CAPE Valuations March 2017

Home country bias.  The predilection for investors to invest their money in the country in which they reside, and therefore know the most about.  To varying degrees, most investors have at some point suffered from this.  Many still do.  When starting out, it makes sense to focus on those markets you know that little bit better.  Those companies you may use often, or at least are more aware of.

CAPE Valuations March 2017

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CAPE Valuations December 2016

A few months ago I wrote an article updating the cheapest countries by CAPE ratio as listed in Meb Faber’s Global Value.  The article was called Finding Value in a Global Environment, and sought to look at the performance that would have been obtained had one invested in an ETF tracking the markets of each of those ten countries.  As a reminder, the CAPE (Cyclically Adjusted Price-Earnings ratio) was created by Professor Robert Shiller and works by taking the price of a market/stock/sector and dividing it by the average of ten years of earnings, adjusted for inflation.  I highly recommend the work of the aforementioned Faber on the CAPE ratio if you want to find out more (https://mebfaber.com/).

As a strategy I find it extremely interesting that this valuation method can be used as a tool to help ascertain which countries could be determined as “cheap” and “expensive”.  I will therefore be adding an article every three months or so showing the performance of the ten cheapest countries for the previous quarter.  This is more for my records, but if its interesting at all to you, more the better.

CAPE Valuations December 2016

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Finding Value in a Global Environment

I recently finished three short books by Meb Faber, entitled Global Value, Global Asset Allocation and Shareholder Yield.

There are many talking points from these, however I’d like to focus specifically on Global Value today.  The book is as its title suggests, focussed on identifying value outside of his home country, the US.

Home Country Bias

One bizarre, yet predictable problem most individual investors have is something called “home country bias”, the tendency to invest most of your assets in the country and markets in which you live.  I myself am guilty of this (just look at the portfolio) and it is something I am attempting to move away from over time.

I do however remain a “bottom-up” rather than “top-down” investor.  I look to find undervalued companies and then look at broader market conditions, rather than the other way around.  I also have in my favour the fact that the CAPE ratio for the UK is historically below-average.  Aah, but what is the CAPE, I hear you ask (hopefully!).

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