A few thoughts for the board:
One thing I have been debating is investing in a market like this. I think most can agree that this market has high valuations, and Graham talks about avoiding investing during a time of high market valuations. For me, I would rather wait until the market doesn't seem so irrational. I mean the market has rallied over the past week on what? The prospects of more central bank intervention? I guess we will see which way the market moves, but as of right now I personally think it is getting more and more overvalued.
Second thing is a question for the board. I have been fine tuning some of the models I am working on, however I can't decide on the discount rate to use. Buffett and other value investors use long term government bonds as their discount rate, which I like and plan on using. My issue is this: the 30 year government rate is ~2.3%, which is historically low and will distort any valuation produced by a model, so I am not sure if I should still use the long term government rate as my discount rate.
My two thoughts on this are:
1) use the low rate as it is representative of the market environment we are currently investing in and accept that valuations will be distorted (which can be helped by a Margin of Safety)
2) use a historical average to smooth out these low rates, however this bothers me as it seems like it is ignoring the investing environment we are in.
Lastly, for those who use a model to value companies what time frame do you use? For example, if we follow Graham's rule of selling at either a 50% gain or after 2 years, then what is the point of modeling earnings for 10 years if we potentially won't hold the stock for that long? Wouldn't it be better to model for 2 - 3 years and attempt to have a clear picture over that time frame, instead of projecting 10 years out?
Any comments, advice, or criticisms welcome as I am trying to hone my investment approach.
Thanks!
Micah |
