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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Daniel Chisholm who wrote (230)	4/21/1998 9:03:00 AM
From: Reginald Middleton	Respond to of 1722

<My "problem" with using (risk-adjusted, as you have corrected me) equity risk premiums is that I don't think the risks and rewards people have assumed and earned in the past should completely control my criteria for valuation (though of course they are very important historical data, that should always be used to temper one's own bullishness or bearishness. > The historical premiums are adjusted to real time risk adjusted rates. Histoical data is used as a starting point. In addition, the cost of capital doesn't completely control valuation criteria, it simply gives the oppurtunity cost of the capital being used by the company in question. Think of taking out a loan for 10% to build an apartment complex. The 10% is used as the cost of your financing, yet it does not necessarily tell you how risky your real estate venture is (even though the efficient market may say allude to such). With the 10% figure, all we know is that you will destroy value if the returns from your real estate venture do not equal the cost of the money you sunk into it, 10% (not including cash tax savings etc.) <In the face of certainty, one can use a discount rate of 0% over risk-free, and then see if a company appears to be undervalued.> This is only true if you had a 200+ year old, monopolistic company with a 23 trillion dollar run rate, and the ability to finance itself at any given time simply by demanding the money at one of the lowest rates available globally. That company would then resemble the US's credit risk profile and qualify for arisk free rate. Since most companies don't come close, one has to adjust thier risk profile to match that of treasuries. This is not done arbitrarily, mind you. A disciplined investor uses set arithmetical process. One way to do it is to quantify operating and other risk classes (see below), another way is to capture the risk profile from the market, traditional CAPM. Buffet uses risk premium in his decision making. Risk Factor Raw Value Adj Value Avg Industry Value Deviation Std Dev Standard Value Percentile Standard Value x Weight = Contribution to Risk Index Operating Risk (48.79) 0.00% Adj EBIT/Beg Capital 4.02 (0.9) 2.0 (2.9) 0.7 (4.00) 0.00% -29.80% NOPAAT/Beg Capital 2.2 (1.0) 1.8 (2.8) 0.7 (4.00) 0.00% 34.96% Total COPAAT/Beginning Total Gross Cap 2.4 (1.3) 1.5 (2.8) 0.7 (4.00) 0.00% -89.84% Net Oper Cash Flow/Capital 4.7 (1.1) 2.6 (3.7) 0.9 (4.00) 0.00% -40.65% Capital Growth 10.3 (0.0) 3.0 (3.0) 0.7 (4.00) 0.00% -110.34% Strategic Risk (1.83) 3.39% Profitability (5 Yr Avg) (2.65) 0.41% Adj EBIT/Beg Capital 6.9 0.0 18.3 (18.3) 15.8 (1.16) 12.40% 0.05% NOPAAT/Beg Capital (0.7) 0.0 11.9 (11.9) 11.7 (1.02) 15.37% -33.43% Total COPAAT/Beg Total Gross Capital 7.1 10.8 13.7 (2.8) 0.7 (4.00) 0.00% -148.05% Growth (Compounded Avg. - 5 Years) (0.95) 17.01% Net Sales 20.59% 0.0 15.1 (15.1) 15.6 (0.97) 16.62% -49.42% Internal Capital 81.98% 0.0 15.2 (15.2) 17.6 (0.86) 19.39% -44.63% Asset Risk (4.27) 0.00% Working Capital Management (5 Yr Avg) 5.33 100.00% Account Recievables Days on Hand 115.1 2.8 4.2 (1.4) 0.4 (4.00) 0.00% 18.84% Inventory Days on Hand 96.9 (3.8) 3.0 (6.7) 1.7 (4.00) 0.00% 14.23% Plant Management (5 Yr Avg) (5.72) 0.00% Intensity: Weighted Asset Life 0.8 1.7 3.6 (1.9) 0.5 (4.00) 0.00% -261.73% Newness: Net Plant/Gross Plant 1.0 0.0 0.5 (0.5) 0.1 (3.84) 0.01% -130.87% Life: Gross Plant/Depreciation, Depletion 8.4 0.0 9.7 (9.7) 2.5 (3.86) 0.01% -103.43% Size and Diversity (3.14) 0.08% Size 964.2 0.0 4.6 (4.6) 1.5 (3.10) 0.10% -63.27% Foreign Income 25.79% (4.0) 0.2 (4.2) 2.6 (1.60) 5.49% -4.41%

To: Daniel Chisholm who wrote (230)	4/21/1998 1:35:00 PM
From: porcupine --''''>	Respond to of 1722

Daniel, re: valuing Boeing, in case you missed it and FWIW, what I wrote in post #193 was: This is the Value "story" on Boeing: Suppose there were only two auto companies in the world, or only two PC makers, or only two chip makers, or only two telcos. And, also suppose that one of the two was owned and managed by four Socialist-led Western European governments facing increasing labor strife that is not soon going away. In the case of jumbo jets, Boeing is the one that is run by successful union-busting capitalists. All of this Value is off-financial-statement. But, it's there and it's real. Alas, that doesn't solve the problem of how to measure this Value.