No. of Recommendations: 18
I think it's great context for understanding how book and price to book have evolved over time.
I think it's reasonable, within error bars, to think that the multiples seen in the last 10 or 20 years are probably not a bad guess of what you might see in the next five.
I think the log-real-book trend line is an amazing thing to behold and ponder...for the past.
But one warning about this sort of work...
I would be very much opposed to the dangerous notion that the relationship between current price and the trend line has any predictive value at all, despite what has happened in the past.
The linearity of log real book since 1998 is truly amazing, but there is no reason to think that it will continue like that. However, there IS a pretty good reason to think that price will continue to bear some sort of relationship to current book or recent peak book: because book is a not-too-terrible yardstick for value. This sensible relationship can hold whether book rises faster or slower than the old trend line in future, which a long-baseline trend line won't handle.
If the growth rate of real book suddenly halves and stays at that new lower rate, following PB will still get you useful valuation information, but following price to trend line would soon have you buying at overvalued levels thinking they were cheap.
Jim
