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Pastimes : Bad investing information/advice on the net contest
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To: The Other Analyst who wrote (171)11/16/1999 5:14:00 PM
From: Chuzzlewit  Read Replies (2) of 214
 
Perhaps you missed this part:

analyticalbooks.com

If you were to go back in time -- say ten years -- and used the same reasoning would his method have predicted the increase in the book value of MSFT or CSCO or INTC?

The problem I have with the entire approach is that it is replete with hidden assumptions. For example, on what objective basis does an investor draw those book value trajectories? Second, there is the assumption that stocks trade on a multiple of book value. Third, the notion of valuing a stock on the basis of book value makes sense. Book value is a mine field because it is based on a variety accounting standards which may or may not make sense. Some of these include the reasonableness of management's depreciation estimates, the use of historic cost of appreciating assets such as land and the arcana of accounting for acquisitions.

Finally, the best use of DCF techniques is based on timing of cash flows. But his analytic framework is based on book value, not cash flow.

The author makes some unwarranted assumptions -- if you look at the price of stocks you must be struck with important parameters: investors' assessment of future growth and interest rates. Both of these are fluid, but especially the growth assumptions in rapidly evolving businesses. I think it is the height of foolhardiness to make such forecasts five years out.

TTFN,
CTC
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