John, it's all in the assumptions, and yours are fallacious in any number of respects.
First, you assume that the worth of a stock depends on its book value. False! A stock is worth what a willing buyer and a willing seller believe it's worth. The fact that you believe that book value is the determining factor simply adds your bias to the market price of stocks you trade. I happen to believe that the worth of a stock depends on the present value of the expected stream of free cash flows. But I don't substitute my view for the market's. I simply use that as a basis for buying and selling decisions.
Second,you assume that book value has real meaning. False! Book value is a fiction dependant on a variety of accounting assumptions including, but not limited to the historic cost of assets, the judgement of management concerning reasonable depreciation rates, SEC rules regarding the write off of IPR&D for acquired companies under purchase accounting, the level of dividend payout, etc.
Third, you assume that you are capable of forecasting book value many years out. That assumption requires a huge leap of faith because it not only requires that you can forecast long term operating earnings with some level of accuracy, but also that you understand the future accounting standards that the company will employ. The fact is that technology companies are evolving their product offerings so rapidly that looking out beyond a year or two is a fool's mission.
Finally, you tacitly assume that a company's share price behavior suddenly adjusts rather than gradually and asymptotically approaching the eventual lowered growth rate.
About a year ago, the NY Times did a study on buy and hold on AT&T beginnings just before the company was broken up. It assumed that all of the resulting companies would be held, and a DRIP for dividends. The study showed that over the holding period the initial investment returned around 19% per annum. And that study was published before The VOD buyout of ATI (at a huge premium), and the consolidation of the baby Bells.
TTFN,
CTC |
