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Global Value: Building Trading Models with the 10 Year CAPE

Cambria Quantitative Research, No. 5, August 2012

15 Pages Posted: 21 Aug 2012 Last revised: 13 Sep 2012

Meb Faber

Cambria Investment Management

Date Written: August 14, 2012

Abstract

Over seventy years ago Benjamin Graham and David Dodd proposed valuing securities with earnings smoothed across multiple years. Robert Shiller popularized this method with his version of this cyclically adjusted price-to-earnings ratio (CAPE) in the late 1990s, and issued a timely warning of poor stock returns to follow in the coming years. We apply this valuation metric across over thirty foreign markets and find it both practical and useful, and indeed witness even greater examples of bubbles and busts abroad than in the United States. We then create a trading system to build global stock portfolios based on valuation, and find significant outperformance by selecting markets based on relative and absolute valuation.

Keywords: Graham, Dodd, Shiller, PE, CAPE, Price to Earnings, Stocks, Trading Models, Bubbles

JEL Classification: G1, G10

Suggested Citation

Faber, Meb, Global Value: Building Trading Models with the 10 Year CAPE (August 14, 2012). Cambria Quantitative Research, No. 5, August 2012. Available at SSRN: https://ssrn.com/abstract=2129474

Meb Faber (Contact Author)

Cambria Investment Management ( email )

2321 Rosecrans Ave
Suite 4270
El Segundo, CA 90245
United States

HOME PAGE: http://www.cambriainvestments.com

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