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

To: Freedom Fighter who wrote (499)	7/13/1998 2:33:00 PM
From: Axel Gunderson	Read Replies (1) \| Respond to of 1722

Your facts are certainly correct but in trying to determine the appropriate/average risk premium for stocks over bonds it is necessary to use the assumptions that may have prevailed at that time and not the actual results. The actual results often are very different. You've really brought my earlier point back around to this. I pointed out how somebody who didn't consider the risks could offer a mathematical rationale for choosing stocks over bonds, using the concept of implied return. By the same token, you are pointing out that at some time somebody could have applied a short term (a few years) projection. But when we value the "market" should we be considering such short range fluctuations? Or is it more appropriate to say "hey, over the long haul this grows at 6.3% per annum, and darn it, I think that in 20 years we will look back and see that it has grown 6.3% (or maybe a little more) per annum?" This is where I am uncomfortable with the idea Porc put forth in response to my original post. I inferred from Porc's follow up post that he considered my explanation as somehow supportive of the idea that indexing makes more sense than investing in bonds. The problem is in looking at the implied return by itself. Taken to extremes, all else being equal, if the S&P 500 was at 11,000 today, instead of 1100, it would have an implied return of the 6.3% growth plus a dividend yield of only 0.14%, for a total implied return of 6.44%. All right, who on this thread will invest in something with a PE approaching 300 if it is growing its earnings at 6.3% per annum? Axel