Unlike other popular valuation metrics, which measure the level of the S&P 500 against expected earnings, sales, cash flow or some other metric, the CAPE ratio takes the level of the S&P 500 and divides it by the average inflation-adjusted earnings of its constituent companies over the past decade.The CAPE ratio, a popular valuation metric devised by Yale economist Robert Shiller, has been pressing higher since the bull run began. It stood just shy of 38 as of late August, a level it hasn’t visited since la ...

As I write this article, the Shiller PE has crossed the 40 mark. This ratio, also known as the CAPE ratio (Cyclically Adjusted Price-to-Earnings), is a valuation measure developed by economist Robert Shiller to assess how expensiveThe author is a mechanical engineer. He holds a B.S. in Mechanical Engineering and an M.B.A in Finance. He employs evidence and factor-based investing in his personal portfolio.He will sometimes seculate for fun and take small positions in individual stocks he believes are trading ...

Market Valuation - CAPE ratio evaluates market value using historical earnings data [1] - The report defines the CAPE ratio, its formula, uses, and limitations [1] Market Prediction - The report explores the CAPE ratio's ability to predict market trends [1]

Core Insights - Warren Buffett is recognized as one of the greatest investors due to his successful capital allocation at Berkshire Hathaway, achieving nearly 20% annualized returns over six decades [1] - Buffett advises average investors to consider investing in an S&P 500 index fund, highlighting that even small investments can grow significantly with patience and discipline [2] Investment Strategy - Investors are encouraged to consider the Vanguard S&P 500 ETF, which could potentially grow a monthly investment of $1,000 into $252,000 over 10 years [3][7] - The S&P 500 index has delivered a total return of 255% over the past decade, translating to an annualized return of 13.5%, exceeding its long-term average of 10% [5] ETF Characteristics - The Vanguard S&P 500 ETF tracks the performance of S&P 500 stocks and is managed by a reputable firm with trillions in assets, providing investor confidence [6] - The ETF has a low expense ratio of 0.03%, aligning with Buffett's preference for low-cost investment options [8] Future Performance Considerations - While past performance does not guarantee future results, if the next decade mirrors the last, a consistent investment strategy could yield substantial returns [7] - Current high valuations, indicated by a CAPE ratio of 37.8, suggest that future returns may be lower than historical averages [10] - Factors such as rising government spending and liquidity could potentially support asset prices, leading to returns that match or exceed the previous decade [12]