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To: stock bull who wrote (42177)	5/15/1998 2:09:00 PM
From: Chuzzlewit	Read Replies (1) \| Respond to of 176387

Stock bull, you raise some interesting questions. Unfortunately, I don't have any answers. However, I do have some thoughts. Conceptually, a valuation model is easy. Just discount the expected future cash flows at the appropriate risk adjusted discount rate and you are there. Unfortunately, nobody seems to know how to do this in a practical manner. For instance, how can we forecast growth beyond the next few years when econometric models are incapable of doing that, especially considering that the shape of the economy ten years from now will depend to a great extent on actions taken during the intervening years? The second issue is that even if forecasting growth were not a problem, current valuation models take into account net money flows into and out of equity markets. In my opinion this is a major theoretical flaw in valuations. I suppose that you might argue that the choice of discount rate includes those forecasts, but I don't believe that's correct. The narrow measure of valuation, P/E is particularly vulnerable in several respects, because it is a static historical metric. That is, using it as a benchmark does not take into account changing interest rates, perceived changing growth rates or perceived risk. So, the conclusion that I draw is that current stock market valuation models do not accurately reflect the way investors value stock. Here's the best I can come up with. Take the stock's PEG and divide by the market's PEG. At least this gives you a relative valuation metric. I believe that the PEG for the market is around 1.25. As to your question about herd mentality, I will leave that to the TAers. TTFN, CTC