Edited by the Research Team of

EQUITIES AND TOBIN’S Q

“The miserable failures of capitalist economies in the Great Depression were root causes of worldwide social and political disasters.” —James Tobin

With Dear Subscriber,

John Mihaljevic, CFA
h We estimate that Tobin’s Q increased from a March low of 0.33 to 0.72
Managing Editor,
The Manual of Ideas as of June 26, roughly in line with an adjusted average of 0.71 for the
john@manualofideas.com period from 1900-2009. Our data shows that while Q declined sharply in
2008, it has increased from 0.55 at yearend 2008 and from 0.61 at the end of
About This Report
1Q09. The numerator (market value) and denominator (replacement cost) of
Equities and Tobin’s Q, 1900-2009 the Q ratio were up 11% and down 1%, respectively, in the first quarter.
—Evaluating the Market Outlook in
the Context of a Century of History h Today’s Q ratio sends a neutral near-term and medium-term market
Report Date: June 28, 2009 signal, and a modestly bearish long-term market signal. Of the five other
Publishing Frequency: Quarterly instances since 1900 when Q increased to 0.72 or below, it was higher one
Website: www.manualofideas.com/q year later in three instances. Four out of five times, it was higher three years
after the initial increase. Five years and ten years after the increase, it was
Inside This Report higher in only one of five instances and unchanged in another instance.
Quarterly Update ……………… p. 1
Q in Investment Management … p. 2 Tobin’s Q Ratio, 1900 – June 26, 2009
Putting Q in Historical Context … p. 3 2.0

Q Estimates For 1,000 Largest 1.8

Public Companies (by market cap) p. 4 1.6

1.4
Economic Rationale …………… p. 25
1.2
Q and Warren Buffett ………… p. 28
1.0
Calculating Tobin’s Q ………… p. 29 0.8
Selected Charts and Data ……… p. 31 0.6
Additional Resources ………… p. 39 0.4
0.2
About The Author 0.0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
John Mihaljevic, CFA, served as James
Tobin’s research assistant from 1996-98 and This chart consists of two data sets: 1900-1944: We use a modified Blanchard, Rhee, Summers series.
We adjust the data to reflect the series’ upward bias as compared to the Tobin (new) methodology
worked with Professor Tobin to refine the Q
developed by James Tobin and John Mihaljevic. 1945-2009: We use the Tobin (new) series. We believe
estimation method. Mr. Mihaljevic was also this combined set of data from 1900-2009 provides the most accurate historical rendering of the Q ratio.
involved in research projects at the Cowles Source: The Federal Reserve; Blanchard, Rhee, and Summers; The Manual of Ideas.
Foundation, including researching James
Tobin’s Money, Credit and Capital.
Mr. Mihaljevic graduated summa cum laude
h Replacement cost declined 0.7% sequentially in 1Q09, a reversal from a
from Yale, having earned distinction in the sequential increase of 0.3% in 4Q08, reflecting deflationary forces at play
study of economics. In addition to working for in the U.S. economy, including rising unemployment, home price erosion,
and studying under James Tobin, Mr.
Mihaljevic studied under Chief Investment and financial deleveraging. We note that replacement cost has not recorded a
Officer David Swensen and Sterling full-year decline in any year since at least 1900. Further declines in
Professor of Economics William Nordhaus. replacement cost would therefore be very significant in a historical context.
Mr. Mihaljevic has worked as an investment We will watch the recent deflationary trend closely, but we do not anticipate
banker, equity research analyst and
investment manager. He currently serves as that replacement cost will in fact decrease for the full year 2009.
managing member of Mihaljevic Capital
Management LLC and managing editor of
Sincerely,
The Manual of Ideas.

EQUITIES AND TOBIN’S Q is published quarterly by BeyondProxy LLC, P.O. Box 1375, New York, NY 10150. Website: www.manualofideas.com. Email: support@manualofideas.com. Please
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