No. of Recommendations: 1
If you insist that treating R&D as a capital asset instead of a current period expense, yet at the same time insist that one-off write downs of assets are nonexistent expenses, you are manipulating numbers into some alternate version of reality.
If an asset write down is not an expense, what is it? Is it just some kind of unneeded accounting convention that has no value and can therefore be ignored, or is it an attempt by accountants to show the results of management’s previous actions by both trueing up the balance sheet and reporting a poor expenditure of shareholders’ monies? How is this not a desirable piece of information for valuation purposes?
So, instead of ignoring a one-off item, at least treat it like you desire to treat R&D and record a deferred expense that will be amortized against past earnings and previous p/e calculations.
I remember a nearly $100 billion write down of the AOL purchase. I think it was by some variety of Warner. Was that acquisition of no consequence to the purchasing company’s shareholders and of no reflection on the acumen of its management? Would the historic record be more or less accurate and useful if it was conveniently erased?
The goal of CAPE-H ist not to calculate a theoreticaly correct fair value of a company or of the index but to remove the noise that gets introduced by big one time writedowns, i.e. companies tend to cluster the big bath write offs during recessions which then distort the CAPE calculation for years. If you keep that in mind the adjustment makes sense for this purpose. The stronger correlation of CAPE-H with 10-year returns, compared to CAPE, seems to validate this adjustment.
