Molson Hart on Twitter: "You’re right that CAPE uses EPS not market cap/total earnings (as I think it should). I was wrong about that. I don’t understand why Shiller would do that. Better to use market cap/earnings. More robust. I think this is was @svrnco was trying to get at.… https://t.co/BUgnIzHAJa"

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puppytigers‏ @puppytigers Apr 15

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Replying to @puppytigers @Molson_Hart and

If we assume that earnings are constant every year but # shares decreases annually, then the CAPE ratio will always be growing even though the P/E ratio remains constant.

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Molson Hart‏ @Molson_Hart Apr 15

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Replying to @puppytigers @LT3000Lyall @svrnco

First off, sorry your reference of 3 should have been obvious to me. I disagree with what you just wrote. See my point in 2. I have a ton of work to do today but I will review your points in greater depth plus this Shiller paper: https://poseidon01.ssrn.com/delivery.php?ID=444091009006080006031088124090093092096081003083049054069103120078089000120027085081107026040056062060105066028111092084017117012043009087045069073028065115091007003003048124117126095127005004086086121120121120029064072014026078020025030120088025084&EXT=pdf …

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puppytigers‏ @puppytigers Apr 15

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Replying to @Molson_Hart @LT3000Lyall @svrnco

No hurry at all. I should mention that I have no expertise in finance or investing, just a small part-time investor seeking to learn from great minds.

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Molson Hart‏ @Molson_Hart Apr 15

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Replying to @puppytigers @LT3000Lyall @svrnco

Molson Hart Retweeted puppytigers

Nah, this is not right. Yes, price per share is changing, but market cap is not vs. a company doing dividends. Therefore, because CAPE is market cap/10 years of averaged earnings if earnings are constant, # of shares is not relevant. See my original #2.https://twitter.com/puppytigers/status/1250427166384205828 …

Molson Hart added,

puppytigers @puppytigers

Replying to @puppytigers @Molson_Hart and 2 others

If we assume that earnings are constant every year but # shares decreases annually, then the CAPE ratio will always be growing even though the P/E ratio remains constant.

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puppytigers‏ @puppytigers Apr 15

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Replying to @Molson_Hart @LT3000Lyall @svrnco

Ah, now I see where the disagreement is. LT3000 defines CAPE as price per share divided by average earnings per share, while you define it as market cap divided by average total earnings. I had a closer look and it seems to be a more complex issue than I envisioned. 1/2

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puppytigers‏ @puppytigers Apr 15

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Replying to @puppytigers @Molson_Hart and

Multiple sources define CAPE for a single stock based on price and earnings per share, but indexes are different because they're measures of market cap instead of price per share. What this means is that LT3000's point holds for companies, but not to indexes. Interesting.

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Molson Hart‏ @Molson_Hart Apr 15

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Replying to @puppytigers @LT3000Lyall @svrnco

Using eps is convenient but not logical for cape calculations. Lt3000’s “point” doesn’t hold for companies or indices (indexes?). He’s just calculating things wrong and deriving conclusions from bad calculations.

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puppytigers‏ @puppytigers Apr 15

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Replying to @Molson_Hart @LT3000Lyall @svrnco

The thing is that CAPE for companies is defined based on price per share and EPS. So if you're saying that EPS should not be used for calculating company CAPE ratios, then you're essentially arguing the same point as LT3000, using the exact same logic.

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puppytigers‏ @puppytigers Apr 15

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Replying to @puppytigers @Molson_Hart and

Or at least, that's the formula I'm seeing on most websites that talk about CAPE. But if those websites aren't using the conventional definition of CAPE, then I fully agree that LT's post is attacking a strawman (though a commonly used one).

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Lyall Taylor‏ @LT3000Lyall Apr 15

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Replying to @puppytigers @Molson_Hart @svrnco

Indexes such as S&P500 have aggregate EPS of index. Where is the evidence most index CAPE multiples use market cap rather than EPS? I’ll stand corrected if the former is used, but do u have evidence to support claim? The conventional CAPE calculation is price over 7/10yr av EPS.

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Molson Hart‏ @Molson_Hart Apr 15

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Replying to @LT3000Lyall @puppytigers @svrnco

You’re right that CAPE uses EPS not market cap/total earnings (as I think it should). I was wrong about that. I don’t understand why Shiller would do that. Better to use market cap/earnings. More robust. I think this is was @svrnco was trying to get at.pic.twitter.com/kI2qPNXrSX

7:58 PM - 15 Apr 2020

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