The Myth of Black Swan Market Events
Mark Spitznagel is the founder and chief investment officer of Universa Investments, and the author of “The Dao of Capital.”
As André Gide, the French Nobel laureate in literature, once said, “Everything that needs to be said has already been said. But since no one was listening, everything must be said again.”
Indeed, no one has been listening to the past hundred years of stock market history in the United States.
We have data going back a century that shows the total aggregate valuation of corporate America (think the stock market) in relation to the estimated aggregate replacement value of its stock of capital (think machines, equipment, buildings, chairs, etc.). It is similar in concept to an aggregate price-to-book ratio.
This has come to be known as the Tobin’s Q ratio; the higher the ratio, the higher the price of corporate valuations relative to their tangible capital, and the more “expensive” the stock market.
You would think that this ratio shouldn’t get far out of whack from a long-run average. If average companies became valued high relative to their tangible capital, this would imply that they earn high returns on their existing equipment, and thus further investment in more equipment (growth) should more than “pay for itself” in the form of higher valuations.
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