Author: mungofitch

Subject: Re: OT Annuities in retirement

Date: 7/6/2022

Recommendations: 19

The chart you provided appears to show the relationship between their changing prices over time. I`d like to also be able to trace the relationship between their respective fair values over time, ideally within some historical context. Thanks to you and others here, I`m able to do that for BRK. Is a comparable metric available for QQQE? I track the trend earnings of QQQE. So, my fair value estimation process goes like this: Calculate the earnings yield each day through time. Since it`s an equal weight index, the median earnings yield on a given day gives a good idea for the whole and is numerically very steady over time, unlike the average. Given a no-dividend index series, convert the daily earnings yields into daily estimated earnings figures for the index. Inflation adjust all those earnings figures. Create a trend line through the real earnings figures. (it is an *amazingly* good fit since 2005--R squared 0.946) Estimate today`s "on trend" earnings using that trend line. Earnings are pretty close to the trend line right now. Divide that trend earnings figure into the current price to calculate the earnings yield now. Compare that EY to the average EY in the last (say) 15 or 25 years to get an idea of whether it`s overvalued or undervalued right now. Using this sort of method my latest estimate is that QQQE would be trading at about $61-66 if it were at the average valuation level since the tech bubble. There are lots of steps in the process, meaning this isn`t a precise calculation. But it gives a strong impression that today`s price of $64.57 is neither a particularly high nor particularly low valuation level. It seems pretty normal within rounding error. So, how to value it in future? You would probably be OK for quite some time just extrapolating the trend line for a while. Use my fair value range, adjust for inflation after today, and add about another percentage per year for trend value growth to get a fair value in the future. My "best" and "more conservative" trend lines rose at about inflation+8.1%/year and inflation+7.1%/year. So you could probably use inflation plus 7% as the value growth rate and not be overestimating the value. CPI was 292.3 when I last did the analysis to get the $61-66 figures. If both Berkshire and QQQE were trading at their average valuation levels in the last ~16 years, and both have a typical year of progress of value growth, then you might expect a one year return around 12-13% better for Berkshire than for QQQE starting now. Or half that advantage for two years, if they`re both at average valuation levels two years from now. A lot of "ifs", big error bars, but broadly speaking Berkshire is rather cheap right now whereas QQQE is about fairly priced. Or so my spreadsheets tell me, anyway. Sometimes I`m wrong. Jim