No. of Recommendations: 20
I don't know anyone else who uses this model, so do with it what you will. Personally, I think it makes perfect sense that price and IV should track metrics such as sales, earnings and BV. Berkshire's market cap has tracked BV almost perfectly over the last 60 years (r^2 = 0.98). In my opinion the trendline of price versus BV provides a reasonable estimate of IV at any point in time over that period.
Though I appreciate you don't make any big claims for it, this method has a gigantic fatal flaw, and I really suggest you stop calculating it or posting it. It's like being a vaccine skeptic: talking about it is not really a public service.
Yes, it's true that value has tracked a multiple of book very closely over very long periods. That makes decent economic sense, as long as the general structure of the firm is about the same. Some operating subs, some investments.
And yes, it's true that inflation-adjusted book per share has risen at a shockingly steady rate on trend since (say) 1998.
But there is a yawning and potentially fatal gap between those observations and assuming that the rate of growth will CONTINUE to be steady, which is what happens when you look at the current level of the long run trend line and think of it as a value metric. The ratio of price to *current* observable value is a meaningful thing, but the ratio of price to the trend line from the past is a trap. If the rate of value growth drops, your metric will insist for many many years into the future that the stock is getting cheaper and cheaper, and you'll buy more and more, and be surprised when you don't make any money. It just isn't meaningful at all, except in the special case that the value growth rate in future is *coincidentally* the same as the past. Not only is that uncertain, I would be very surprised if many informed observers expect that to be the case in the next 10-20 years.
Jim
