Did you know that if you were in the position to sell every share listed on the US stock market you would have enough money plus change left over to purchase all of their factories, machines and inventory?
It's quite an astounding concept but one which leading economist James Tobin highlighted through his theory known as the Tobin Q. The Tobin Q Theory suggests that total stock market capitalisation should be about equal to replacement cost of capital.
A recent article published in the Australian Financial Review (AFR) has reported that the Tobin Q is currently showing that US equities are approximately 10% above their replacement cost.
Might not sound like a lot but it is!
A 10% premium might not sound like outrageous bull market territory, however, consider this – there have been only two other times in US history that the Tobin Q has been at higher levels. Once was in early 1929 as the stock market peaked before the disastrous October 1929 crash and the onset of the Great Depression; the other time was during the internet bubble of the late 1990's.
History might not repeat but it does rhyme!
An ever present problem with statistical measures is that they can be open to such widely differing interpretations and sometimes too much weight is placed on one data point over another. This could indeed be the case right now with regards to Tobin's Q, then again it could rightly be ringing an alarm bell.
One of the key jobs of an investor is to decide who to entrust your capital to. Identifying high quality managers who act like owners is one of the key ways to achieve this aim. A major advantage of choosing to buy into companies with high calibre management teams is that they are more likely to have a solid grasp of history and understand the inherent risks within a business cycle. Managers who (in my opinion) meet this criteria include Flight Centre Travel Group Ltd (ASX: FLT), Platinum Asset Management Limited (ASX: PTM) and Reece Australia Limited (ASX: REH).
If we are indeed nearing the top of the bull market, now, more than ever could be the time to make sure your portfolio companies are run by reliable managers.
