No. of Recommendations: 9
You have also projected an increase in book value of 2.5% per quarter, at least for the foreseeable future. Hence, the expected book value per B share in a year (to be precise, at the end of Q2 2025) should be approximately $309.80.
That sounds like something I said. That 2.5%/quarter or 10.4%/year annualized is nominal, not inflation-adjusted, so it implicitly includes a guess about inflation. 7% real growth plus 4.4% inflation? 8% plus 3.4% if you're optimistic?
Since your models are predicting an expected market price of $385.50 in a year and projected book value per B share at the end of Q2 2025 is $309.80, the equivalent P/B is 1.24.
That also sounds like a logical consequence of what I said.
What can I say? Two different models.
The later forecast is based on several models of the same general form:
* For starting dates since 2008 with a certain starting P/B (or price-to-value ratios based on a different metric), what were the average forward real one year returns?
* Divided those starting valuation multiples into 10 or 20 buckets, and fit a curve through the graph to get a formula
* Run that formula on today's price-to-book or price-to-value ratio.
The $385.50 used a guess of Q2 book, but I didn't make a guess for Q2 "two and a half column" value.
If I do that too, the average of the sundry models gives a slightly higher prediction of maybe $391 a year from now, still assuming 3.25% inflation.
Which, no matter how you slice it, would still represent a darned low price to book ratio, or a darned low rate of growth of observable value.
e.g., average P/B since 2008 has been around 1.37, so a forecast of $391 per B or $586500 would suggest book at around 428000, less than 2% above my current estimate even before adjusting for inflation.
The only thing I can think of without delving too deeply is that, in the last 16.5 years, higher valuations led to particularly poor years...overshoots?
Or I have a really bad bug somewhere.
I'll have a look at it further when I get a chance.
Jim
