Ask 10 different money managers what metric they use to determine if a stock (or particular market) is overvalued, and you'll more than likely receive 10 different responses. Of course buying at "the bottom" is easier said than done, as we all know so I submit to you this perspective.
Kyle Caldwell, personal finance reporter at the Daily Telegraph, determined whether stock markets were undervalued or overvalued. Caldwell used three measures: price to earnings (P/E), cyclically adjusted price to earnings ratio (CAPE) and price to book (P/B). His analysis included 34 countries, both developed and emerging and compared current measures to historical averages.
The CAPE adjusts for cyclical variations and takes a longer term view than the P/E considering the earnings average over the last 10 years instead of the 12 month average. Its premise is that eventually earnings will move back to their long term trend. Price to book divides the current value per share over the equity value sho
