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Everything You Need To Know About the CAPE Ratio

I just got back from 5 days backpacking and fishing in King’s Canyon (next to Sequoia) at a place called Rae Lakes.  It has been on my bucket list for years, and it did not disapoint.  Here is a quick photo before we dive into all things valuation related.  Lots and lots of (little) trout.

 photo (5)

 

So, there has been a lot of discussion about the CAPE ratio on social media lately.  I’ve been writing on CAPE for a long time, including dozens of blog posts, a white paper, and a book – Global Value.  (I’ll even send you a free copy if you agree to write an honest review on Amazon, just email me.)  We launched an ETF on the findings at has been one of the top 5 launches of the year.  Barry did a nice post with links to a lot of writers thoughts on the topic.  I’ll add some of my findings with links below from the blog over the years.  

Is the CAPE ratio good at predicting future returns? (Yes) Is it perfect? (N0)

Does the CAPE ratio work on individual stocks? (Yes)

Does the CAPE ratio work for sector rotation? (Yes)

Does valuation and sentiment correlate? (Yes)

Using CAPE to get out of stocks in the 1990s, is that a bad thing? (No)

Do accounting changes matter (Not really)

Does 2008/2009 matter? (No)

Does it matter what CAPE ratio you use? ie 1,3,5,7, 10 year? (Not really)

Can you combine trend and valuation to time the stock market? (Yes)

Does buying expensive markets result in bigger losses? (Yes)

Do the best and worst times in history to invest correlate with value? (Yes)

Another post on trend and value

Behavioral reasons value works

 

 

and Global Valuations

 

Does CAPD work too? (Yes)

Does CAPD say the same thing as CAPE? (Yes)

CAPE ratio Bollinger Bands

Are market cap weighted bubbles one reason the CAPE ratio works? (Yes)

Did the CAPE ratio work in 2013? (Yes)

How long does it take to work off a CAPE ratio bubble? (About 2-4 years)

Does it matter what value metric you use? (Not really) also here

How big was the US bubble? (Normal for bubbles, tiny vs. Japan)

Are most stock markets cheap? (Yes)

Does adjusting CAPE ratio for inflation make sense? (Perhaps)

Does CAPE simply correlate with drawdowns? (Yes) and here

Asness on CAPE

Arnott on CAPE

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