CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

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CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sat Sep 29, 2018 8:29 pm

In March 2015, Robert Shiller said publicly that he was buying indexes in Italy and Spain. He also said he wanted to get out of U.S. equities. He was basing his investment decision in significant part on the CAPE ratios for those countries.

More specifically, he told CNBC "I'm thinking about getting out of the United States somewhat. Europe is so much cheaper....What I have done is I've invested in Italy indexes, Spain index." (Source: https://seekingalpha.com/article/303137 ... make-sense)

Using the iShares Italy and Spain etfs (EWI and EWP) as measures of how these countries indexes have done, Shiller's investment would be down 7.16% in Italy and 15.33% in Spain (source: Morningstar, EWI and EWP from March 1, 2015 to September 28, 2018).

On the other hand, the IVV, representing the U.S. equities that he wanted to get out of, is up 38% over the same period.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Taylor Larimore » Sat Sep 29, 2018 8:55 pm

Duffer:

Thank you for your post. It provides more evidence that it is impossible to forecast future returns.

A good solution: Buy the market and stay-the-course.

Best wishes.
Taylor
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by willthrill81 » Sat Sep 29, 2018 9:33 pm

I've seen many backtests that attempted to use valuation tools like CAPE. None of them worked well, and it seems that Shiller didn't have a magical touch when it came to using them either.

Low valuations do not necessarily lead to good returns, and high valuations do not preclude good returns.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by whodidntante » Sat Sep 29, 2018 10:51 pm

Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by columbia » Sat Sep 29, 2018 11:01 pm

This approach would dictate loading up on Russian equities.




Good luck with that, should one pursue it.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by willthrill81 » Sat Sep 29, 2018 11:25 pm

whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
IIRC, he called a lot of other market crashes that never materialized as well. The broken clock is right twice a day.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by unclescrooge » Sat Sep 29, 2018 11:30 pm

willthrill81 wrote:
Sat Sep 29, 2018 11:25 pm
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
IIRC, he called a lot of other market crashes that never materialized as well. The broken clock is right twice a day.
I was going to post the exact same thing!

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by AlohaJoe » Sun Sep 30, 2018 12:02 am

whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
It is arguable whether he "correctly" called it. Didn't he call it over three years too early? That's a failed trade; anyone who followed that lost money

I'm not sure that "a crash is going to happen and any crash in the next five years means I get credit for predicting it" is exactly fair. Getting the timing right is the biggest part of making a prediction, I'd think.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by whodidntante » Sun Sep 30, 2018 12:32 am

AlohaJoe wrote:
Sun Sep 30, 2018 12:02 am
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
It is arguable whether he "correctly" called it. Didn't he call it over three years too early? That's a failed trade; anyone who followed that lost money

I'm not sure that "a crash is going to happen and any crash in the next five years means I get credit for predicting it" is exactly fair. Getting the timing right is the biggest part of making a prediction, I'd think.
Shiller was three years early with the housing bubble prediction, yes. It was the same year that Michael Burry realized it, so he was also early. Burry managed to position his fund to profit from it, so I wouldn't say that getting the timing right is always critical.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by eye.surgeon » Sun Sep 30, 2018 2:03 am

Interesting food for thought for those who view CAPE as a crystal ball.

Also, I'm calling the next correction for tomorrow. If it happens in the next 3 yrs, like Shiller, I will have called it.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 6:43 am

Taylor Larimore wrote:
Sat Sep 29, 2018 8:55 pm
Duffer:

Thank you for your post. It provides more evidence that it is impossible to forecast future returns.

A good solution: Buy the market and stay-the-course.

Best wishes.
Taylor
Hello Taylor.

Indeed, Taylor! Thank you!

That is very much what I do, though I broadly buy the market in a slightly individualized way. I do buy and hold.

Best,
duffer
Last edited by duffer on Sun Sep 30, 2018 10:17 am, edited 2 times in total.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 7:02 am

columbia wrote:
Sat Sep 29, 2018 11:01 pm
This approach would dictate loading up on Russian equities.




Good luck with that, should one pursue it.
As a matter of fact, in an appearance on CNBC in September 2017 Shiller did advocate buying Russian equities, and made the case for avoiding U.S. equities.

His argument for buying Russian equities and avoiding the U.S. was also based on CAPE ratios.

He said:
While the U.S. has the highest CAPE ratio, "the lowest CAPE ratio of the 26 countries [analyzed] is Russia," Shiller said Tuesday on CNBC's "Trading Nation."

The Yale professor of economics and Nobel laureate added that "I'm thinking about" investing in Russia "when [the ratio] is this low."
See the interview at: https://www.cnbc.com/2017/09/20/robert- ... tocks.html

Russian equities have in fact done better than his call on Italy and Spain. While at the beginning of September, they were down 5% from his initial call, over the last three weeks they have improved so that they are now up 9%. Their volatility is enormous.

U.S. equities, with much less volatility, are up 18% over the same period.
Last edited by duffer on Sun Sep 30, 2018 7:17 am, edited 3 times in total.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by columbia » Sun Sep 30, 2018 7:11 am

duffer wrote:
Sun Sep 30, 2018 7:02 am
columbia wrote:
Sat Sep 29, 2018 11:01 pm
This approach would dictate loading up on Russian equities.




Good luck with that, should one pursue it.
As a matter of fact, in an appearance on CNBC in September 2017 Shiller did advocate buying Russian equities, and made the case for avoiding U.S. equities.

His argument for buying Russian equities and avoiding the U.S. was also based on CAPE ratios.

He said:
While the U.S. has the highest CAPE ratio, "the lowest CAPE ratio of the 26 countries [analyzed] is Russia," Shiller said Tuesday on CNBC's "Trading Nation."

