Publications [#239253] of Edward Tower

Journal Articles

  1. Harney, M; Tower, E, "Rational Pessimism: Predicting Equity Returns by Tobin's q and Price/Earnings Ratios", The Journal of Investing, vol. 12 no. 2 (Fall, 2003), pp. 58-69
    (last updated on 2021/12/04)

    In the spring of 2000, two books predicted a substantial fall in the S&P500 Index. Robert Shiller’s Irrational Exuberance found that, historically, a high price earnings ratio, with real earnings averaged over 10 years, accurately predicts a low real rate of return from investing in the S&P500 Index. Smithers and Wright’s Valuing Wall Street found that a high Tobin’s q for the non- financial equities in the S&P500 does the same. We discover that q beats all variants of the PE ratio for predicting real rates of return over alternative horizons. We also formalize the feedback mechanisms considered in both books.