Global Value: Building Trading Models with the 10 Year CAPE

I put together a fun white paper that summarizes some of the work we have been doing on valuation and turning the ideas into some practical trading systems with some pretty cool results.  I sent this out to The Idea Farm list yesterday but a few reported the link didn’t work so I thought I’d post it here.

Global Value:  Building Trading Models with the 10 Year CAPE


Over seventy years ago Benjamin Graham and David Dodd proposed valuing securities with earnings smoothed across multiple years.  Robert Shiller popularized this method with his version of this cyclically adjusted price-to-earnings ratio (CAPE) in the late 1990s, and issued a timely warning of poor stock returns to follow in the coming years.  We apply this valuation metric across over thirty foreign markets and find it both practical and useful, and indeed witness even greater examples of bubbles and busts abroad than in the United States.  We then create a trading system to build global stock portfolios based on valuation, and find significant outperformance by selecting markets based on relative and absolute valuation.

Summary chart from the paper: