Post #4601 by mungofitch on the Mechanical Investing board

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Investment Strategies / Mechanical Investing

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Calculating CAPE is pretty hard. Could you just use the median p/e?

You generally can't do math on P/E ratios. (imagine one period of zero or negative earnings...) You can calculate the median P/E, but you can't average a bunch of those, which you probably need to do. Instead, do math on earnings yields. So you can calculate the average EY=E/P over time or among companies.

I think the average (through time) of the median (among the companies) EY would be the best, it would give a very stable figure you could average to get a sense of "normal" valuation. Then compare the current median EY among companies to that stable historical norm. This is pretty much the method I use to value the Nasdaq 100.

Jim

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