Benjamin Graham of value investing fame wrote in the book The Intelligent Investor, “Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (This figure corresponds to 15 times earnings and 1.5 times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”
I’m of the opinion that Benjamin’s writings are pretty sage from the perspective of a value investor. Let’s take a look at the prices of worldwide stocks in the various asset classes based on Mr. Graham’s sayings. Since Vanguard publishes the two parameters for all of its stocks’ ETF, I shall use this fund company info for this purpose. As listed on its website:
|Asset class||P/E||P/B||P/E * P/B|
|Global ex-US REIT||10.5||1.1||11.6|
|All-world ex US||16.7||1.7||28.4|
|All-world ex US small-cap||20.0||2.5||50.0|
From the table above, the most glaring contradiction must come from the polar opposite of US and ex-US REIT sectors. Ex-US REIT is the most value-y while US REIT is priced like it will have tremendous growth ahead (which I don’t think will be likely to materialize). Perhaps 10 years down the road, we’ll most likely see a profitable delta of ex-US REIT over US REIT, considering the pricing disparity.
Of all the asset classes listed above, only Global ex-US REIT is comfortably within the limits set by Mr. Graham. Emerging markets and US financial are also close and worth considering to overweigh in one’s portfolio.
Overall, most of the world’s stock markets are overpriced. Everything is expensive!