Robert Shiller’s CAPE

I have long held the view that using Robert Shiller’s CAPE to determine whether stocks are under- or over-priced is misleading. Average levels for CAPE have shifted over time, and one cannot rely solely on historic highs and lows as a measure of whether the market is over-bought or over-sold.

So I was interested to learn that Robert Shiller currently maintains 50% of his investment portfolio in stocks. From an interview with Jason Zweig at WSJ:

Today’s level “might be high relative to history,” Prof. Shiller says, “but how do we know that history hasn’t changed?” So, he says, CAPE “has more probability of predicting actual declines or dramatic increases” when the measure is at an “extreme high or extreme low.” ….Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.