wdhalgren

30 Years of Price to Book - Comstock

Couple of comments. First, using a 30 year chart is somewhat misleading because the insanity of the late 90's pushed price to book well above historical norms, and thus skewed the chart. Also, I'm not sure how Comstock did their calculations, but I'm positive that numerous other sources, including Barron's, reported S&P price to book greater than 6 at some point during the dotcom bubble. The chart above maxes out at 4.9 times.

Second, you make the following statement: "Furthermore, there has been a shift when it comes to industries in the S&P 500, with manufacturing companies playing a decreasing role while knowledge-based companies (e.g. software, consulting, other services etc.), where hard-assets are not a determining factor, comprise a larger portion of the index." It's an often used and somewhat alluring justification for the 30 year bull run in stocks, but may not be completely accurate.

Book value is a measure of the accumulated wealth of a company, whether it was contributed by investors or operating income. From that perspective, valuations have certainly risen above historical norms. The implication of the "soft asset" argument is that human or intellectual capital are now more important than in the past. While that may be true, it does, of course, require that human or intellectual capital of a company be more productive than that of its peers in order to justify a higher price to book. Otherwise, the company has negative intellectual capital which should subtract from valuation. So, an individual company might deserve an elevated price to book based on intellectual/soft capital, but I don't see how it can be true of the market as a whole. Unless this really is Lake Woebegon, and we're all above average.