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To: Chuzzlewit who wrote (172)	11/17/1999 10:13:00 AM
From: Edwarda	Read Replies (1) \| Respond to of 214

I think it is the height of foolhardiness to make such forecasts five years out. It may be, but it is part of an investor's due diligence, nonetheless. If one does not assess the P/E to expected growth rate, it starts to get a bit tricky trying to figure out a reasonable valuation for a growth company, don't you think? Your points about book value are valid, but when the accounting is relatively clean, book value is useful as a part of the valuation process--although only a part.

To: Chuzzlewit who wrote (172)	11/17/1999 11:15:00 AM
From: The Other Analyst	Read Replies (1) \| Respond to of 214

For example, on what objective basis does an investor draw those book value trajectories? I don't think the price to book value trajectory in his analysis is very critical to the way it works. My guess is he is using the so-called "clean surplus" method where starting book value plus EPS minus DPS equals ending book. It is flawed, but it is still a discipline that improves the outcome compared to not using any constraints. But the real model seems to be just DCF. Second, there is the assumption that stocks trade on a multiple of book value. No, I got the impression he was assuming stocks trade on the present value of future cash flows to the investor. The price to book ratio is only used in the model to derive the terminal value. At least that was my impression from what was on the site. Third, the notion of valuing a stock on the basis of book value makes sense. Book value is a mine field because it is based on a variety accounting standards which may or may not make sense. Some of these include the reasonableness of management's depreciation estimates, the use of historic cost of appreciating assets such as land and the arcana of accounting for acquisitions. These flaws in book value are correct as far as the book value you see on a balance sheet produced by the company, i.e. for past results. But as you project out further and further, the starting book value has less and less relevance, and the projected book value, based on adding earnings and subtracting dividends, becomes more important as a percentage of the total projected book value. Again, all he is really doing, I think, is giving novice investors a discipline to force them to think rationally about the terminal value assumption. Finally, the best use of DCF techniques is based on timing of cash flows. But his analytic framework is based on book value, not cash flow. I think he does use dividends, and the timing of those dividends, in his valuation. Again, I do not think he is basing anything but the terminal value on the price to book ratio. The author makes some unwarranted assumptions -- if you look at the price of stocks you must be struck with important parameters: investors' assessment of future growth and interest rates. Both of these are fluid, but especially the growth assumptions in rapidly evolving businesses. I think it is the height of foolhardiness to make such forecasts five years out. Interest rates do enter into his model. He comes up with a discount rate, although it is a slightly flawed application of the CAPM, as I noted. For practical purposes, not a big deal. Are growth assumptions fluid? Of course. He seems to be saying you have to keep monitoring and revising your projections as new data comes in. I agree. Can you make forecasts 5 years out and be right? Of course not. That is NOT the question, however. The question is can you make forecasts 5 years (or for any other horizon) and be modestly more right than the expectations inherent in the consensus forecasts being made by others. If you can, then you can "beat the market". The way you can do it is not from getting caught up in the details of the number crunching, but in making some judgments about big picture issues. Like Iridium is a short because there is not going to be sufficient demand from executives in deserts miles from anywhere for the phone service. I think the contribution of projections and valuation analysis actually increases as the situation becomes murkier and more difficult to quantify.