A Good Question For Shiller Fans

by: Jeff Miller

I love great questions from readers. These are often the source of new ideas for articles. That is the case tonight, but there is a twist: The commenters have conflicting perspectives.

I want to write something on this theme, but before doing so I solicit comments. Here is the dilemma:

  1. Shiller disciples use this approach to earnings: "Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10 - FAQ."
  2. At the same time, Shiller disciples frequently express concern about profit margins because they currently exceed historical averages.

My simple question is, "Why does a Shiller disciple care about profit margins?"

If your method only looks at the trailing earnings from the last ten years, and you think that stocks need to decline 30% or so before you would consider buying, then why the interest in profit margins? This only affects current and forward earnings, which have little effect on your metrics.

This would seem to be a question of far greater interest for those who see expected earnings as relevant. Before attempting to answer these questions on a familiar topic, I solicit reader input...

Thanks in advance!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.