Why the Schiller PE Ratio Matters More Than Ever for Investors in 2025

If you've been trying to find great investments lately and feel like you're hitting a wall, you're not alone. In this market, where prices are sky-high and the fundamentals feel fuzzy, it’s more important than ever to have the right tools and mindset. One of the tools I rely on is the Schiller PE ratio, and in today’s post, I’m going to break down what it tells us, why it matters right now, and how we as Rule #1 investors can use it to make smarter decisions.

The Market Is Overpriced—Here’s the Proof

Let’s start with some facts. The Wilshire GDP ratio is currently more than double the level considered to signal a good deal. Historically, 80 and below is considered healthy. Right now, at the publishing of this blog? We're around 207. That means companies are priced to perfection—or beyond.

The Schiller PE ratio, also known as the CAPE ratio (Cyclically Adjusted Price-to-Earnings), is a tool that adjusts average earnings over 10 years for inflation. Historically, it averages around 15–16. Right now, it’s over 34.

That puts us in the same valuation territory as:

• The Great Depression (1929)

• The Dot-Com Bubble (2000)

There have only been a few times in the last 140 years when the Schiller PE got this high—and most have ended in major crashes.

This doesn’t mean we can time the market. But it does mean we need to be sober and strategic.

What Is the PE Ratio (and Why It Matters)

Before diving deeper into the Schiller PE, let’s cover the basics. The Price-to-Earnings (PE) ratio is one of the most widely used metrics in investing. It tells you how much investors are willing to pay today for a dollar of a company’s earnings.

Here’s the formula:

PE Ratio = Price per Share / Earnings per Share (EPS)

For example, if a company’s stock is trading at $100 and its earnings per share is $5, the PE ratio would be 20. That means investors are willing to pay $20 for every $1 of earnings.

A low PE ratio can indicate a potentially undervalued stock, while a high PE ratio might suggest overvaluation—especially if earnings don’t justify the price. However, context is everything. Growth stocks often carry higher PEs due to future earnings potential.

The Schiller PE ratio (CAPE) improves on this by smoothing out earnings over 10 years and adjusting for inflation, which helps avoid the distortion caused by short-term events.

In short:

• The regular PE ratio looks at recent earnings.

• The Schiller PE provides a long-term view of market valuation.

If you’re serious about value investing, the PE ratio—and especially the Schiller PE—should be a cornerstone of your analysis.

Price Does Not Equal Value

I can’t emphasize this enough: Price and value are not the same.

Just because a stock has dropped 40% or even 80% doesn’t mean it’s a deal. It just means it’s lower than it was. Unless you know what the business is actually worth, you're guessing.

Price just means what someone paid. It doesn’t tell you a thing about what it’s worth.

As Rule #1 investors, we focus on buying wonderful businesses at attractive prices. In an inflated market like this, that means waiting and watching.

Be Wary of False Bargains

Even when a stock seems like it's on sale, always ask: Who's selling it to me and why?

Institutional investors, who make up about 85% of the market, aren’t usually fools. They have research, data, and short-term pressures. If they’re dumping something, there’s a reason.

That said, our advantage is time. We can be patient. We can ride out volatility. But only if we’ve done the homework and we’re not buying into terminal problems.

Stock Buybacks: The Hidden Distortion

One of the reasons prices can stay irrational longer than you'd expect is corporate manipulation—especially stock buybacks. Companies flush with cash are using it to buy back shares, boosting stock prices artificially instead of investing in long-term growth.

Take IBM, for example. Between 1999 and 2019, IBM spent billions buying back stock at inflated prices. It hasn't delivered shareholder value—just the illusion of price support.

They might as well have taken that cash and lit it on fire in the parking lot.

If management is buying back stock when it's overpriced, it’s a red flag. Good capital allocators wait for the right time—just like we do.

Three Signs of a Good Capital Allocator

1. Low to no debt

2. High and rising return on equity and invested capital

3. Disciplined with stock buybacks and acquisitions

When CEOs start buying back overpriced shares or overpaying for M&A, that’s not strategy—that’s ego or pressure.

I want CEOs who buy $1 of value for 50 cents, not the other way around.

The Lesson: Be Patient, Build Your Watchlist

So where does that leave us in 2025?

This market may keep climbing for a while. Or not. But eventually, as always, gravity will catch up. Stock prices will reflect actual profits. And when that happens, we want to be ready.

Keep adding great businesses to your watchlist. Stick to your valuation methods. Wait for your price.

Eventually, greed fades and fear takes over. That’s when we strike.