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Strategies & Market Trends : Value Investing
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To: James Clarke who wrote (9446)12/31/1999 8:37:00 AM
From: Madharry  Read Replies (1) of 78670
 
There is a certain fallacy in the argument you are making. you are assuming that that if long term interest rates changes today they will remain at that level for the infinite life of the cash flows but that is not true either. Investor expectation may well assume a different long term interest rate for the cash flow life of their investment that exists today, and it may be change at a much slower rate than a change in interest rates today. For example although the 30 year bond is now say 7.5%, the investor may already be assuming a long term discount rate of 8.25% and only if the bond goes way out of whack is it likely that panic will ensue, or that investors will switch portfolio allocations. big way. The exceptions being homebuilders, financials and insurance companies, which are more sensitive to immediate rate changes. I am also hypothesizing that investors in high growth vs. low growth investments may even have different assumed long term discount rates and I would surmise that the high growth investor has a much higher assumed discount rate because of the greater risk of the cash flow assumptions. So that a reit investor may be using discount rate of 8% but the high growth investor is using a discount rate of 12-15%.
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