Subject: Value Trend
A while back there was a post on the long run trend of Berkshire.
I added a comment to the effect that it's a bad idea to use the long run trend line to say anything about current value levels.
I later realized that my comment may have been taken as a bit harsh and dismissive, which was definitely not my intent.
I just wouldn't want someone to make investment decisions using a method which could go very badly awry, which I think is a real danger there.

So, in a more constructive vein, have a look at this chart for something I would suggest as a substitute
www.stonewellfunds.com/PriceAndWMAofValue.png

The blue line is just a chart of the average real stock price in each calendar quarter.
The smoothed value lines look a lot like a long run trend, but it's just a smoothing with an average lag of 1.25 years, so it will adapt reasonably quickly if/as Berkshire's trend rate of value growth slows.
There isn't nearly as much danger of extrapolating a happy long run trend and being way off base when valuations stay below that.

The smoothing is constructed like this:
First, the pink smoothing line.
For each quarter, I start with book per share.
Adjust each historical figure for inflation at the end-of-quarter date to get real book, call that "A".
Create a separate column for peak-to-date real book per share, and then multiply those by 0.9. Call that 90%-of-peak for each quarter "B".
Why 90%?
The theory on this is: during really good markets book per share may be an overoptimistic estimate of value per share...but almost certainly not by more than 10%.
Any drop in book per share of more than 10% is almost certainly a transient mark-to-market issue and isn't something to worry about.
Next, take as your value for each quarter the maximum of current real book per share ("A") and 90%-of-peak ("B").
Next, for the smoothing: do a WMA16 of that series.
For those who aren't familiar with the jargon, that's a weighted moving average using 16 data points.
The most recent data point is given weight 16, the second-last is given weight 15, the third last 14, and so on down to a weight of 1 for the oldest data point.
This reacts to changes quite a bit more quickly than a simple moving average. Think of it as something in the middle grounds between the raw data set and a simple moving average of the data set.
And last step: take that WMA and multiply by 1.50.
Why 1.50?
I looked for the multiple that gave the best fit to price data.
I gave squared errors in the fit to the price data 1999-2003 a weight of 1, 2003-2008 a weight of 2, and 2008 to date a weight of 3.
The best fit result was a multiple of 1.5004 times the weighted moving average of real book. We're among friends, so call it "one and a half".

It is my belief that this moving average line is much more reliable than the long run trend line.
That is, if the stock price is meaningfully below this trend line, the stock is very probably trading at a better-than-average valuation multiple and vice versa.
It reacts to slow periods in observable growth in value reasonably quickly, generally without assuming that value per share actually falls in a bear market.
The current price is roughly 3% below the trend line.

The yellow line on the graph is the same type of WMA as the pink line.
The only differences are
* I started with my quarterly "two and a half column" value metric rather than book per share.
This values operating subs as a multiple of their earnings rather than book, and includes (among other things) a haircut on large stock holdings at high valuation multiples, notably Apple and Coke.
* I assumed that this metric is never a cyclical overestimate of more than 7% rather than the 10% I used for book value: the "2.5 column" metric is a bit more stable.
This 7% number is selected based on the size of the impact from the largest stock overvaluation haircut I have done to date.

You can see that both methods give very similar results once the smoothing is done.
Book may diverge from fancier metrics of value over time, but this similarity so far is the source of my frequent comments to the effect that book per share may no longer be a theoretically sound yardstick of value, but so far (and only by coincidence) it gives results which are not meaningfully different.
For now, rules of thumb about valuation at various multiples of book are as good as they ever were. So far.

Jim