One of Cambridge University's oldest colleges, Clare College, is confident that stocks are now cheap. So confident, in fact, that it's borrowing the equivalent of $22 million over 40 years to buy equities. I'm not joking when I say that this is one of the most reliable positive indicators for stocks I've seen. Here's why.

By all accounts, Clare College's endowment has consistently outperformed the market over the last 55 years. Recently, it has made some canny calls, exiting the U.S. stock market in 1999 and selling most of its real estate investments in 2002.

From bear to bull
One of its key advisors is financial economist and former student Andrew Smithers, who's been bearish on stocks for some time. With the stock market collapse, Smithers has begun to change his stance, telling Forbes recently that the college put 2 million pounds to work in index funds on Oct. 10, buying the Nikkei 225 and the S&P 500.

At the time, the S&P 500 was just over 900; if it were to fall to 700, Smithers says, the endowment would make a large bet. "We are getting to values were we could see good long-term returns," he says. Keep in mind, though, that "long-term" in this context means decades, not months.

Where the index is cheap, so are its components
For those with the time, interest, and competencies, I'd recommend individual stocks over indexes. When an index is undervalued, there are necessarily some good values among its components. In fact, over two-thirds of the stocks in the S&P 500 currently sport a price-to-book value multiple that is in the lowest decile of historical values going back to the beginning of 1995. They include some of America's greatest businesses (this list is purely indicative – they're not recommendations):

 

Price-to-Book Value Multiple

Wal-Mart (NYSE:WMT)

3.1

Procter & Gamble (NYSE:PG)

2.9

Johnson & Johnson (NYSE:JNJ)

3.5

General Electric (NYSE:GE)

1.4

JPMorgan Chase (NYSE:JPM)

0.9

Coca-Cola (NYSE:KO)

4.3

Cisco Systems (NASDAQ:CSCO)

2.8

Source: Standard & Poor's Capital IQ.

If you don't believe in my "ivory tower" indicator, you should know there is a precedent for Clare College's performance. The great economist John Maynard Keynes was solely responsible for the management of part of the King's College (Cambridge) endowment (known as "The Chest"). An early value investor, Keynes beat the U.K. stock index over a period spanning more than two decades.

Keynes was also a professor to economist Brian Reddaway, who managed Clare's endowment for 45 years, until 1998.

It's not just Clare College; The Best Investor You've Never Heard Of also happens to work for a university endowment.

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Alex Dumortier, CFA, has a beneficial interest in Wal-Mart, but not in any of the other companies mentioned in this article. JPMorgan Chase and Johnson & Johnson are Motley Fool Income Investor recommendations. Wal-Mart Stores and Coca-Cola are Motley Fool Inside Value picks. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.