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Technology Stocks : Warren Buffett
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To: Lars who wrote (25)12/21/1996 8:51:00 AM
From: shean bond   of 82
 
lars

thanks for your reply.

i have a copy of hagstroms book printed in 1995 - it says its the updated version.

i've downloaded a MS XL V5.0 file from a site called 'investorweb' for the 'two stage "dividend" discount model' and have used it to repeat the some of the numbers in the appendices of hagstrom's book. it works ok and follows the method outlined by hagstrom.

the main problem i have with this model is hagstrom's capitalisation rate for calculating the company value after year 10 in his examples. he uses a rate of 'k-g' (his notation) which is the discount rate minus the second stage growth rate. in his examples, mostly k=9% and g=5%. because this number (k-g) is typically small, it causes the calculated company value in year 11 to be very high. so high that it generally swamps the calculated npv of the previous ten years earnings.

i feel that the capitlaisation rate should be only 'k', not 'k-g'. if it where only 'k', then the final company value calculated in year 11 would be a lot less than what hagstrom calculates. on page 155 of hagstroms book, the 'permanent holdings' chapter on coca cola, hagstrom says:

"When a company is able to grow owner earnings without the need for additional capital, it is appropriate to discount owner earnings by the difference between the risk-free rate of return and the expected growth rate of owner earnings."

to quote prof somner-miller: "why is this so?"

i'd be interested to hear about the modifcations that you have made to the buffett/hagstrom method.

apart from the capilatisation rate used in the 10th year, i feel that the method is sound for checking the value of a company against its actual market capitalisation. it's the only rational method that i have come across for assessing whether a share price is reasonable or not.

shean
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