The Yale professor of economics and Nobel laureate added that "I'm thinking about" investing in Russia "when [the ratio] is this low."
See the interview at: https://www.cnbc.com/2017/09/20/robert- ... tocks.html

He missed the boat (2016 returns) on that idea:
https://www.portfoliovisualizer.com/bac ... ion1_1=100

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 7:14 am

eye.surgeon wrote:
Sun Sep 30, 2018 2:03 am
Interesting food for thought for those who view CAPE as a crystal ball.

Also, I'm calling the next correction for tomorrow. If it happens in the next 3 yrs, like Shiller, I will have called it.
Ha! LOL.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 7:41 am

willthrill81 wrote:
Sat Sep 29, 2018 11:25 pm
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
IIRC, he called a lot of other market crashes that never materialized as well. The broken clock is right twice a day.
Which other bubbles do you recall him predicting?

He called the dot com bubble. I was reading Irrational Exuberance (1ST edition) in 1999. He called the US housing bubble - I read the 2nd edition where he did so in 2006.

That takes us to now. Bubbles he has identified of late:

- Canadian housing bubble - he's in good company, because several of the IMF/ OECD/ BIS have mentioned this one (I'd have to check which of those). Of course, Toronto and Vancouver have not blown up, yet. I have every confidence that they will

- Bitcoin bubble - he was talking about looking at that as it occurred, he has subsequently written about some of the interesting manifestations of same (enthusiasm was stronger on the West Coast than the East Coast, so it appeared; among techies more than Wall Streeters)

What other bubbles did he call, that did not happen/ blow up?

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 7:45 am

AlohaJoe wrote:
Sun Sep 30, 2018 12:02 am
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
It is arguable whether he "correctly" called it. Didn't he call it over three years too early? That's a failed trade; anyone who followed that lost money

I'm not sure that "a crash is going to happen and any crash in the next five years means I get credit for predicting it" is exactly fair. Getting the timing right is the biggest part of making a prediction, I'd think.
It was hard to bet against US housing. There's no stock that says "buy this and make a fortune when US housing falls".

As The Big Short details, those who were early (Bury, Eisman etc.) were nearly margin called -- they nearly did not hang in there long enough.

Stock calls are harder because you can actually trade on them fairly instantaneously. Alan Greenspan called it too early and coined the term that became the title of Shiller's later book.

The worst mistake for your reputation is Irving Fisher, who saw the 1929 Crash and then confidently predicted that stocks were oversold and would rebound.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 7:55 am

unclescrooge wrote:
Sat Sep 29, 2018 11:30 pm
willthrill81 wrote:
Sat Sep 29, 2018 11:25 pm
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
IIRC, he called a lot of other market crashes that never materialized as well. The broken clock is right twice a day.
I was going to post the exact same thing!
Do you recall what other bubbles Shiller predicted, that did not turn out to be bubbles?

An interesting one is fracking - -whether that is a bubble*. Bethany Maclean of Enron journalism fame, has published a book on fracking finance. Which has some similarities to a financial bubble.

* like almost all the classic financial bubbles, there is something very real going on there. Fracking is a real set of technologies that has transformed the economics of the oil industry. The bears will tell you at the margin, the bulls will tell you completely and totally affecting the economics of the entire industry - it almost does not matter who is correct. But transforming the technology of oil extraction has short and long term implications for the prices of oil and natural gas, but doesn't justify companies raising huge amounts of money at sub economic returns. In other words, like the dot com bubble - the growth of the commercial internet has met or exceeded even optimistic forecasts made in 2000 but most of the businesses and business models that raised money in that era have been crushed and even Amazon (and there really isn't another Amazon in the list of top internet stocks, that was also a major listed business in 2000*) took something like 13 years to regain its share price high.

* Apple. But is Apple an internet stock? What Apple became was an incredibly successful consumer device company - the Sony of its age, but with arguably stronger barriers to entry.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 7:58 am

whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
That is a good point :happy
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 8:00 am

Thank you for posting, very interesting :happy I was precisely wondering about Shiller when I wrote my thread on Italy yesterday.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 8:10 am

willthrill81 wrote:
Sat Sep 29, 2018 9:33 pm
I've seen many backtests that attempted to use valuation tools like CAPE. None of them worked well, and it seems that Shiller didn't have a magical touch when it came to using them either.
can you give some references? I am not talking about using valuations to get in and out of the US market - that indeed does not work.
I am talking staying invested in the global stock market, but moving to the geographical areas which have lower CAPE. A number of firms like Cambria, RA, GMO, StarCapital etc recommend this. So I would be interested in seeing the backtests that invalidate this strategy (over the long term, not in the time 2015 to present).
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by afan » Sun Sep 30, 2018 8:15 am

I don't make investment decisions based on valuations. Too much noise to be useful. To be fair to Shiller, he emphasizes the studies that show valuations to have some preditictive power over the long term. A few years is not long enough to evaluate the accuracy of his country picks.

Among other questions, this raises the frequency of adjustment. If you base your ten year projected returns on current valuations, how often do you change your allocation? If you bought Italy and Spain a few years ago when their CAPEs were low, what do you do now?

1. Use 10 year projections to lock in allocation and change it only every 10 years, based on then current valuations? In other words, ignore current valuations, since you have not waited long enough for your 10 year horizon to play out.

2. Update your allocation at some greater frequency, thus never reaching the 10 years on which your investment approach was based? This would undercut the supposed predictions of CAPE, since you never wait long enough to hit the period when they are most useful.

3. Create a data driven rule that tells you when CAPE has changed enough to abandon your long term projections and rebalance your target allocation? If so, what are the data and what is the rule?

If Shiller is follows 2 or 3, he would say that Italy and Spain are even better buys now than when he bought them. He should be shedding whatever US stocks he has remaining and putting the money into the lowest CAPE indexes he can find now.

Assuming of course he is doing this in a tax favored account.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 8:22 am

Lauretta wrote:
Sun Sep 30, 2018 8:00 am
Thank you for posting, very interesting :happy I was precisely wondering about Shiller when I wrote my thread on Italy yesterday.
Catch the falling knife.

