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

To: Berney who wrote (387)	6/11/1998 10:36:00 PM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

A great economy is not a perfect economy, which is what Dow 9200 was implying earlier this year. It is now "correcting", as they say, to a more reasonable level.

To: Berney who wrote (387)	6/15/1998 9:23:00 PM
From: Freedom Fighter	Read Replies (3) \| Respond to of 1722

>Porcupine, Let's see -- great economy, low unemployment, low interest >rates, strong dollar -- etc. Do you think Mr. Market heard? This week >it appears that fear is winning over greed. Unless you believe that the above scenario is now a permanent, forever, and an only to improve situation, stocks are dramatically overpriced based on all historical precedent. That's the problem. If close to perfection is forever, stocks are now discounted at around 5%-8% depending on a few assumptions (including some very favorable ones). The current projection for inflation over the next 10 years is about 1.7%. The long term real rate of return on stocks is 7%. This is not very appealing math. It implies a serious decline just to get to the long term average return assuming the favorable scenario. If however, as economists teach us, there are long term relationships between the cost of capital and its return and God forbid there are still business cycles, policy errors, external shocks etc... it is very ugly math. We can debate the economics, but unfortunately we can't debate the math! I can't repeat this often enough. THE VALUE OF A BUSINESS IS NOT A FUCTION OF THE CURRENT EARNINGS OR YEAR FOWARD PROJECTIONS AND THE CURRENT INTEREST RATE SCENARIO. NOONE VALUES BUSINESSES THAT WAY IN PRIVATE OR INFORMED TRANSACTIONS EVEN THOUGH THERE ARE MANY FORMS OF INVESTMENT (possibly successful) THAT USE THAT APPROACH. THE VALUE IS A FUNCTION OF LONG TERM FREE CASH GENERATING ABILITY DISCOUNTED AT A RISK ADJUSTED RATE. THE RISK PREMIUM CAN OFTEN BE QUITE SIGNIFICANT AND THE EARNINGS PROJECTIONS ARE NORMALIZED WHEN APPROPRIATE. The upside to the possibility of a "NEW ERA" of valuation is not much above high grade corporate bonds, mortgage backed securities or even cash. The downside is a disaster to occur at some point!