Nobel Prize winning economist Robert Shiller, who also teaches at Yale University, likes to troll the global markets for investment opportunities. In a recent interview with Yahoo Finance he explained his investing style. “I believe in value investing and I look at the valuations of the markets.”
While the average investor may use the standard price-to-earnings ratio to determine the value of say the S&P 500 (^GSPC), Shiller has taken it a step further. “I have my own price earnings ratio called CAPE, real price divided by 10-year average real earnings,” he explained. While more bullish on Europe, Shiller does believe U.S. corporate earnings are growing nicely.
The CAPE Ratio, or the Cyclically Adjusted Profit Earnings Ratio, as it's formally known is telling Shiller to shift money into European equities. “The U.S. is getting up close to 28 on the ratio, almost twice the historical average of Europe, the EU is more like the historical average.”
What about a potential recession in Europe and the threat of Greece exiting the European Union? If investors are diversified, which Shiller highly recommends, investing in risky pockets of Europe, should not be a problem. “Investing in Greece as part of a diversified portfolio and you can put in wildly risky things... as long as you keep it measurable.”
Shiller’s best selling book Irrational Exuberance, which studies historical financial market trends, is in its 3rd edition.
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