It is very easy to be too early. The low CAPE10 (price/ book effectively) might well be the result of the valuation of financials - the market is valuing those financials at such a low level, a "value trap" in fact, because it believes their assets could be seriously worth less than their stated values. By their nature, banks and insurance companies are inherently geared, a small move in asset value wipes out their equity. At which point... disaster.

You live in Italy? You had better make sure that, if there is a crisis, it does not have knock on effects on your portfolio and life (labour income, property values, relations you might have to support, etc.) that would correlate with, say, a bailout of the Italian banking system or a Eurozone crisis on the Italian currency.

Because then doubling up on Italian equities could be really not a good thing to do.

I have warned posters here about not overconcentrating their exposure to the Italian government bond market. In the words of Star Wars (to Governor Tarkin, in the Death Star, at the end of Episode IV)

"We've analyzed their attack, sir, and there is a danger. Should I have your ship standing by?"
"Evacuate? In our moment of triumph? I think you overestimate their chances!"

The yield on Italian government bonds vs. German bunds says that the market thinks there is a danger of a restructuring.

FWIW the Italian coalition has actually proposed a perfectly sensible fiscal strategy in light of the stagnation of the Italian economy. When monetary policy won't move the needle, you have to try fiscal policy (again to quote Star Wars "Punch it" https://www.youtube.com/watch?reload=9&v=oVv9EB-PZgA ).

I would quibble with how they are planning to spend the money not the desire to try to do something when the conventional nostrums have failed.

However that does not mean the key decision makers in the Eurozone will accept that strategy.

And the Italian banking system really does worry me. Without having done the analysis, it feels as if there are a bunch of institutions that might be in serious financial trouble - a failure to recognize huge losses on the loan books. See Ireland, UK, Iceland (USA) for that that implies about what happens next.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by cjking » Sun Sep 30, 2018 8:24 am

I doubt he predicted those markets were a better bet over three years. Stock-market returns over one year will be close to random, over three years not much less so. Even over the 10 to 30 year periods that are more appropriate for this kind of prediction, they will be a lot of noise overlaying the signal.

I think past threads have established that something like eighteen years is the period CAPE-based predictions perform best over. However that's probably not relevant, as it's likely that valuation-based buy decisions are made without a specific period in mind. If you want to measure how well a prediction has done, measure the outcome over the average of all plausible holding periods. Choosing one fixed end date, short or long, and the results have a good chance of being hugely skewed by noise. Taking an average is a noise-cancelling measure that leaves the signal exposed. Smithers ("Valuing Wall Street") called his measure "hindsight value", and used 40 holding periods of 1 to 40 years for his average.

"Valuing Wall Street", having defined a good metric, shows CAPE performing outstandingly in back-testing. The only time it performs differently/worse than "q", the metric the book is about, is for a few short years at the end of the first world war. (Ironically, "Valuing Wall Street" actually makes CAPE look better than "Irrational Exuberance" did, as Shiller himself judged the performance of CAPE over fixed ten-year periods.)

The fact that luck will always have a big role in returns doesn't mean there's never any value in applying judgement as well.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 8:26 am

afan wrote:
Sun Sep 30, 2018 8:15 am
I don't make investment decisions based on valuations. Too much noise to be useful. To be fair to Shiller, he emphasizes the studies that show valuations to have some preditictive power over the long term. A few years is not long enough to evaluate the accuracy of his country picks.

Among other questions, this raises the frequency of adjustment. If you base your ten year projected returns on current valuations, how often do you change your allocation? If you bought Italy and Spain a few years ago when their CAPEs were low, what do you do now?

1. Use 10 year projections to lock in allocation and change it only every 10 years, based on then current valuations? In other words, ignore current valuations, since you have not waited long enough for your 10 year horizon to play out.

2. Update your allocation at some greater frequency, thus never reaching the 10 years on which your investment approach was based? This would undercut the supposed predictions of CAPE, since you never wait long enough to hit the period when they are most useful.
Are you confusing CAPE10 with 10 year returns?

CAPE10 - estimate of PE ratio using a 10 year historic smoothed earnings series - backward looking. Current Price divided by average of last 10 years of EPS. CAPE10 is a way of avoiding using a forward PE to assess market cheapness or expensiveness and which empirical evidence shows is always wrong, because analysts are too optimistic in their earnings forecasts.

10 year returns - prospective returns in the next 10 years

3. Create a data driven rule that tells you when CAPE has changed enough to abandon your long term projections and rebalance your target allocation? If so, what are the data and what is the rule?
Shiller gives you enough information to do that, I believe. Certain Smithers & Wright, who use Tobin's "q" ratio, but show it is equivalent to Shiller, do.
If Shiller is follows 2 or 3, he would say that Italy and Spain are even better buys now than when he bought them. He should be shedding whatever US stocks he has remaining and putting the money into the lowest CAPE indexes he can find now.

Assuming of course he is doing this in a tax favored account.
Meb Farber has an ETF that invests mechanically in the lowest valuation markets.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 8:31 am

Valuethinker wrote:
Sun Sep 30, 2018 8:22 am

I would quibble with how they are planning to spend the money not the desire to try to do something when the conventional nostrums have failed.

However that does not mean the key decision makers in the Eurozone will accept that strategy.

And the Italian banking system really does worry me. Without having done the analysis, it feels as if there are a bunch of institutions that might be in serious financial trouble - a failure to recognize huge losses on the loan books. See Ireland, UK, Iceland (USA) for that that implies about what happens next.
Yes the 'reddito di cittadinanza' might not solve the problem; Ray Dalio thinks that this kind of measures is not useful; people need to have a meaning (which may come with employment) more than handouts.

I know that a lot of small banks are at high risk. But do you think the big banks (like Intesa San Paolo or Unicredit) or big companies like Assicurazioni Generali can be in danger too?
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 8:34 am

cjking wrote:
Sun Sep 30, 2018 8:24 am
I doubt he predicted those markets were a better bet over three years. Stock-market returns over one year will be close to random, over three years not much less so. Even over the 10 to 30 year periods that are more appropriate for this kind of prediction, they will be a lot of noise overlaying the signal.

