Cyclically Adjusted P/E (CAPE)

The cyclically adjusted PE ratio (CAPE ratio) is a measure that attempts to smooth out the impact of the business cycle on earnings. It is computed by taking the current price and dividing by the average inflation-adjusted earnings from the previous 10 years. This measurement is also known as the Shiller P/E ratio, or P/E 10.

It was popularised by Professor Robert Shiller of Yale University in his book Irrational Exuberance (published 2000), in which he correctly predicted the Dot-Com bubble. This was not a new idea. Ben Graham, the value investor who was Warren Buffett’s guru, had suggested a similar measure, involving the averaging of profits over an extended period to smooth out the effects of the economic cycle.

CAPE assumes a reversion to the mean, i.e. that ratio will converge to the average over time.Do note that this is a long term indicator.

This is a link to a daily calculation of the CAPE: http://www.multpl.com/shiller-pe/

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