The Most Important Thing I Read All Year: Use CAPE Ratios to Base Investment Decisions- Mike Swanson (12/28/12)
I've shared with you lots of information this year - things I've written and things I've read and passed on to you. Most of my success this year has been due to one thing - investing in a place where no one else would, because valuations there were and still are super cheap - Europe.
One of things I passed on to you this year was a paper by Mebane Faber in which he showed how to use cyclically adjusted P/E ratio's to figure out what countries to invest in. He back tested a hundred years of data to demonstrate what the results would be. The paper explains what CAPE ratios are and why they work. It shows you why you low valuations often trump BAD NEWS in the long run ad reward investors who take advantage of them.
If you didn't read this paper this year, missed out on investing in Europe, or want to make money in the future I suggest you read it. You can find it by clicking here.
I think it is the most important thing I read all year when it comes to investing. Value investing is the way people like John Templeton and Warren Buffet made their fortunes. They bought into stocks and markets when they were truly cheap. Using CAPE ratios is an easy way to do this.
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