I think past threads have established that something like eighteen years is the period CAPE-based predictions perform best over. However that's probably not relevant, as it's likely that valuation-based buy decisions are made without a specific period in mind. If you want to measure how well a prediction has done, measure the outcome over the average of all plausible holding periods. Choosing one fixed end date, short or long, and the results have a good chance of being hugely skewed by noise. Taking an average is a noise-cancelling measure that leaves the signal exposed. Smithers ("Valuing Wall Street") called his measure "hindsight value", and used 40 holding periods of 1 to 40 years for his average.

"Valuing Wall Street", having defined a good metric, shows CAPE performing outstandingly in back-testing. The only time it performs differently/worse than "q", the metric the book is about, is for a few short years at the end of the first world war. (Ironically, "Valuing Wall Street" actually makes CAPE look better than "Irrational Exuberance" did, as Shiller himself judged the performance of CAPE over fixed ten-year periods.)

The fact that luck will always have a big role in returns doesn't mean there's never any value in applying judgement as well.
nice post and thank you (and nice to see you post again; you and Ted Swippet are two of my favourite posters, as UK voices herein).

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 8:40 am

afan wrote:
Sun Sep 30, 2018 8:15 am
I don't make investment decisions based on valuations. Too much noise to be useful. To be fair to Shiller, he emphasizes the studies that show valuations to have some preditictive power over the long term. A few years is not long enough to evaluate the accuracy of his country picks.

Among other questions, this raises the frequency of adjustment. If you base your ten year projected returns on current valuations, how often do you change your allocation? If you bought Italy and Spain a few years ago when their CAPEs were low, what do you do now?

1. Use 10 year projections to lock in allocation and change it only every 10 years, based on then current valuations? In other words, ignore current valuations, since you have not waited long enough for your 10 year horizon to play out.

2. Update your allocation at some greater frequency, thus never reaching the 10 years on which your investment approach was based? This would undercut the supposed predictions of CAPE, since you never wait long enough to hit the period when they are most useful.

3. Create a data driven rule that tells you when CAPE has changed enough to abandon your long term projections and rebalance your target allocation? If so, what are the data and what is the rule?

If Shiller is follows 2 or 3, he would say that Italy and Spain are even better buys now than when he bought them. He should be shedding whatever US stocks he has remaining and putting the money into the lowest CAPE indexes he can find now.

Assuming of course he is doing this in a tax favored account.
Yes these are great questions, I have been wondering about some of these myself. Since I personally had a big lump sum to invest some time ago; I overweighted then those countries that had lower CAPE.
Now when a given country gets cheaper, I tend to buy more of their index (see my thread on Italy).
But I don't think one can develop a strict, optimal strategy to implement this. If you look at how Shiller speaks, he said e.g. here
https://www.telegraph.co.uk/finance/per ... -fund.html
'putting a little bit into Russia is probably a good idea' and other qualitative things like that. I also saw a video by Bogle, on a different subject (relative allocation of stocks to bonds) who said maybe it's good to rebalance, maybe not, probably best to rebalance only when your portfolio gets very unbalanced. So I get the idea that in a subject so ridden with uncertainties, it does not make sense to develop a strict strategy. One can still overweight some lower CAPE markets, without necessarily having strict, optimal rules.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by cjking » Sun Sep 30, 2018 8:41 am

afan wrote:
Sun Sep 30, 2018 8:15 am
Among other questions, this raises the frequency of adjustment. If you base your ten year projected returns on current valuations, how often do you change your allocation? If you bought Italy and Spain a few years ago when their CAPEs were low, what do you do now?
Here's a simple example of a strategy. Imagine there are only two different assets to choose between. Maybe "US equities" and "rest of the world equities". Start off allocated to whichever has the higher smooth earnings yield (1/PE10.) If and when the other goes into the lead by say 0.5%, switch. (The 0.5% margin is to keep switching frequency/costs down.)

You can easily develop slightly more complex variations on this, for example you might want at times to be be half-allocated to each.

My current figures for these two assets, for anyone who is interest, are US equities yielding 3.1%, "rest of the world" yielding 5.1%. These are raw figures, I would adjust both downwards to allow for fund charges and withholding taxes, but at current valuations those adjustments aren't big enough to make a difference to any allocation decisions.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by columbia » Sun Sep 30, 2018 8:49 am

Valuethinker wrote:
Sun Sep 30, 2018 8:26 am
afan wrote:
Sun Sep 30, 2018 8:15 am
I don't make investment decisions based on valuations. Too much noise to be useful. To be fair to Shiller, he emphasizes the studies that show valuations to have some preditictive power over the long term. A few years is not long enough to evaluate the accuracy of his country picks.

Among other questions, this raises the frequency of adjustment. If you base your ten year projected returns on current valuations, how often do you change your allocation? If you bought Italy and Spain a few years ago when their CAPEs were low, what do you do now?

1. Use 10 year projections to lock in allocation and change it only every 10 years, based on then current valuations? In other words, ignore current valuations, since you have not waited long enough for your 10 year horizon to play out.

2. Update your allocation at some greater frequency, thus never reaching the 10 years on which your investment approach was based? This would undercut the supposed predictions of CAPE, since you never wait long enough to hit the period when they are most useful.
Are you confusing CAPE10 with 10 year returns?

CAPE10 - estimate of PE ratio using a 10 year historic smoothed earnings series - backward looking. Current Price divided by average of last 10 years of EPS. CAPE10 is a way of avoiding using a forward PE to assess market cheapness or expensiveness and which empirical evidence shows is always wrong, because analysts are too optimistic in their earnings forecasts.

