- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
CAPE Ratios: How much weight should we assign to them in choosing markets?
Posted on 8/6/13 at 12:13 pm
Posted on 8/6/13 at 12:13 pm
Cyclically-adjusted price-earnings ratios (CAPE) seem to be a popular measure of stock market value. Analysts, e.g., Mebane Faber, apply CAPE to international markets, and rank resultant global comparisons. There's presumed importance relative to prospective market performance. The numbers below are from April.
From a risk stance, market/national stability is an obvious governor. For example, I wouldn't be trading US positions for Greece on this info, but Germany at 14 vs the US at 22.5 (even given the EU situation) gets my attention. Just curious as to thoughts here re: weighting or importance of the comparisons.
From a risk stance, market/national stability is an obvious governor. For example, I wouldn't be trading US positions for Greece on this info, but Germany at 14 vs the US at 22.5 (even given the EU situation) gets my attention. Just curious as to thoughts here re: weighting or importance of the comparisons.
Posted on 8/6/13 at 12:42 pm to NC_Tigah
quote:
Cyclically-adjusted price-earnings ratios (CAPE) seem to be a popular measure of stock market value.
Well yeah, according to the Wikipedia entry for CAPE ratio, the idea is at least as old as Benjamin Graham's Security Analysis, although the specific term "CAPE" usually refers to Bob Shiller's 10-year methodology.
Obviously you don't want to use P/E ratios based on a single data point, since that leads to meaningless statistics in a similar vein to my greatest pet peeve of financial media reporting, the infamous "corporation X increased profits by 2,584.32% last quarter!" (so what?).
But how you want to smooth out past earnings, and/or blend it with estimates of future earnings, is more art than science.
This gets into the similar issue of using PEG ratios, which adjusts P/E ratios for expected growth (since rational investors will bid up prices to higher P/E ratios when expected CAGR's for earnings are higher).
But then how do you estimate future growth? Not only for a single corporation but also for a particular country's stocks? (And for that matter, how do you know how much a particular country's stocks will branch out into emerging markets, capturing equity from foreign subsidiaries?)
How do you use common sense and say something like "the last 3 years aren't very characteristic of future earnings," or something similar?
It has to do with experience, gut, intuition, common sense, and all that jazz.
ETA: And related to this...
quote:
Just curious as to thoughts here re: weighting or importance of the comparisons.
The way I look at them, P/E ratios are pretty much everything when it comes to investment allocation across large asset classes (as opposed to say doing CAPM or APT or Fama-French calculations for alpha for some high-low strategy within a particular sector, or DCF/NPV calculations for a very specific project) ... once you've worked out all the necessary adjustments.
You adjust P/E ratios for smoothing to make then CAPE ratios. You adjust them for future growth estimates to make them PEG ratios. You can adjust them for expected volatility in earnings or in foreign exchange rates (LOLZ Argentina). But once you do all these adjustments, you should theoretically have a pretty clear metric for which class of equity has the most attractive price (even if your estimates for guessing what that metric is are necessarily very rough and back-of-the-envelope-esque).
EDIT2: It looks like an excellent time to go enable some Zionists...
quote:
Israel 11.32
This post was edited on 8/6/13 at 1:19 pm
Posted on 8/6/13 at 12:49 pm to NC_Tigah
Other than momentum factors it makes sense to at least consider PE10, especially if you have already won the game. Doesn't mean the market can't keep crawling higher for a few years, but for longer term results I like investing in less costly securities not more expensive, especially if one believes in reversion to the mean. One reason why rebalancing can make a lot of sense. Ben Graham 25-75 mantra would come into play. It's not like 1999-2000 at this point by a long shot, though, plus ZIRP continues.
Posted on 8/8/13 at 6:39 am to NC_Tigah
Do these comparisons use the same definition of earnings regardless of country? Accounting rules do vary somewhat after all.
Back to top
Follow TigerDroppings for LSU Football News