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Meb Faber: Buy Cheap Cyclically Adjusted P/E (CAPE)

Posted By Barry Ritholtz On September 4, 2012 @ 12:00 pm In Earnings,Quantitative,Technical Analysis,Valuation | Comments Disabled

Cyclically Adjusted P/E
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Meb Faber of Cambria Investment Management looks at 10 years of earnings. Based on a methodology developed by Yale University Professor Robert J. Shiller, Faber concluded from an analysis of cyclically adjusted price-earnings ratios, designed to minimize the effect of economic swings on profits.

Cyclically adjusted P/E, also known as CAPE, for U.S. stocks since 1900. The figures were obtained from Shiller’s Yale website, where they are available from 1881 onward.

The U.S. was among 32 markets examined in Faber’s study [2]

Investing in markets whose ratios were in the bottom third at the start of each year would have produced inflation-adjusted annual returns that beat the global average by four to seven percentage points. Markets with ratios in the top third trailed by a comparable amount.

The results point to “significant outperformance by selecting markets based on relative and absolute valuation,” Buying only when CAPE was below 15 and shunning markets with ratios higher than 30 led to higher returns, the research showed.




Chart of the Day
By David Wilson
Bloomberg August 23, 2012

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/09/chart-of-the-day-ten-years-of-earnings-may-put-investors-ahead/

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[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2012/08/0823chart.jpg

[2] Faber’s study: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2129474

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