10 year returns - prospective returns in the next 10 years

3. Create a data driven rule that tells you when CAPE has changed enough to abandon your long term projections and rebalance your target allocation? If so, what are the data and what is the rule?
Shiller gives you enough information to do that, I believe. Certain Smithers & Wright, who use Tobin's "q" ratio, but show it is equivalent to Shiller, do.
If Shiller is follows 2 or 3, he would say that Italy and Spain are even better buys now than when he bought them. He should be shedding whatever US stocks he has remaining and putting the money into the lowest CAPE indexes he can find now.

Assuming of course he is doing this in a tax favored account.
Meb Farber has an ETF that invests mechanically in the lowest valuation markets.
Are referring to GVAL? How long does Faber stipulate that it will take for this bet to pay off? (It hasn’t so far.)

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by cjking » Sun Sep 30, 2018 8:51 am

My current strategy restricts me to holding twice a countries share of world market capitalisation, so I've piled into Italy and Spain to the maximum extent allowed. Which means 1.6% exposure to Italy and and 1.8% to Spain.

Us "market-timers" like to live dangerously. :D

(After implementing a change in strategy over the past week, my exposure to US equities has fallen from 18% to zero.)

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Valuethinker » Sun Sep 30, 2018 8:52 am

Lauretta wrote:
Sun Sep 30, 2018 8:31 am
Valuethinker wrote:
Sun Sep 30, 2018 8:22 am

I would quibble with how they are planning to spend the money not the desire to try to do something when the conventional nostrums have failed.

However that does not mean the key decision makers in the Eurozone will accept that strategy.

And the Italian banking system really does worry me. Without having done the analysis, it feels as if there are a bunch of institutions that might be in serious financial trouble - a failure to recognize huge losses on the loan books. See Ireland, UK, Iceland (USA) for that that implies about what happens next.
Yes the 'reddito di cittadinanza' might not solve the problem; Ray Dalio thinks that this kind of measures is not useful; people need to have a meaning (which may come with employment) more than handouts.
The world has changed. Pensions are a handout that people mentally link with "employment" but, in fact, are simply a handout. No one with a cushy corporate or civil service pension likes to think they are a parasite, economically draining society, but they are (in narrow economic terms *except* for the services they provide looking after grandchildren** etc). Old age pensions were introduced by Bismark as a way of undercutting the Catholic Church in his unified German state ("kulturkampf") and, not coincidentally, crushing the Polish nation. Up until then through history, we didn't live too long after ceasing to work, and our families looked after us. It's that danged Mediterranean diet again, if only Italians did not live so long ;-).

So to the universal basic income - admitting that we cannot always, everywhere, ensure people have work. That it is not "unemployment insurance" but "income insurance". But we can ensure they don't starve or be homeless. In the age of Robots, having regular work may become a privilege, rather than a norm (I suspect not; at least I can't see robots doing too well caring for the personal needs of elderly people; nor fixing my plumbing).

But I was being simply narrowly Keynesian. Give people more money to spend and they will spend it, and that will generate jobs and growth. Especially if you give money to people with no disposable income, who absolutely cannot save it. Italy grows a lot of its own food and other necessities, so these poor Italians will spend it in Italy, whereas I might spend a tax cut holidaying in Tuscany ;-) which won't do the British economy much good - -even if I need a visa post Brexit for my Italian holidaying ;-).

Beyond doubt, Italian bridges and roads need to be checked and repaired (I was going to post a smiley, but to the people of Genoa, this is not funny).

Even a lower pension age makes a certain sort of sense. If you have record youth unemployment, then encouraging people to retire helps those young people get on the employment ladder.
I know that a lot of small banks are at high risk. But do you think the big banks (like Intesa San Paolo or Unicredit) or big companies like Assicurazioni Generali can be in danger too?
I have not done any research on this. Right now it feels like the solution is the one the Japanese adopted - get big banks to take over smaller ones. That doesn't solve the problems, though. It just puts off the evil day. To be fair to the Japanese they muddled through. Chase etc. were de facto broke over the Third World debt crisis of the late 70s/ early 80s, but they managed to muddle their way out the other side.

Italy is very much the Japan of Europe but without some of Japan's strengths, and with the straightjacket of the Euro. That makes things difficult.

The shock that RBS (at that time, something like the world's 5th largest bank by assets) and HBOS (Halifax and Bank of Scotland were two of the oldest most conservative financial institutions in the UK) could effectively go broke was... shocking. That makes me doubt that big banks are inherently safer than small banks - bad banking is bad banking.

Generali? I really don't know. It's one of the world's largest insurers so I would hope not. But I don't know enough about it.

There's a "reflexivity" problem (in Soros - speak) here. These Italian financial institutions hold a lot of Italian government bonds. A restructuring of those, or even the threat of same, could precipitate falls in the asset values of those institutions, thus wiping out their equity capital (Assets = Liabilities (policy holders or depositors) + Equity). Thus precipitating a panic and a crisis.

** I am pretty sure this is why, evolutionarily, we have the life lengths we do for humans, especially women. Elephant troops rely on the grandmother elephants to remember, 50 years back, where the water holes are, what is dangerous, etc-- they have proven they do have these memories. And to share looking after the baby elephants. In human associations too, someone to look after the small children and to hold the group wisdom.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by letsgobobby » Sun Sep 30, 2018 9:03 am

duffer wrote:
Sat Sep 29, 2018 8:29 pm
In March 2015, Robert Shiller said publicly that he was buying indexes in Italy and Spain. He also said he wanted to get out of U.S. equities. He was basing his investment decision in significant part on the CAPE ratios for those countries.

More specifically, he told CNBC "I'm thinking about getting out of the United States somewhat. Europe is so much cheaper....What I have done is I've invested in Italy indexes, Spain index." (Source: https://seekingalpha.com/article/303137 ... make-sense)

Using the iShares Italy and Spain etfs (EWI and EWP) as measures of how these countries indexes have done, Shiller's investment would be down 7.16% in Italy and 15.33% in Spain (source: Morningstar, EWI and EWP from March 1, 2015 to September 28, 2018).

On the other hand, the IVV, representing the U.S. equities that he wanted to get out of, is up 38% over the same period.
A little smug for a race which may not yet be over, eh?

