The least dirty shirt on offer

An article featured in this weeks “The Economist” is about the cyclically adjusted earnings ratio, (CAPE) as calculated by Robert Shiller of Yale University.

The CAPE averages profit over ten years and is now used by many as a vital valuation indicator. The article explains that currently, the indicator shows that American shares have hitherto been more highly valued only in 1929 and the late 1990s, periods that were followed by significant crashes.

But the article is also balanced in explaining that CAPE valuations are for the longer term view, and that over-value can exist for quite some time.

The CAPE is a similar method developed by Nick and me in 2010 on individual equities. More recently, however, we have not traded with this method due to there being few suitable valuations on offer.

The CAPE is for the long-term, but it is, of course, advantageous to purchase, even for the longer term, at particularly good value.

The article concludes with fund managers being nervous about equity valuations, but they (fund managers) find government bonds deeply unattractive. They are therefore stuck with the stock market as the “least dirty shirt” on offer.

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