No. of Recommendations: 1
Actually I think perhaps you've missed the point. They are real losses, to some passable degree of precision. If you (say) spend a billion buying or building a product that never sells, that's a real reduction to your firm's owner earnings for the decade, and incidentally the share's value. It doesn't matter which year they occurred in---a big lump during a recession because you bought it, or little amounts expensed every year because you built it or because under old rules you'd have goodwill amortization every year. The whole *point* of the CAPE ten year lookback is to get some good years and some inevitable bad years in the mix to get an idea of what an "average" period looks like. If you eliminate the very bad years, you eliminate the whole benefit of the smoothing. The big write-offs are critical, since they are so frequent that they are a normal part of business. That's the only reason to use anything other than the current year results.
I get your point and I completely agree that these losses are real and reduce owner earnings and you certainly want to take them into account when valuing a single company. But how do you reconcile this with the fact that CAPE-H statistically outperforms the classic CAPE in predicting future 10-year returns?
