Stock versus Bond Valuation Fails as a Strategy, says Research

April 24, 2012


“I haven’t failed, I’ve found 10,000 ways that don’t work” ~ Thomas Edison

The WSJ has an article on the “Fed” model, which purports to inform investors when stocks are inexpensive using earnings yields versus bond yields.

Andrew Smithers, a respected financial consultant and the author of “Valuing Wall Street,” has a four-word reply: “It’s a con job.” He has studied the Fed model in detail. His conclusion: It isn’t supported by history, economics or logic. “It’s almost impossible to see how anybody who was in his right mind could hold that there was any validity to it,” he says, before adding, “unless, of course, he was trying to sell you shares.”

Hedge fund manager Cliff Asness, who has published research on the topic, agrees. People follow the model, he says, “but they do so in error.”

Source: WSJ

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