Jeremy Siegel is a Wharton professor of finance, the author of a fine book, Stocks for the Long Run, and a senior adviser for WisdomTree Investments. His impressive background gives him a lot of credibility and he is a frequent guest on the financial media. In a recent interview, Siegel opined that "stocks are 25 percent to 30 percent below what I'd call fair market value and that might be conservative in terms of earnings power and relative interest rates."
If you believe Professor Siegel has some special insight into future stock prices, you are probably mistaken. His ability to make these predictions is no greater than yours.
Prices for stocks are not below fair market value. By definition, they are at fair market value because they incorporate all publicly available information. Millions of traders all over the world are looking at this information. They are the ones who set the prices of all publicly traded stocks. There is ample evidence that the collective wisdom of these traders is far more accurate than the assessment of any one trader or professor. This evidence is summarized in James Surowiecki’s excellent book, The Wisdom of Crowds: Why the Many are Smarter than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations.
Stocks may go up or down and Professor Siegel may turn out to be right or wrong, but this price movement has nothing to do with whether they are underpriced today. Tomorrow’s news moves stock prices and no one knows what that news will be. Future events are random and unpredictable. The most likely consequence of reliance on any trading system, stock picker, marketing timer, manager picker, style selection, or the views of self-styled investment gurus is that your expected returns will be negatively impacted.
Professor Siegel’s prediction track record is mixed at best. At the end of 2007, he predicted that "the economy will avoid a recession" in 2008. His crystal ball also revealed that "the stock market will have another winning year in 2008" and that "financial stocks, which have plummeted 18 percent so far this year, will outperform the S&P 500 index next year  as the credit crises fades."
The recession of 2008 was the worst since the Great Depression. The S&P 500 lost 38.49 percent in 2008. It was its worst year since 1937. Financials underperformed all market sectors, losing 56.95 percent.
You would be far better off ignoring all statements about undervalued stocks. Instead, you should assume that stocks are fairly priced. Rather than relying on the often clouded crystal balls of talking heads, you should focus on the factors that really do affect your returns. The most important of these factors is the amount of exposure you have to the stock market. You can determine the right asset allocation (the division of your portfolio between stocks and bonds) by taking an asset allocation questionnaire.
Then focus on the cost of the funds in your portfolio. Low costs directly correlate with higher returns. I recommend some very sophisticated and very low cost portfolios of index funds and exchange-traded funds in my new book, The Smartest Portfolio You’ll Ever Own.
Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.