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Hi Jim,
While this probably belongs on the BRK board, as it is a strategy based around BRK, I wanted to dive into the exact calculations required to generate the plot:
This is a graph of a smoothed valuation metric. (basically a 16 quarter WMA of inflation adjusted book per share, scaled to match the average valuation multiple in the last 20 years. (smoothed line moved up to minimize RMS errors versus price line)
Let me see if I understand these steps:
(1) Get previous 16 quarters of inflation adjusted book per share
(2) Get previous 20 years of PE multiples
(3) WMA = triangular weighting of (1)/(sum of weights) * average(2) for each quarter
(4) Do a least squares match of offset of (3) to price over same timeframe (any smoothing)?
(5) Calculate the standard deviation of the offset line in (4) vs price (assume gaussian spread).
Is that correct? Or did I mess something up. This seems like something that changes rather slowly. Maybe only redo the calcuation every quarter?
--G
