Using Shiller PE to Time the Market

[dallas27]

Does the cape ratio hold water in non-us markets?


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[sengsational]

I meant to post this link earlier. It lists CAPE for various countries. Food for thought, I suppose.
Global Stock Market Valuation Ratios (Shiller PE, CAPE, PB...)

Excellent addition to the non-US angle in this thread. Thanks!

 

[Texas Proud]

I think that the biggest problem I have with this method is that it is using the last 10 years of profits to 'predict' the next 10 or more... I just do not see how they are correlated....


Using the work CAPE ratio.... the best country to invest in now is Russia.... how many people are going to take THAT advice


Edit... opps... missed Greece which has the lowest number... but still same question

 

[dallas27]

I think that the biggest problem I have with this method is that it is using the last 10 years of profits to 'predict' the next 10 or more... I just do not see how they are correlated....


Using the work CAPE ratio.... the best country to invest in now is Russia.... how many people are going to take THAT advice


Edit... opps... missed Greece which has the lowest number... but still same question

Greece, (and italy) have terrible markets right now. I would absolutely invest in them. I am exposed through broad ETF's already, but I would place a extra bet if the right, low cost ETF were available. High unemployment, many friends in the EU, and access the Med see and EU markets. Rebound is inevitable.

Russia is a different story, as you have a political uncertainty that is highly volatile and makes a long term bet much more risky than greece. That said, I am exposed to russia as well.

 

[karluk]

I meant to post this link earlier. It lists CAPE for various countries. Food for thought, I suppose.

Thanks for the link. I have seen similar country by country comparisons before. They were one of the factors that convinced me to increase my international exposure, especially to emerging markets, earlier this year. It's not at all clear that this is the right move, but it's my attempt to find relative bargains at a time when there are so many warnings about extremely high prices in both U.S. equity and bond markets.

 

[target2019]

If you look at CAPE for foreign markets, or even PE, keep in mind the wide disparity in how companies report earnings.

 

[Lsbcal]

If you look at CAPE for foreign markets, or even PE, keep in mind the wide disparity in how companies report earnings.

Right! Single data points in time are not enough. What about country inflation? Unemployment? Relative interest rates, etc.

 

[gcgang]

https://www.gmo.com/America/CMSAtta...crzQlZPEp7Lk+mHtezRPbWPlPtbu4+IbU8UAGtIt6BuU=

Above is a Feb 2014 article from GMO, basically concluding that CAPE has been a way to determine valuations, and that the US markets are in overvalued territory, European and especially Emerging offer better value.

While CAPE doesn't predict what the market will do in the near term, it has had a pretty good record at helping figure out the probabilities of what my biggest concern is at this point in my life, suffering a significant "drawdown". Low CAPE, very low chance of a big decline, high CAPE...




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[target2019]

https://www.gmo.com/America/CMSAtta...crzQlZPEp7Lk+mHtezRPbWPlPtbu4+IbU8UAGtIt6BuU=

Above is a Feb 2014 article from GMO, basically concluding that CAPE has been a way to determine valuations, and that the US markets are in overvalued territory, European and especially Emerging offer better value.

While CAPE doesn't predict what the market will do in the near term, it has had a pretty good record at helping figure out the probabilities of what my biggest concern is at this point in my life, suffering a significant "drawdown". Low CAPE, very low chance of a big decline, high CAPE...




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Is that the article, "A CAPE Crusader?"

 

[gcgang]

Yes, that's the title, A Cape Crusader a Defence Against the Dark Arts.


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[CCdaCE]

In the paper : Investing for Retirement: The Defined Contribution Challenge -- Ben Inker and Martin Tarlie , currently at GMO LLC - Home

They talk about the correlation between the Shiller P/E value and future returns.

At 1 year, it's about a 20% correlation,
At 5, almost 45%,
at 10 years, 60%,
At 20, about 70%.

See chart 10 on pg. 7.

So, like others have said, not a perfect system. But, overall, this paper addresses a lot of the variables of asset allocation, and a thought provoking discussion of valuation, timing/timeframes, returns simulations, etc.

-CC

 

[target2019]

https://www.gmo.com/America/CMSAtta...crzQlZPEp7Lk+mHtezRPbWPlPtbu4+IbU8UAGtIt6BuU=

Above is a Feb 2014 article from GMO, basically concluding that CAPE has been a way to determine valuations, and that the US markets are in overvalued territory, European and especially Emerging offer better value.

While CAPE doesn't predict what the market will do in the near term, it has had a pretty good record at helping figure out the probabilities of what my biggest concern is at this point in my life, suffering a significant "drawdown". Low CAPE, very low chance of a big decline, high CAPE...




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Good read. Thanks for highlighting.

Montier uses five measures (one is PE10), and concludes that U.S. market is overvalued, and expectation is - 1.1 return over the next 7 years.

