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 (1428)	3/14/1999 8:44:00 PM
From: Freedom Fighter	Read Replies (2) of 1722

Porc, I basically agree with everything you said. >>Returning to definition #1, I know of no fundamental economic law that states that the profit margins, ROE, etc. that prevailed in the 1820's, 1890's, 1930's, and so on, are causally connected to what they will be in the present or the future.<< There is no economics law I know of either. My view on this matter is mostly one of risk/reward. The current bet is close to a 100% certainty that past relationships will not return. Current stock prices demonstrably reflect (valuations that is) that we are in a new era of high and sustainable ROE, a wide spread between cost of capital and its return on direct investment and a low risk premium between bonds and passive equity investment (stock and bond risk premiums). There is something inconsistent in this that one would expect to change (intuitively to me that is). Why should the spread be higher than usual on direct investment and lower than ususal on the passive investment in the very equity that stocks are in part a claim to. Everyone who is capable of it should just go into business for themselves because the reward is so much greater. Yet if they do you would expect more normal relationships to return. In my mind it's more or less an intuitive perception that the first 125 years was not an accident. There are some relationships that will be forced even if they are not identical to the past. For myself, if I can get a 15% return on captal from direct investment and stocks continue to get discounted at much lower rates of return than in the past, I will become an active investor. Wayne

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