The Shiller P/E Ratio is a powerful and accurate way to assess long-term valuation, because it evens out the sometimes misleading readings of the basic P/E Ratio.
The P/E Ratio is a core metric used by investors, financial analysts, and anyone that is interested in finding the valuation of a stock. It simply tells you the multiple a stock trades at relative to earnings over a single 1-year time period (trailing 12 months EPS, current year EPS, or next year EPS).
However, this metric can offer a distorted view, since it relies on a single year’s results, which can be temporarily high or temporarily low. To solve this dilemma, Yale Professor Robert Shiller came up with a way to look at the stock (or market) multiple relative to real earnings that are ‘normalized’ for events that are expected to be temporary.
His solution is now called the Shiller P/E Ratio, also known as the CAPE (Cyclically-Adjusted Price-to-Earnings) Ratio. Learn more about this important long-term valuation tool in this whitepaper.