No. of Recommendations: 14
if you do get a moment some time then it'd be interesting to see the associated scatterplot of two year forward real return vs the value measure. Geek note:
In this sort of situation, I think it's important to reduce the noise resulting from the randomness of the valuation on the specific end date anniversary. So to calculate forward returns, I don't do (price two years from now)/(price today). Instead I do (average price 1.75 to 2.25 years from now)/(price today). It's amazing how much this helps your models: it still looks at the short term squiggles of price and valuation on purchase date which is what matters, but doesn't get thrown off by the quirks of a specific end day.
This is a scatter plot of ratio of price to my smoothed and scaled-up value line, over the last 20 years, daily figures. The forward two year returns are an annualized rate, after inflation.
http://www.stonewellfunds.com/PriceToTrendAndForwa...With today's price of $713670 ($475.78 per B), today's smoothed line level is about $613570 and the ratio is about 1.163. Using that ratio, the formula fit from the graph suggests one might expect a forward two year return around -1.62%/year after inflation. The standard deviation of the ratio in the last 20 years has been 11.8% with mean (by construction) of 1.
Jim
