13 January 2009

Tobin's q

"Tobin's q" is a ratio between:

The Market Value of a Company determined by the price of its Stocks and Bonds
The present Cost to replace this company's Assets (such as its factories, etc.)

If we calculate this value for the entire stock market (excluding Financial Companies) over the last 110 years, it looks like this:

When the ratio is below zero, it would cost more to create a company anew than to buy an existing company on the stock market. In Bull markets, Tobin's q is above zero, due to the "greater fool" principle. In Bear markets, Tobin's q is below zero, do to the "holy shit!" principle.

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