Does Warren Buffett Use The CAPE Ratio?

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Does Warren Buffett Use The CAPE Ratio?

The Cape Ratio Weekly is a newsletter devoted to the CAPE Ratio. The latest issue dated October 1, 2013, analyzes whether Buffett, the ultimate value investor, uses the ratio in his investment analysis.

But, first, CAPE Ratio 101…

What is the CAPE ratio? The acronym stands for Cyclically Adjusted Price Earnings Ratio, and is a means to arrive at a valuation of a stock, or a market.

It is calculated by dividing the price by the average of 10 years of inflation-adjusted earnings.

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The use of 10-years of earnings data is preferred to one-year data as the latter may be too volatile and not adequately representative of the full earnings picture.

The ratio came into its own when Yale economist Robert Shiller popularized it as a method for valuing the equity market. The ratio is, therefore, also called the Shiller PE Ratio.

Berkshire Hathaway’s holdings and the CAPE ratio

Caperatio.com analyzed Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) holdings as per their August quarterly filing to figure out whether Buffett used the CAPE ratio at all. Here is a pie chart of the holdings:

Berkshire cape ratio

Caperatio.com found that Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) had a weighted CAPE Ratio of 22.51 for the portfolio.

And this is interesting – the CAPE Ratio for the S&P 500 (INDEXSP:.INX) as a whole is 24.05.

That’s a pretty close correlation.

From Caperatio.com: “While some individual stocks within the portfolio of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) might be considered poor choices if only the CAPE Ratio is considered, the overall portfolio clearly favors a strong CAPE Ratio value. The fact that this so closely mimics the S&P 500 and seems to fall just short of it is almost too coincidental.”

For investors interested, here are the 25 lowest positive CAPE Ratio stocks in the S&P 500 (INDEXSP:.INX):

2-sp500-lowest

The CAPE Ratio website also offers a unique research tool on their site that calculates CAPE Ratios for individual stocks after input of the stock ticker.

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