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 9:30 am

duffer wrote:
Sat Sep 29, 2018 8:29 pm
In March 2015, Robert Shiller said publicly that he was buying indexes in Italy and Spain.
After doing some search, I don't believe that what you state is accurate. Shiller had already bought Italian stocks before 2015, and as this article shows, he had done quite well with his investment.
https://www.telegraph.co.uk/finance/per ... -fund.html

Since we don't knwo when he invested, it's not really possible to compare his investment with other strategies. Above all, as noted by other posters, strategies based on valuations should be judged over a much longer time horizon than a few years.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 10:36 am

Lauretta wrote:
Sun Sep 30, 2018 9:30 am
duffer wrote:
Sat Sep 29, 2018 8:29 pm
In March 2015, Robert Shiller said publicly that he was buying indexes in Italy and Spain.
After doing some search, I don't believe that what you state is accurate. Shiller had already bought Italian stocks before 2015, and as this article shows, he had done quite well with his investment.
https://www.telegraph.co.uk/finance/per ... -fund.html

Since we don't knwo when he invested, it's not really possible to compare his investment with other strategies. Above all, as noted by other posters, strategies based on valuations should be judged over a much longer time horizon than a few years.
I think you are wrong. In any reasonable understanding of what he was saying and publicly recommending by speaking on CNBC, he was recommending those country stocks then. However, even if we take your speculation that he had bought earlier as true, he still did terribly:

If he bought a year before he talked about it on CNBC in September 2015, then he was down 14.6% in Spain and down 2.7% in Italy over that longer period to the present (9/1/2014 to 9/30/2018, again using the EWP and the EWI as the country indexes). During the same period, the U.S. (as measured by FUSEX) was up 57.7%.

I guess you could argue that over some longer term, like 20 years, he might be up, at least a bit. I guess that would be a sort of "buy and fold" strategy.
Last edited by duffer on Sun Sep 30, 2018 11:07 am, edited 5 times in total.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by willthrill81 » Sun Sep 30, 2018 10:38 am

Valuethinker wrote:
Sun Sep 30, 2018 7:41 am
willthrill81 wrote:
Sat Sep 29, 2018 11:25 pm
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
IIRC, he called a lot of other market crashes that never materialized as well. The broken clock is right twice a day.
Which other bubbles do you recall him predicting?
Shiller is a perma-bear. He has been calling for poor returns for the U.S. ever since he mined CAPE. Granted, that's not quite the same as a market crash, but he's been wrong at least as often as he's been right.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 10:48 am

duffer wrote:
Sun Sep 30, 2018 10:36 am

I think you are wrong. In any reasonable understanding of what he was saying and publicly recommending by speaking on CNBC, he was recommending those country stocks then. However, even if we take your speculation that he had bought earlier as true, he still did terribly:

If he bought a year before (September 2014) he talked about it on CNBC, then he was down 14.6% in Spain and down 2.7% in Italy (again, using the EWP and the EWI as the country indexs). During the same period, the U.S. (as measured by FUSEX) was up 57.7%.

I guess you could argue that over some longer term, like 20 years, he might be up, at least a bit. I guess that would be a sort of "buy and fold" strategy.
Well, if you look at the video (do you have access to it?), at about 50 sec he says that he had already bought Italy. So I am not really speculating...
https://www.cnbc.com/2015/02/18/i-may-g ... iller.html

We don't know when, but like the Telegraph article I posted earlier says, the FTSE MIB did very well in 2013. But more importantly, these are short time spans during which predictions are not meaningful.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Carlos Danger » Sun Sep 30, 2018 10:57 am

It's great that Shiller continues to teach/do academic work instead of living on a yacht since he's a multi-billionaire.

He is a multi-billionaire, right? I mean, afterall, he accurately sees/forecasts bubbles.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 11:04 am

Carlos Danger wrote:
Sun Sep 30, 2018 10:57 am
It's great that Shiller continues to teach/do academic work instead of living on a yacht since he's a multi-billionaire.

He is a multi-billionaire, right? I mean, afterall, he accurately sees/forecasts bubbles.
Yes, his friend David Swensen is probably not a multibillionaire either, though he can successfully beat the market as he has shown with the Yale foundation. So I still like to listen to them. Like Swensen says here, when you work in academia you may be motivated by other things than making the max amount of money for yourself.
https://www.youtube.com/watch?v=wRdx7kVNQ_E

Also, if you like to listen to multibillionaires, you may listen to Cliff Asness, who also likes CAPE to estimate future returns. (I personally think he became a billionaire through excellent marketing skills, not because he is a better at quantitative research than Fama or Shiller). I have btw corresponded with people at AQR last week, who also think that overweighting countries with lower CAPE is a good strategy.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 11:13 am

Lauretta wrote:
Sun Sep 30, 2018 10:48 am
duffer wrote:
Sun Sep 30, 2018 10:36 am

I think you are wrong. In any reasonable understanding of what he was saying and publicly recommending by speaking on CNBC, he was recommending those country stocks then. However, even if we take your speculation that he had bought earlier as true, he still did terribly:

If he bought a year before (September 2014) he talked about it on CNBC, then he was down 14.6% in Spain and down 2.7% in Italy (again, using the EWP and the EWI as the country indexs). During the same period, the U.S. (as measured by FUSEX) was up 57.7%.

I guess you could argue that over some longer term, like 20 years, he might be up, at least a bit. I guess that would be a sort of "buy and fold" strategy.
Well, if you look at the video (do you have access to it?), at about 50 sec he says that he had already bought Italy. So I am not really speculating...
https://www.cnbc.com/2015/02/18/i-may-g ... iller.html

We don't know when, but like the Telegraph article I posted earlier says, the FTSE MIB did very well in 2013. But more importantly, these are short time spans during which predictions are not meaningful.
I granted your speculation about his purchasing earlier, and you are still wrong about whether CAPE produced a good investment, and Shiller, acting on the basis of CAPE, still did poorly. Plus, he was clearly recommending Italy, Spain and even Russia to others in September 2015.

