Graham and Doddsville -- Value Investing In The New Era Message Board

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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era

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To: porcupine --''''> who wrote (89)	3/17/1998 10:37:00 PM
From: Freedom Fighter	Read Replies (1) of 1722

My Model Shows Stocks at 7%-8% returns. >Does this mean the interest a bond would have to pay to generate the >same income as would the company's earnings as a percentage of the >stock's current share price? Yes. At current prices the present value of the free cash flow should yield between 7%-8%. (this is a long term view) That gives us a 1.2%-2.2% risk premium over 30 year govts. Clearly 7%-8% is much lower than the historical 10%. Then again, inflation and interest rates are lower than average. This all assumes steady PE ratios, interest rates and Return on Equity. If ROE returns to more average levels (above the long term average but lower than now) all bets are off. Returns will be lower and PEs should fall. Similarly, if rates and inflation rise PEs should fall and earnings will decline a little. If both should return to average levels: let's say ROE 15%-16% and inflation to 3%-3.5%, an efficiently priced market would tumble in a major way from here. (IMO)

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