No. of Recommendations: 1
I'm trying to infer your estimate of current intrinsic value. If I understand you correctly, your 20-year average valuation is intended to give a smoothed valuation level that tracks IV, but which is not necessarily equal to IV. It's apparently the average of your two and a half valuation and 1.5 times the 16 quarter WMA of BV. Is this correct?
Yes. I do two valuation methods. I scale each of them to get the best fit to observed 20 year price (inflation adusted). Then I take a simple average of the two scaled smoothings.
Your current valuation level is $612,733, which corresponds to 1.554 times the 16 quarter WMA book value, which I calculate to be $394,284. It is also 1.326 times the March 31 BV/share.
I'll take your word for it : )
I admit that I do another adjustment that I didn't mention in that particular post. The rationale is that when book drops during a recession, it's unlikely to be a lasting drop in value. Book per share just before a drop might be a pinch exuberant, as in 1999, but probably not wildly so. So during a drop in book per share I limit the drop in my "adjusted book" to be no more than 4% of the peak to date. Then I feed those figures into the WMA.
From our recent discussion of IV/BV I understood, or misunderstood, your estimate of current IV to current BV to be flat over the last 25 years at a value of about 1.60. Certainly not 1.32 in Dec 1999 as I suggested.
I think I was speaking of flat in the sense of "no net change", same at start and end. The middle has been very different. The average P/B in the last 20 years is just a hair under 1.40. (using peak-to-date known book, which is generally a better measure of value).
Would you mind straightening me out? What would be your estimate of current IV to current BV?
I can't really say. The only thing my calculations say is that the current price has a relationship to this trend line that is 19% higher than the average such relationship in the last 20 years.
Perhaps surprisingly, I don't usually try to calculate IV as such. As you note, my metric is something that correlates with IV, and rises at the same rate, but is some unknown multiple of true IV. That's because (a) it's impossible to come up with a multiple that's correct for true IV so everybody would pick a different one, and (b) a tracking metric is all I need for my two purposes: how fast is value growing, and what's the current relationship between price and value estimate compared to what is historically typical?
I could make a stab at true IV in the past. For me, intrinsic value is the price that you could pay and sell 5-10 years later at an "average" market multiple and make inflation + 6.5%/year, basically Siegel's constant. So I could tell you what my rough idea of IV was for any date more than 10 years ago : )
Take the average real price in the last 5 years scaled to 2015 dollars, divide by 1.065^7.5= 1.6037, and that's the price 10 years ago that (with hindsight) would have been true IV in my books.
Jim
