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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: om3 who wrote (16884)1/31/2000 11:48:00 PM
From: Mike Buckley  Read Replies (1) of 54805
 
Steve,

To be honest with you (and please don't be offended by this) I didn't read much of your post. I can always go back to it if needed, but for now the issue is that I disagree with the premise upon which your thinking appears to be based.

The problem is that if the market is efficient it will price a stock so that the return is just the risk-free interest rate plus a premium for risk. So even if the company is growing at a tremendous rate, the efficient market price will be so high that the stock price only grows at a boring rate.

Take a look at the graphs on 100 and 107 in the revised manual. If you agree with the authors as I do, the efficient price is the risk-adjusted rate of return plus the economic value added. As the company continues to grow, it does so because of increased economic value added to the risk-adjusted rate of return. It's that growth that will fuel the stock price over the years even if if the market does efficiently price the stock.

Even if you come to side with me on this, I believe it's nothing other than an academic scenario. It's simply not a realistic expectation that the market will consistently price gorillas and gorilla candidates efficiently.

Make sense?

--Mike Buckley
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