It's probably fair to say:

If valuation low forward return high.
If valuation high forward return low.
Right?

In short, yes.

I have data for all trading days since B shares were listed in 1996 (thank you old yahoo, curse you new yahoo). I also have book values taken from the quarterly reports for all quarters starting in 1996.

I choose to look at the P/B ratio going forward from December 2012 because it was drastically different after the BNSF acquisition and the 1.2X buyback threshold implemented around that time. You can pick dates within a couple of years of that and I don’t think you will get meaningfully different outcomes.

Take all dates from December 2012 forward and bucket them into P/B quartiles over this nearly 12 year period (<1.33x, <1.39x,< 1.44x, >1.44x). Now calculate the forward cagr from each date to today and place those returns in the P/B quartile buckets.

If you look at returns with a minimum 2yrs of history (stop at about October 2022 based on today’s date) you find median annual return rates by quartile of 16.9%, 14.7%, 13.8%, 12.9%. So yes, better forward returns if starting valuation is lower.

Incidentally I did a similar analysis with a stop date of November 2022 for the ending forward returns to avoid the current high valuations and found similar spreads on the forward returns of 12.4%, 11.1%, 10.6%, and 9.7%.

Jeff

As an aside:
We might think that the quartiles of P/B will change meaningfully over time like they did around 2011/12. I started tracking the forward quartiles from July 2018 when Warren removed the buyback threshold and up until about November 2022 they were significantly lower with median running about 1.33x. However, now that we have been experiencing higher than normal multiples for almost two years, the quartiles are nearly identical to the longer term ones. Maybe we will see significant change at some point but it doesn’t appear to be happening yet.