Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (17692)	9/11/2003 4:48:01 AM
From: mikeslemmer	Respond to of 78490

That's an interesting way of looking at it. My attitude has been that, for a variety of reasons, the markets are providing investors with very low yields at this point in history -- whether that be through fixed-income investments with low interest rates or through equities trading at high P/Es (and hence low E/Ps). Low rates of return like these are "supposed" to represent "low risk", for the obvious reason that companies need to compensate investors for taking on higher risk by offering them a higher rate of return. Presumably these low rates of return are partially a product of low inflation and actions by the fed. But whatever the causes, reversion to the mean (and gov't deficits, and inflationary monetary policies, etc.) will create future rates substantially higher than those today. In that context, owning a long-term fixed-income investment is inherently a high-risk activity. A perpetual, callable, non-convertible preferred stock would seem to maximize this risk. My fear would be that the company will never actually need to redeem the shares at $25/share, because by 2008 the interest rate environment will have lowered their principal value substantially. Instead, the company will do a tender offer and buy you out at a loss. One other thing - I think the right standard of comparison for an investment like this is the 30-year treasury (the closest risk-free thing to a perpetuity), not a money-market fund. Using that as a benchmark, your yield spread is more like 4%.