Nobel prizes do not signify wisdom in all areas of human endeavor. While Nobel winners have done important work in a narrow area of their specialization, they usually are wrong about many other things, sometimes famously so.
Last edited by duffer on Sun Sep 30, 2018 11:21 am, edited 1 time in total.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 11:18 am

duffer wrote:
Sun Sep 30, 2018 11:13 am


Nobel prizes do not signify wisdom in all areas of human endeavor. While Nobel winners have done important work in a narrow area of their specialization, they usually are wrong about many other things, sometimes famously so.
I really don't want to argue with you, so I am happy you found the best strategy for you and I wish you all the best.
Let me just say though that Shiller got the Nobel Prize for economics, so he was not talking about 'other things', he was talking about the very subject he got the Nobel prize for. Anyway I tend to agree with Taleb that the Nobel Prize for economics has often been awarded to donkeys, so the Nobel Prize is not the reason why I like Shiller.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 11:39 am

Valuethinker wrote:
Sun Sep 30, 2018 8:52 am
No one with a cushy corporate or civil service pension likes to think they are a parasite, economically draining society, but they are (in narrow economic terms *except* for the services they provide looking after grandchildren** etc).


** I am pretty sure this is why, evolutionarily, we have the life lengths we do for humans, especially women. Elephant troops rely on the grandmother elephants to remember, 50 years back, where the water holes are, what is dangerous, etc-- they have proven they do have these memories. And to share looking after the baby elephants. In human associations too, someone to look after the small children and to hold the group wisdom.
That's an interesting point - like others you make in your post. Toynbee thought that mothers should be given a salary compared to that of magistrates or professors (but I know from personal experience that the latter is not very attractive, so I'd go for magistrate salary :wink: ) for raising and educating their children, since this role has a very important social function. So I think this reasoning can indeed be extended to the role of grandparents.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by InvestInPasta » Sun Sep 30, 2018 11:42 am

Taylor Larimore wrote:
Sat Sep 29, 2018 8:55 pm
Duffer:

Thank you for your post. It provides more evidence that it is impossible to forecast future returns.

A good solution: Buy the market and stay-the-course.

Best wishes.
Taylor
+1

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Moreover it's too hard to ignore emotions when investing in an active way.

Let's say Shiller predicion will prove to be right, and in 2025 Italy and Spain will have done better than World market. How would an investor feel if he has put his money in Italy/Spain markets and for the next 2-3 years (let's say until 2022) World market goes on performing better than Italy/Spain?
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 11:48 am

InvestInPasta wrote:
Sun Sep 30, 2018 11:42 am


Let's say Shiller predicion will prove to be right, and in 2025 Italy and Spain will have done better than World market. How would an investor feel if he has put his money in Italy/Spain markets and for the next 2-3 years (let's say until 2022) World market goes on performing better than Italy/Spain?
Excellent point, that's why I think it's good to own the world, and then add a tilt to value or other strategies if you are inclined to do so. Last year my portfolio did a lot better than MSCI World, this year it's doing worse. The fact that I own US stocks, even though underweight relative to MSCI World, makes me minimize the regret that I would have if I had just invested in low CAPE countries (or small caps, which I also tilt towards).
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by duffer » Sun Sep 30, 2018 12:58 pm

Lauretta wrote:
Sun Sep 30, 2018 11:18 am
duffer wrote:
Sun Sep 30, 2018 11:13 am


Nobel prizes do not signify wisdom in all areas of human endeavor. While Nobel winners have done important work in a narrow area of their specialization, they usually are wrong about many other things, sometimes famously so.
I really don't want to argue with you, so I am happy you found the best strategy for you and I wish you all the best.
Let me just say though that Shiller got the Nobel Prize for economics, so he was not talking about 'other things', he was talking about the very subject he got the Nobel prize for. Anyway I tend to agree with Taleb that the Nobel Prize for economics has often been awarded to donkeys, so the Nobel Prize is not the reason why I like Shiller.
I don't particularly want to argue either, but I am happy to discuss issues or to argue politely.

At the same time Shiller got the Nobel, so did Eugene Fama. Fama's viewpoint, for work related to which he got the Nobel with Shiller, is essentially opposite to Shiller. Fama thinks that the market virtually always prices things right (the "efficient market hypothesis") and that bubbles don't exist, including the bubbles that Shiller is forever looking for. Fama is the founder of DFA which features factor funds. So, you can choose your Nobel winner. The Nobel per se shouldn't mean much to an investor.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by HomerJ » Sun Sep 30, 2018 1:25 pm

whodidntante wrote:
Sun Sep 30, 2018 12:32 am
AlohaJoe wrote:
Sun Sep 30, 2018 12:02 am
whodidntante wrote:
Sat Sep 29, 2018 10:51 pm
Shiller is a Nobel laureate who correctly called the dot bomb and the housing bubble. I bet people made fun of him then, too.
It is arguable whether he "correctly" called it. Didn't he call it over three years too early? That's a failed trade; anyone who followed that lost money

I'm not sure that "a crash is going to happen and any crash in the next five years means I get credit for predicting it" is exactly fair. Getting the timing right is the biggest part of making a prediction, I'd think.
Shiller was three years early with the housing bubble prediction, yes. It was the same year that Michael Burry realized it, so he was also early. Burry managed to position his fund to profit from it, so I wouldn't say that getting the timing right is always critical.
He was 4 years early with the dot-com prediction. He predicted ten-year 0% real return in 1996, 4 years before the actual crash.

The market more than doubled, then dropped 40%. It never got as low as it was in 1996.

He (like all of us) is unable to predict the future.
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by marcopolo » Sun Sep 30, 2018 1:27 pm

cjking wrote:
Sun Sep 30, 2018 8:24 am
I doubt he predicted those markets were a better bet over three years. Stock-market returns over one year will be close to random, over three years not much less so. Even over the 10 to 30 year periods that are more appropriate for this kind of prediction, they will be a lot of noise overlaying the signal.

