.4, therefore financial and the undervalued energy sectors offer the most attractive prospects at this time.

Stay in cash until you can discover promising energy and financial services opportunities.

General observation:

1. When the market is fair valued or overvalued, buy high-quality companies such as those in the Buffett-Munger Screener. Utilities and industrials are such prospects.

2. When the market is undervalued, buy low-risk beaten-down companies like those in the Ben Graham Net-Net Screener. Buy a basket of them and be diversified. Financial services and energy fits this category.

3. If market is way over valued, stay in cash. Shiller P/E is 52.1% higher than the historical mean of 16.7 or "regular mean" of 22. Implied future annual return is only: 0.2% which is less than can be earned in saving deposit of 1%.