More on current CAPE

[kramer]

Great detailed article on CAPE here by Larry Swedroe:

Swedroe: CAPE 10 Ratio In Need Of Context | ETF.com

He covers how the accounting rules have changed in the US, idiosyncracies and history of CAPE, etc. A very well written and detailed article.

[Gone4Good]

Quote:

Originally Posted by samclem There are lots of factors that explain why the 47 year historical returns of Greek equities at the present PE10s will not be a good guide to the future.

That's the nature of value. There's always lots of good reasons not to own cheap securities. That's why they're cheap. And lots of good (or at least somewhat plausible) reasons to own expensive securities. That's why they're expensive.

Whether or not anyone finds any of this useful is mostly a matter of investment style, temperament and discipline.

[Gone4Good]

Quote:

Originally Posted by kramer Great detailed article on CAPE here by Larry Swedroe: Swedroe: CAPE 10 Ratio In Need Of Context | ETF.com He covers how the accounting rules have changed in the US, idiosyncracies and history of CAPE, etc. A very well written and detailed article.

Not a fan. Most of his adjustments are nonsense. A longer critique of this Swedroe piece is here

[Boho]

I'm trying to shorten a short list of countries to invest in and I found this advice from Burton G. Malkiel: " 'U.S. investors need to overcome their home-country bias,' noting that the CAPE ratio of several foreign markets is below historical averages (unlike in the U.S.)."

In researching more on CAPE, I found this thread. The title of this thread and of the linked article scared away from CAPE, but I read the thread and the article and the first chart in the article. It sounds like CAPE works. If you sell at the worst time, then using CAPE is worse than if you don't use valuation indicators like CAPE, but overall, using CAPE will make you more money, right?

I've reduced this thread to:

Quote:

Originally Posted by Gone4Good What that means is that you can't compare CAPE values from one country to another. A CAPE of 20x in the U.S. doesn't mean the same thing as a 20x value in Europe. But you certainly can compare them within a country. And what you find is the same strong relationship where low CAPEs precede higher future returns and high CAPEs precede low future returns.

I'm not sure now though. Low CAPE means cheaper, higher value, right?

[bmcgonig]

Quote:

Originally Posted by Boho I'm trying to shorten a short list of countries to invest in and I found this advice from Burton G. Malkiel: " 'U.S. investors need to overcome their home-country bias,' noting that the CAPE ratio of several foreign markets is below historical averages (unlike in the U.S.)." In researching more on CAPE, I found this thread. The title of this thread and of the linked article scared away from CAPE, but I read the thread and the article and the first chart in the article. It sounds like CAPE works. If you sell at the worst time, then using CAPE is worse than if you don't use valuation indicators like CAPE, but overall, using CAPE will make you more money, right? I've reduced this thread to: I'm not sure now though. Low CAPE means cheaper, higher value, right?

Mebane Faber runs an ETF that invests in the countries with the lowest CAPEs. Might be interesting to you too see what he does

http://www.cambriafunds.com/gval.aspx

[Boho]

Quote:

Originally Posted by bmcgonig Mebane Faber runs an ETF that invests in the countries with the lowest CAPEs. Might be interesting to you too see what he does Cambria Global Value ETF (GVAL) - Cambria Funds

Yeah, because I may want to not do that. I'm glad I didn't buy GVAL three years ago. I compare everything to the S&P.

[Boho]

Hmm...maybe I should be ignoring the performance from the first year of a fund. It trails foreign indexes in that first year too.

[samclem]

Quote:

Originally Posted by Boho Hmm...maybe I should be ignoring the performance from the first year of a fund. It trails foreign indexes in that first year too.

You are looking at only a tiny bit of data. It's just too little from which to draw conclusions (about that fund or funds in general).

Use of CAPE to "time" the US market seems to work relatively well, but only over long periods (i.e. the "buy" and "sell" signals can be mis-timed for a >long< time, so it's useless as a tool for short-term trading). I personally believe I can use it to shift my AA a little bit, but am not confident enough in it to use it for "all in/all out" moves.

Due to inefficiencies in international equities investing (case: China's restrictions on selling, "captured" money from their domestic investors, etc) and some structural changes that make long-term CAPE trends in some countries suspect as a key to understanding the future (Case: Greece today is not the investing environment of Greece 1990), I am less confident in the utility of CAPE internationally than here in the US.

[sengsational]

Quote:

Originally Posted by Boho I compare everything to the S&P.

Why?

[Boho]

Quote:

Originally Posted by sengsational Why?

NASDAQ and the S&P 500 are the only indexes I'm familiar with. Between the two, the S&P 500 is the only one whose symbol I currently know ($SPX) so I can get it to show up on the chart that I use for comparisons. I found an ETF that tracks NASDAQ that I decided is good enough for me to buy. I figure that's close to the S&P 500, so S&P 500 = good. Anything more volatile than it = scary. Anything that tracks it closely = what's the use? I want something close to the inverse of the S&P, or at least independent of it without being too risky. We've had recent weirdness in the US of the kind that I want protection from so I don't feel like I have to check too far back, though maybe it's different with CAPE.

[samclem]

Quote:

Originally Posted by Boho I want something close to the inverse of the S&P, or at least independent of it without being too risky.

You want to arrange your asset allocation so that your whole portfolio gets good performance (i.e. return) and has volatility that you can accept, right? The commonly accepted way to do that is to use many types of volatile assets that are not well correlated, but which each have good returns. If going by this approach, an investor really really doesn't care about the volatility of each asset, provided that asset earns good volatility-adjusted returns >ad< he's got another part of his portfolio that he expects to be negatively correlated to it (or, at least uncorrelated to it).

Quote:

Originally Posted by Boho We've had recent weirdness in the US of the kind that I want protection from so I don't feel like I have to check too far back, though maybe it's different with CAPE.

If you truly believe that our markets are now in uncharted territory ("it's different this time"), then neither CAPE nor any other historically-based
guide to the future will be of much use.

[Boho]

Quote:

Originally Posted by samclem ..use many types of volatile assets that are not well correlated, but which each have good returns...

Yes. I'm doing the index fund thing which is more than a lot of people do. I looked for bond funds and I'll give that another shot but I don't care very much any more about bonds. I'm not sure that they "have good returns." I just know they have lower returns than stock. And I'm looking for a foreign fund now.

Quote:

If you truly believe that our markets are now in uncharted territory ("it's different this time")...

I do but maybe not by a whole lot. That's why I'm using last November to represent general weirdness that includes past recessions, but I may go back further.

[sengsational]

Quote:

Originally Posted by Boho ....

I guess what I was trying to get at is that comparing a global fund to US large equities index seems not very helpful to me. I guess if you're default investment is US large equities, then you can say what you said (glad you didn't invest in it). Out of the various ways to categorize investments, there are going to be winners an losers for various time periods. There was a big chart posted, MidPack?, that showed which asset classes did better or worse every year for a bunch of years. It just looked so random. Picking one to compare all the others against seemed kind of weird if one discounts the fact that we happen to live in the place where these big companies started and have their HQ.