I think past threads have established that something like eighteen years is the period CAPE-based predictions perform best over. However that's probably not relevant, as it's likely that valuation-based buy decisions are made without a specific period in mind. If you want to measure how well a prediction has done, measure the outcome over the average of all plausible holding periods. Choosing one fixed end date, short or long, and the results have a good chance of being hugely skewed by noise. Taking an average is a noise-cancelling measure that leaves the signal exposed. Smithers ("Valuing Wall Street") called his measure "hindsight value", and used 40 holding periods of 1 to 40 years for his average.

"Valuing Wall Street", having defined a good metric, shows CAPE performing outstandingly in back-testing. The only time it performs differently/worse than "q", the metric the book is about, is for a few short years at the end of the first world war. (Ironically, "Valuing Wall Street" actually makes CAPE look better than "Irrational Exuberance" did, as Shiller himself judged the performance of CAPE over fixed ten-year periods.)

The fact that luck will always have a big role in returns doesn't mean there's never any value in applying judgement as well.
I have no idea if the current value of CAPE will be predictive in the near or longer term.

I do find it interesting that this argument about longer term predictions and "the game is not over yet, he might still be right", seems to only be dragged out when the prediction is wrong in the near term. Everybody touted the valuation-based call on the tech and housing bubble pretty much right as they happened. Where were all the "Valuation are predictive over the long term, you can't judge it on just a few short years" back then. Even now, we have not reached the 18 years you mention from his CAPE-based (and housing) warnings prior to 2008-2009, but that does not seem to stop those same people from crowing about how spot on he was about that.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by letsgobobby » Sun Sep 30, 2018 2:04 pm

He was 4 years early with the dot-com prediction. He predicted ten-year 0% real return in 1996, 4 years before the actual crash.

The market more than doubled, then dropped 40%. It never got as low as it was in 1996.
The average price of the S&P500 in 1996 seems like it was ~675. The price on March 9 2009 was 675. This does ignore dividends. However, those were relatively low for the duration of this episode. During this period of 12.5 years, the investor experienced two massive bear markets of 40-60%. The S&P was simply a terrible investment given its near zero return and extraordinary volatility. An investor in nearly any other asset class - small, international, gold, treasuries, TIPS - did far better with less volatility.

Homer, I think your facts are not correct.

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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by HomerJ » Sun Sep 30, 2018 2:26 pm

letsgobobby wrote:
Sun Sep 30, 2018 9:03 am
A little smug for a race which may not yet be over, eh?
This is true enough.
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marcopolo
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by marcopolo » Sun Sep 30, 2018 2:34 pm

letsgobobby wrote:
Sun Sep 30, 2018 2:04 pm
He was 4 years early with the dot-com prediction. He predicted ten-year 0% real return in 1996, 4 years before the actual crash.

The market more than doubled, then dropped 40%. It never got as low as it was in 1996.
The average price of the S&P500 in 1996 seems like it was ~675. The price on March 9 2009 was 675. This does ignore dividends. However, those were relatively low for the duration of this episode. During this period of 12.5 years, the investor experienced two massive bear markets of 40-60%. The S&P was simply a terrible investment given its near zero return and extraordinary volatility. An investor in nearly any other asset class - small, international, gold, treasuries, TIPS - did far better with less volatility.

Homer, I think your facts are not correct.
1996 + 10 = 2006. Are you sure Homer was not correct?
If your point is that markets can drop 50% at any random time in the future, I agree with you, Homer J says so all the time as well.
But, that does not make the 1996 call any more correct.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Lauretta
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Re: CAPE-Based Robert Shiller Bought Italy and Spain Indexes in 2015

Post by Lauretta » Sun Sep 30, 2018 2:45 pm

duffer wrote:
Sun Sep 30, 2018 12:58 pm
Lauretta wrote:
Sun Sep 30, 2018 11:18 am
duffer wrote:
Sun Sep 30, 2018 11:13 am


Nobel prizes do not signify wisdom in all areas of human endeavor. While Nobel winners have done important work in a narrow area of their specialization, they usually are wrong about many other things, sometimes famously so.
I really don't want to argue with you, so I am happy you found the best strategy for you and I wish you all the best.
Let me just say though that Shiller got the Nobel Prize for economics, so he was not talking about 'other things', he was talking about the very subject he got the Nobel prize for. Anyway I tend to agree with Taleb that the Nobel Prize for economics has often been awarded to donkeys, so the Nobel Prize is not the reason why I like Shiller.
I don't particularly want to argue either, but I am happy to discuss issues or to argue politely.

At the same time Shiller got the Nobel, so did Eugene Fama. Fama's viewpoint, for work related to which he got the Nobel with Shiller, is essentially opposite to Shiller. Fama thinks that the market virtually always prices things right (the "efficient market hypothesis") and that bubbles don't exist, including the bubbles that Shiller is forever looking for. Fama is the founder of DFA which features factor funds. So, you can choose your Nobel winner. The Nobel per se shouldn't mean much to an investor.
Right, so we agree that the Nobel does not matter. I wonder, did you read my previous message? In it I had written:
Anyway I tend to agree with Taleb that the Nobel Prize for economics has often been awarded to donkeys, so the Nobel Prize is not the reason why I like Shiller.
So I am a bit puzzled that you keep mentioning the Nobel prize.

As far as Fama is concerned, he also found that value stocks (stocks with low valuations) have higher returns than stocks with high valuations. He published a famous paper with French on the subject in 1992. So using the CAPE ratio (which is just a version of the PE ratio which takes into account earnings over roughly a market cycle) for one's allocation is consistent with Fama's findings.
The main difference is that Fama thinks that value stocks have higher returns because they are riskier, not because of market inefficiencies.
Last edited by Lauretta on Sun Sep 30, 2018 2:47 pm, edited 2 times in total.
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