To: Wyätt Gwyön who wrote (48881 ) 11/14/2001 10:49:16 AM From: Bruce Brown Read Replies (1) | Respond to it seems to me that you are barking up the wrong tree. instead of looking for the MSFT of the 1930s to justify the valuations of all US large-growth stocks today, why don't you look at the aggregate PSR of the market now vs. then. sure, MSFT is exceptional, but despite the exceptionalness of MSFT, the Nasdaq as a whole has negative earnings. the Nasdaq as a whole has negative earnings the idea behind mentioning MU was not to suggest it is a gorilla stock, but to offer one example of how supposed "trough" valuations of a cyclical IT co have changed between 1990 and today. this is where it's important to distinguish between "good business" and "good investment". all else being equal, one prefers a good business. but usually a good business is priced as such (expensively), reflecting a lower cost of capital in the form of lower expected returns. in contrast, a business with "troubles" has a higher cost of capital which is typically reflected in higher expected returns. this difference is key to understanding why value stocks have historically outperformed growth stocks. it's not that they're better businesses--often, it's the opposite--but rather, even a poor business can possibly provide a good return at the right price, while even a good business can possibly provide a bad return at the wrong price.
