The Q ratio, or Tobin's Q, can be a reliable measure of stockmarket value. Introduced as a concept by Nobel Laureate Professor James Tobin in 1969, it compares the total market value of the companies whose shares make up an index with their net worth as measured by their replacement cost (what it would cost to recreate their businesses).
Historically, the Q ratio has always reverted to a long-term average of about 0.64 - usually via increases or decreases in stock prices, as these move far more rapidly than net worth. So comparing the current value with this figure allows investors to gauge the current degree of over- or under-valuation of a market.
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Watch Tim Bennett's video tutorial: What is Tobin's Q ratio?
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