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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Richard Nehrboss who wrote (28029)	8/31/1999 10:39:00 AM
From: John Malloy	Respond to of 77398

"Cisco's value also depends on the minimum rate of return an investor will accept" Maybe I don't understand your wording, but this sounds remarkable like the greater fool theory. No, this is not the "greater fool" theory. It is the "intelligent investor" theory. An intelligent investor does not set a minimum acceptable return by whim. He sets it instead by his opportunity cost -- the return he could have earned from his next best investment opportunity. One investor's opportunity cost might be the return he expects from an index fund. Another might choose the interest rate on his mortgage, if his next best opportunity is to prepay the mortgage. Still another might choose the interest rate on money market funds. Add a risk premium to the opportunity cost, that's what makes up the minimum acceptable return for that investor. The risk premium depends on how risky an investor judges an individual stock to be, and on that investor's aversion to risk. Simply choosing a high minimum acceptable return is a losing game. The higher the minimum acceptable return, the higher the discount rate, and the lower the value of the stock. For "value of the stock" read "This is the most I can pay and still earn the minimum return I specified". Set the minimum acceptable return high enough and no stock will be attractive. The most the investor should pay will always be well below the market price, and the stock will always cost too much. In your analysis, you give forecasts of 44% growth tapering to 28%. I'm not sure what your graph looks like, but I assume it's somewhat smooth, and yields something like 35% average for the next five years. As I've indicated, the professionals that make there living from putting their arms around this are projected a 28% average for the next 5 years. I draw smooth curves on a sheet of graph paper when I forecast growth rates and price/book ratios. The forecast curve I drew for Cisco extends the 1990's pattern of slowing growth, when growth slowed from 60 %/yr. to 45 %/yr. My forecast curve averages out to 36.6 %/yr. over the next five years. Those professionals you refer to must be projecting growth to slow to something like 11 %/yr. -- just slightly faster than the growth in current-dollar GDP -- in five years! That doesn't square at all with projections I read about the growth of the internet. I choose to ignore those professionals. John Malloy