Chuzz- As you know, I am in (general) agreement with your valuation methods...but let me try this again..
As you state, today's price should be a function of future cash flows, the riskfree rate, etc...all this is true..
Simultaneously, however, we have a situation where it is clear that, some companies (like Dell) are cheap compared to others...ie, even given its (supposedly) lofty valuation, Dell's is generating more cash flow (per current valued dollar of stock price) than many other companies (on or outside the S&P)..
So, either, (1) All stocks are overvalued...including Dell...and subsequently, all have to come down in price (but Dell should come down less than many others) or (2) Some stocks are properly valued or even undervalued (again Dell would be in this camp in this scenario) but there are many stocks that are overvalued that must depreciate at some point...
Either case...if you are owning stocks....Dell would look attractive...that is, RELATIVE to other stocks...(but may or may not to other investments: real estate, bonds, etc.)
It is a fact that most portfolio models (must) maintain a permanent % holding of stocks in a portfolio, regardless of economic conditions and/or interest rates...Even if rates were to shoot to 10%, those portfolios would still hold some stocks...
Additionally, there are hundreds of mutual funds whose mandate it is to hold stocks. period. They do not have a choice to invest in anything but stocks..
Finally, within the stock universe, there are funds that only invest in large caps, or techs...you get my drift...
These factors skew a stock's true price away from the "pure" valuation model, as you list it.....
Having said this, in order to figure out what the price of a stock should be at this time and at a fixed point in the future.....wouldn't it make sense (inherently mean that you must) include some factor of (1) liquidity and (2) relativity (that is, the stocks valuation relative to other stocks).....given that (1) & (2) put a permanent floor/upward pressure on stock prices...
(Also, one could include the additional effects of taxation policy and inconvenience of switching (and other factors) which makes changes in investment holdings purely as a result of a decrease in % return unlikely...)
I look forward to your thoughts... |
