Re Professor Siegel's article in the WSJ:
"One of the fundamental tenets of economics is that value is created by scarcity, not by usefulness, need or desire. Water, necessary for the sustenance of life, costs pennies, but diamonds, used solely for adornment, fetch astronomical prices. "
When he says value does he mean price?
Not the same thing.
What price was he paid for the article?
Does that equate to the value of the article to him?
What price did I pay for the article? Does that equate to the value of the article to me?
"My reluctance to pay 700 times earnings for AOL is not at all because I am a "value investor" seeking low P-E ratios. In my book, "Stocks for the Long Run," I rejected the conventional wisdom that the "Nifty Fifty" of the early 1970s -- those high-flying stocks that carried an average P-E ratio of 40 -- were overvalued. Even from their market peak in December 1972, many of these firms, such as Philip Morris, Pfizer, Bristol-Myers, Gillette, Coca-Cola, Merck, American Home Products and Pepsi, outperformed the S&P 500 over the next 25 years. But none of the firms that outperformed the market had a P-E ratio in excess of 60 in 1972, and even the most deserving stock of this original group, Coca-Cola, would have been overvalued at a P-E ratio of 80."
Pardon me, but in the 1970's these were all seasoned companies (Coke was about 50 years old then wasn't it?), with no chance to grow 100% in the next year or for the next several. Comparing them with these baby companies (AOL and Yahoo) that haven't even explored much of the demand space for their services yet is comparing apples to oranges. Say we compared the salary per paper published between Mr. Siegel and some brilliant new instructor working in an obviously hot and important area that Mr. Siegel and everybody else doesn't know much about (I'm thinking biology here, not economics). Well, the new instructor might seem expensive on a per paper basis, but since we are comparing apples and oranges, we can't really know whether the salary for the instructor is too high or not. We can probably tell with Mr. Siegel, since even though he is unique just like everybody else, his work is more easily compared with other professors of finance who know something about stocks. |
