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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (48565)	11/5/2001 9:52:37 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 54805

Hi Huey - thanks... but I note in the light of a nice sunny day a few mistakes. For example, 153 + 47 - 172 = 28, not 18. And in my spreadsheet I calculated the sum of (PV of [diluted EPS]), which gives a larger value than the ([sum of PV of E] per diluted share). However, these minor errors in mechanical math are trivial compared to the error in using such an analysis to try and put a fair price on a stock. IMHO. Yes, it's right to establish economic value as the present value sum of profits. But... Rarely, if ever does a company grow monotonicly. So extrapolating a constant growth forwards is dangerous to say the least. In the real world, it seems to me that corporate growth is asymptotic towards an optimum size - a practical reflection of the law of diminishing returns. One tends to get much higher growth in earlier years and lower growth in later years: a convex curve. Exponential modelling gives a concave curve. Two such curves from the same origin will have different areas, further compounded by the time-value-of-money effect. The second yeuchy flaw is that it's all well and good to add up the next 10 years. But we shouldn't forget about the ten years after. Or the ten following that. Sure, time value of money makes a dollar twenty years out worth a lot less than a dollar today. But zero isn't fair either. We should add this thing called "residual value" to the end of our computation. The third flaw is that we aren't taking into account how we plan to make money. We aren't purchasing the whole company. Just a slice. And the ONLY way we will make money on the deal is if we monetize our slice. Which can happen in three ways: (a) we sell it, or (b) we collateralize it, or (c) the company provides us with a share of its return, e.g. dividends. And (b) means we have to put it aside as though it has been sold at some fair value... which is (from a valuation perspective) the same as selling it. If we assume dividends will be zero then the only valuation that matters is the "what I expect to sell it for" kind. Which is tantamount to saying "what he/she/it will be willing to pay for my shares then". So today's valuation doesn't matter a whit. What matters is an N-year-from-now valuation. In other words, the part that we tossed away and called "residual value" has more meaning than the part between then and now. I know the thread doesn't want theory. I also suspect that a certain amount of dry math takes the fun out of "The Game" (it's a lot more fun to cheer on a stock as its price rises... been there, done that...). A lot less fun to look around and see only dim prospects... So I know what a wet blanket would feel like if it had feelings. Besides wet. And it's uncomfortable. So I couldn't let the post sit like it was. John.