Tobin's Q revisited

[HFWR]

Nobel Winner’s Math Is Showing S&P 500 Unhinged From Reality - Bloomberg Business

Tidbits from an article on Bloomberg...

The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets -- higher than any time other than the Internet bubble and the 1929 peak.

This doesn't make sense to me. Really, we value a company based on its assets only? What about ongoing business and future growth potential?

“QE is a very dangerous policy, in my view, because it has pushed asset prices up and high asset prices, we know from history, are very dangerous,” Smithers, founder of Smithers & Co. in London, said in a phone interview. “It is very strongly indicated by reliable measures that we’re looking at a stock market which is something like 80 percent over-priced.”

So now the market is not ten percent overvalued, but eighty percent...

“The issue we have with Tobin Q is that it does a very poor job at timing the market,” Rubin said from Westport, Connecticut. “The followers of Tobin Q never told us to buy in 2009, yet now we are warned that we should sell. Our response is sell what? We were never told to buy.”

Bolding mine...

 

[gcgang]

You don't think valuation matters? http://video.ft.com/4200470744001/Valuation-doesnt-help-timing/Markets
This 4 minute video may help you realize why it matters.


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[HFWR]

You don't think valuation matters? Valuation doesn't help timing - Authers' Note - Markets & Investing Video - FT.com
This 4 minute video may help you realize why it matters.


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Sure valuation matters. But the forum has discussed it many times, and though PE10 and Q and so forth are worth noting, the problem seems to arise when trying to decide how to use them; i.e. when to get out, and when to get back in.

As for the article, I pointed out a couple of things that made me go "duh?".

 

[haha]

Sure, it's been discussed, but to my mind only to be rejected as either that bane of all right thinking investors, market timing. Or, as not suitable for market timing. Or, most powerfully, as contrary to religion- choose an allocation and stay the course.

To all these things, I can't help thinking maybe.

Ha


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