Jim:
IMO, a multiple of 12x to 16x assumes a reasonably rosy projection for inflation, GDP growth and company growth beyond your ten year holding period.
If there is no expected real growth, than getting a 6% to 8% (inverse 12x - 16x) real return is not adequate, to my way of thinking. Expected real growth could be thought of as the projected growth after inflation, risk adjusted.
Long, long term expected real growth is negative. Most businesses succumb to the ravages of technological change and fresh competition, shrinking to nothing in the fullness of time.
Of course, you intentionally stated your answer in terms of an exit multiple, not a sensible valuation. And I agree with that outlook - one can defer exit if the multiples are not there until such time as they are - assuming earnings can hold on until that time.
These thoughts probably seem overly pessimistic to most investors today. We have all become accustomed to 'reasonable' multiple being 15x to 20x. But even this, IMO, is inflated unless future economic conditions turn out to be extraordinarily good. Give me back my 8x to 12x. That's something I can chew on.
Much of this thinking leads one to the net/net way of thinking, which is often what this thread is all about - and for very good reason.
Jim, I am amazed and impressed by your ability to remain sensible and deaf to the thundering of the herd of today's investment environment. I am certain such an independent attitude will bear bushels of fruit.
Peter |
