Wayne and Berney:
I think there is a rational middle ground between "there is one,
and only one, way -- now and forever" and "any way might be just
as valid as any other way".
I agree with Dark Side that the only economically meaningful
definition of an asset's long term value is the present value of the
cash that asset eventually generates for its owners.
If an equity asset generates cash for its owners, eventually the
price the Market will pay for that asset will tend to converge
with prices that the Market is paying for a stream of cash of
similar magnitude and reliability from some other sources, for
example, bonds or real estate. That's the basic meaning of
Capitalism. To mix (the 18th century) Adam Smith's metaphor with
(the 20th century) Benjamin Graham's: Eventually Mr. Market's
invisible hand picks up the the $100 bill lying on the ground.
That doesn't mean that prices can't move up for other reasons.
It just means that those other reasons have to do with factors
outside the purview of economic analysis.
On the other hand, there are different approaches to forecasting
the cash that an asset will generate in the future. In the past,
differing indicia of past and present financial performance have
had more or less success in predicting an asset's future
generation of cash flow. Graham's typical methods were indirect. Buffett's methods are more direct, and more narrowly
focused.
Both succeeded mightily in identifying securities whose short term price was temporarily well below their long term value. It is my (somewhat controversial) view that a significant factor in the similar predictive success obtained by differing approaches to measuring Intrinsic Value was the result of the different political and economic climates that obtained during the bulk of their respective investment careers.
Elsewhere, I have characterized the difference in these two eras
as that between 1) boom and bust Capitalism, and 2) long term
cold-war/welfare-state Capitalism.
I think the current era, the 3rd Era if you will permit, is, unlike the preceding two, one of long term falling costs and rising productivity. If so, this would imply that a somewhat different (though by no means drastically different) mix of criteria of fundamental value will have a greater success in predicting which equities are currently selling at prices below the present value of their long term cash flows -- than would some of the methods of the past.
porc --''''> |
