Disagreement between leading investment managers and strategists has been remarkable.
Consider the diametrically opposed views of two prominent figures:
Bill Gross, the outspoken Managing Director of PIMCO, an investment firm with more than $1.2 trillion in assets under management, asserted in December 2008 that the "Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation..."
Meanwhile, also in December 2008, Russell Napier, Strategist at CLSA, a leading international brokerage and investment group, claimed that the Q ratio supported his expectation of a "horrific" market bottom and another 55% drop in the S&P 500 Index by 2014.
Accurate data and the proper context are critical
Calculating Tobin's Q is not as straightforward as it may seem initially. Data provided in the Federal Reserve's Z.1 statistical releases requires careful examination before it can be used as a reliable input.
Furthermore, an ability to consider recent Q ratios within their historical context is crucial to drawing meaningful conclusions regarding the likely course of equity prices. For example, the prevailing methodology for calculating Q has changed over the decades, necessitating certain adjustments in order to improve historical comparability.
In addition, most commercial Tobin's Q datasets reach back only a few decades, leaving out instructive periods in the early 1900s and the Great Depression.
Finally, time series adjustments may be necessary to account for the growing importance of intangible assets as a factor in equity valuation.
Authored by James Tobin disciple
Report author John Mihaljevic, CFA is an Economics graduate of Yale who served as Professor Tobin's research associate from 1996-98. Mr. Mihaljevic assisted Professor Tobin on a variety of macroeconomic research projects at the Cowles Foundation, including researching and editing Money, Credit and Capital, published by McGraw-Hill/Irwin in 1997. Mr. Mihaljevic is a summa cum laude graduate of Yale University, having earned distinction in Economics.
One of Mr. Mihaljevic's key projects was to develop and implement a new technique of estimating Tobin's Q. Mr. Mihaljevic developed the technique applied in Equities and Tobin's Q in 1996 with the assistance of Professor Tobin, updating the latter's previous method of calculating Q.
Equities and Tobin's Q includes data from 1900-2011, enabling the report author to put the current Q ratio in historical context, including the Panic of 1907 and the Great Depression. We believe that our Q database is the most comprehensive dataset available on the market.
Proprietary data and differentiated analysis to inform your investment and capital allocation decisions
In Equities and Tobin's Q, Mr. Mihaljevic updates on a quarterly basis the Q estimation technique he developed with Professor Tobin in 1996-97. Each report includes Federal Reserve Flow of Funds data, discusses implications for equity investors, and puts the Q ratio in historical context.
- Latest estimates of Tobin's Q, using data released by the Federal Reserve
- Implications for investors, based on placing the Q ratio in historical context and interpreting it
- Charts showing Q since 1900, including a comparison of three estimation methods: (1) Blanchard, Rhee and Summers, (2) Tobin (old), and (3) Tobin (new) -- Mr. Mihaljevic's calculation, developed jointly with Tobin
- More than 100 years of Q data (1900-2011), provided in Excel format
- Tobin's Q estimates for 1,000 largest public companies, updated quarterly
“We worry top-down, but we invest bottom-up.” –Seth Klarman, The Baupost Group
Add value to your process, even if your investment decisions are ultimately made from the bottom up. In a world of increasing volatility, unique insight can make a decisive difference.
A subscription to Equities and Tobin's Q includes:
- Comprehensive quarterly update report, including data from the Federal Reserve's latest Z.1 statistical release
- Timely commentary on the U.S. equity market outlook based on latest Tobin's Q data
- Comparison of Tobin's Q to other top-down valuation measures, including Shiller's ten-year P/E, market cap to GDP, and Dow Jones Industrials in terms of gold
- Timely email alerts whenever Tobin's Q reaches levels that correspond with buy or sell signals for U.S. stocks
- Direct email access to John Mihaljevic should you have any questions about our methodology or Q in general
- Ongoing enhancements to the quarterly report, including new features and resources
Subscriber guarantee: Should you not be completely satisfied with your subscription to Equities and Tobin's Q, we will refund a pro-rated amount in excess of the single-report purchase price. No questions asked. Simply email us at tobinsq@manualofideas.com.
James Tobin on the Q Ratio
“The bottom line of monetary policy is its effect on capital investment, in business plant and equipment, residences, inventories, and consumer durable goods. The effect is not well represented by the market interest rates usually cited, or by quantities of money or credit. Our approach to monetary economics and macroeconomics led us naturally to a different measure, closer to investment decisions. This has become known as ‘Tobin’s q.’”
New Feature: Q Estimates for 1,000 Companies
Our reports now include quarterly estimates of the Q ratio for the 1,000 largest public companies, based on a method developed by finance professors Kee H. Chung and Stephen W. Pruitt in their 1994 paper A Simple Approximation of Tobin’s q. Chung and Pruitt presented a formula that can be calculated using publicly available and easily verifiable accounting and market data. Chung and Pruitt showed that at least 96% of the variability of Tobin’s Q, as calculated more elaborately by Lindenberg and Ross (1981), is explained by the “approximate Q."