 

[REWahoo]

Good read. Thanks for highlighting.

Montier uses five measures (one is PE10), and concludes that U.S. market is overvalued, and expectation is - 1.1 return over the next 7 years.

You'll have to follow up in 2021 to see how he did. Wonder if he's any better at predicting markets than the sad track record this bunch has?

 

[target2019]

You'll have to follow up in 2021 to see how he did. Wonder if he's any better at predicting markets than the sad track record this bunch has?

Probably best that you mark this as something to check.

 

[target2019]

Jim Otar has a tactical allocation discussed in his popular book. One approach would take the 6-year average for an equity fund, and compare that to the end of year result. If the result is higher than the 6-year average, time to go defensive for the coming year in that equity fund. Now what he means by defensive is open to interpretation. I don't think he means going all to cash. He also cautions that there will be false signals, and you'd have to accept those as part of the strategy.

 

[dallas27]

The symphony of experts who are predicting lackluster returns for years to come is the exact reason I believe we'll see just the opposite. Show me a time in financial history that the groupthink was ever right.


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[Lsbcal]

The symphony of experts who are predicting lackluster returns for years to come is the exact reason I believe we'll see just the opposite. Show me a time in financial history that the groupthink was ever right.


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Well a lot of people didn't care for Germany in the mid 1930's.

Still, I agree with your general idea!

 

[dallas27]

Well a lot of people didn't care for Germany in the mid 1930's.



Still, I agree with your general idea!

I did say "financial history". And to be fair, the group think was that Germany was someone else's problem, until it was everyones.


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[sengsational]

What Greenblatt wrote in his "little book" stuck with me. Approaches that work only on timescales of 5+ years (sometimes even 3) tend to keep on working because most money managers get fired/hired on an annual performance basis. Even most private equity firms rarely have a horizon beyond five years.
..

Based on your mention, I got the book from the library. It was re-released in 2010, five years after the original publication. The new title is "The Little Book That STILL Beats the Market".

I read a couple of old threads on this board, but it seems that nobody writing then had read the book. Having " magic" in the title was enough to sour them.

Greenblatt seems like an academic that wants to show intellectual prowess, not just someone who wants to sell books to make money. Wanting to be the guy to give the small investor a tool to do better in the tough world of investing is not quite the same as someone hyping a scheme.

I don't think this technique is simply data mining; I think it probably would work if an investor was able to stomach the many transactions and keep at it, even when it falls behind the market as a whole. But exactly as you and Mr Ha said, the reason why institutional investors can't use the technique is that the wait for the payback can be years, and they'd drop all their customers after a few months of not keeping up.

 

[Lsbcal]

I did say "financial history". And to be fair, the group think was that Germany was someone else's problem, until it was everyones.


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Mea culpa.

 

[Totoro]

I don't think this technique is simply data mining; I think it probably would work if an investor was able to stomach the many transactions and keep at it, even when it falls behind the market as a whole.

I also believe there is something to it, so I am running an experiment with $30k

So far (six months in) it's running at a small overall loss due to a few dramatic losers in the ten share portfolio. Going to keep running it though for at least three years.

 

[sengsational]

I also believe there is something to it, so I am running an experiment with $30k

So far (six months in) it's running at a small overall loss due to a few dramatic losers in the ten share portfolio. Going to keep running it though for at least three years.

I'm tempted to do something similar!

There is a guy on motley fool CAPS "trackjgreenblatt" that has a record going back to 2007, I think. That tool doesn't handle re-buys very well, so I couldn't derive his IRR, but he is ranked in the mid 80th percentile.

 

[Texas Proud]

Can not see it now and am not going to look it up...

I read an article last night before going to bed from Shiller saying that even though the ratio is high it might not mean much.... he said there are only 3 data points and that is not enough to say there is going to be a crash... there is a possibility that earning will grow enough to bring down the ratio instead a drop in price...

So if the person who developed this ratio is saying not to use it as a market timing tool, I do not see how anybody else can say that it should be used as one...

 

[haha]

Can not see it now and am not going to look it up...

I read an article last night before going to bed from Shiller saying that even though the ratio is high it might not mean much.... he said there are only 3 data points and that is not enough to say there is going to be a crash... there is a possibility that earning will grow enough to bring down the ratio instead a drop in price...

So if the person who developed this ratio is saying not to use it as a market timing tool, I do not see how anybody else can say that it should be used as one...

Easy to explain. Anybody can say anything they want to, as long as it does not upset our various spy agencies.

Ha

 

[Lsbcal]

Current PE10 = 25.7

From Sept 2003 to Dec 2007 the SP500 went up 10.9% on an annual basis.
During those years:
PE10 average = 26.2
PE10 minimum = 24.7
PE10 maximum = 27.7

Obviously PE10 during those 4+ years was not a market timing tool.