re: PEG and re ratios. The poster who requested info regarding a definition of, or how, a security is pegged to the Nikei, also wrongly got a response about the "PEG" ratio. PEG is a ridiculous figure and an inappropriate metric for a value investor. I think it's promulgated by the Fools, who themselves, imo, are generally ridiculous -g-.
Note to Jim Clarke: Every once in a while there's a start of a discussion about the importance of interest rates and a focus on "the relationship between ROE and price/book value". I want to mention at this juncture that I agree with you, but going further, I believe that there should be a way - and there is a way (imo) - to link them. I've not seen any discussion of this linkage on the Value thread. I myself do use an arithmetical ratio that combines in one number a company's ROE, p/b, and a Cost of Capital factor. I then use this number to provide a rough estimate of the "fair" value of a company. The purpose is to provide a simple screening tool. It seems to work out well with established companies where book value is important to profit generation (i.e manufacturing companies vs. service/consulting companies.) Since I use the relationship as a screening tool, my cost of capital is a multiple of the current interest rate. Cost of capital varies from firm to firm of course, but it defeats the purpose (screening) if such individual capital costs have to be calculated on a stock-by-stock basis. Right now I just use about 8% or 9% or 10% (or all three to get a range)depending on how I weight the importance of debt and/or book value, both of which are easily seen on most internet stock databases. In this way I can calculate, for any stock, a very rough range of estimates of "fair" value (using Yahoo) and compare it to the current stock price - all in maybe 10 seconds.
(which is my intent with this activity)
Paul |
