This is a guestpost from u/UsefulBeginning which we thought could be useful for many people:


The Cyclically Adjusted Price-to-Earnings ratio is said to be one of the best long term returns predictors of the market.

A few days ago I shared some work I did almost 3 years ago to find out this ratio and I’ve been updating that work over the last few days.

I created two sheets, one to calculate the CAPE at 31/12/2017. Another one to calculate the real time price of the index relative to the price at 31/12/2017. I could have done it in one sheet, but I did it in two, no particular reason.

Why do I need a spreadsheet to calculate the variation of the index? I couldn’t find any chart online for this index. Even if I had, I think not looking at charts it’s a psychological advantage.


Notes:

  1. I only did (for the moment) the first 30 companies by cap. It was just too much work. They cover about 1/3 of the total capitalization of the index which should give you a fair idea.
  2. I’ve been rigorous. I took the net income by looking for each company’s income statement. And for the market cap I also searched the number of outstanding shares for each company in their websites instead of relying in what bloomberg/yahoo/ft told me the capitalization was. As it turns out 1) the are not reliable, 2) they don’t give you the capitalization at a particular point in time (31/12/2017 in this case). In just a couple of cases I could not reliably find the outstanding share count to calculate the market cap so I used the market cap as I found it elsewhere.
  3. I have only 8 years worth of data, instead of the 10 that the ratio is supposed to be.

  • Why am I sharing it here?

I think FIRE and index investing are intimately related.

  • Why calculating the CAPE instead of just putting all the retirement money in the index and forget about it?

In my case, there is a part of me that believes that I can do stock picking and there is another part that suspects that maybe I think I’m smarter than I am. So, compromising, I aim to keep a significant part of my portfolio invested in the index unless the prices get too hot, where I would reduce and move to the actively managed part.

It also doesn’t hurt to have an idea of the pricing of your portfolio, although personally I would not use that info to try to time the market.

  • Why choosing the msci europe index?

It is one of the European indices for which there is a Vanguard fund, which I am invested in.

https://docs.google.com/spreadsheets/d/14yVrJdZGnaXQUlwUGjZcCmaDRxhU1B028rlHVAc4oJk/edit?usp=sharing

https://docs.google.com/spreadsheets/d/1rMvpwdtDaq4Zr1coWbHW_4L9NuI40jwZA1hejGU7EbY/edit?usp=sharing

EDIT:

Well, I recently realized I made a mistake with some of the earnings data where I took the number from the “net income” line instead of “net income attributable to shareholders” or similar, the one that excludes minority interests, which should be the proper number to use to calculate the PER.

The cells where I have made sure I took the right number are now shaded in gray. The rest may or may not be the right figure! It shouldn’t be too different though.

Source: reddit.com/r/EuropeFIRE