1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Greenbackd
Greenbackd
Articles (5983) 

How to Value the Stock Market Using the Equity Q Ratio

June 04, 2012 | About:

Mark Spitznagel, CIO of Universa, released in May a prescient white paper called “The Austrians and the Swan: Birds of a Different Feather” in which he discussed the theory behind the “Equity Q Ratio,” a variation of Tobin’s Q ratio, and the expected returns to the market from various levels of Equity Q Ratio.

Tobin’s Q ratio is the ratio between the market value of the stock market and against the aggregate net worth of the constituent stocks measured at replacement cost.

It can be defined to include or exclude debt. We exclude debt for ease of calculation and refer to it in this form as “Equity Q.”

Spitznagel observes that the aggregate U.S. stock market has suffered very few sizable annual losses (which he defines as “20% or more”). By definition, we can categorize such extreme stock market losses as “tail events.”

universa%201.jpg

However, when the Equity Q ratio is high, large losses are “no longer a tail event, but become an expected event.”

spitznagel-figure-3.jpg?w=500&h=282

Equity Q ratios over 0.9 lead to some very ugly results. So where are we now?

spitznagel-figure-2.jpg?w=500&h=408

Ugly.

About the author:

Greenbackd
Greenbackd is a former corporate advisory and securities lawyer working in value-oriented activist funds management.

Rating: 3.0/5 (6 votes)

Comments

Please leave your comment:


GuruFocus Mobile App


User Generated Screeners


DBrizanblank customized 29Jul2016
timschenkscreen 28 juli 2016
kkopacz.bizForwardRateOfReturnConsumrDef
jtepper2Beneish+Sloan+AZ
jtepper2Beneish+Sloan
DBrizanUSA Holdings 27Jul2016
DBrizanCDN watch 27Jul2016
DBrizanCDN 27Jul2016
pbarker46Some ideas
DANGORDONROE AND ROC 7-28-16

Select portfolio(s):

  • Loading...

Why you are interested?

Your selection and notes will be stored in your portfolio.

Login to add portfolio
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
FEEDBACK