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

To: porcupine --''''> who wrote (466)	7/4/1998 6:11:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

>The question for today is not what methods Graham used in 1934 or >Buffett used in 1974, but which methods would someone adopt in 1998 >that will identify undervaluation in a handful of the 1/3 of the >stocks that inevitably nicely outperform the averages going forward. I agree with you. I have one cautionary comment (as usual). Both Buffett and Gates made less hedged positions about the sustainability of current corporate margins. They don't think they are. If as Buffett says, current prices fully reflect those margins as if they are permanent ("and this is a reckless assumption") (I think they more than do that) then here's a little sobering math. If nominal GDP grows at 5% (3% real 2% inflation) and S&P500 book value grows at that pace (which should approximately be the case give or take): S&P500 Book Value will be 308 in 10 years. If ROE returns to the long term average of 14% as they both seem to suggest (again give or take), and the appropriate multiple for that ROE and 2% inflation is 17.5 (above average, but the average for 2% inflation) the S&P500 will be at 754 in 10 years. Finding stocks that outperform will probably barely get you even over then next 10 years! And there's a potential disaster lurking between now and then! To do better you are betting on something that economics, Buffett and Gates say can't be. Based on their conversation this is probably what their view is. (naturally give or take) We will truly have to find rare gems to do well unless there is bear market that creates very good values.