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

To: Freedom Fighter who wrote (630)	8/14/1998 12:49:00 PM
From: Axel Gunderson	Read Replies (1) \| Respond to of 1722

According to finance models there is a point at which deleveraging, even if it doesn't help EPS as much as share buybacks, enhances value. Investors will pay a higher multiple of the lower EPS if the capital structure is more to their liking and less risky. Count me among them. Part of it is temperament, no doubt, but in a subsequent post you illustrate that it isn't simply that: Stocks as a group have not been more risky relative to other investments. That is only true if measured on an actively managed basis. S&P and Dow Jones are constantly substituting less favorable businesses with better ones. Thus the favorable returns. There was a wonderful study done by Stephen Leuthold a few years back. He tracked a bunch of industry leaders over the decades. You would be shocked how many faded or disappeared over time. Exactly. And one of the causes of disappearance has been debt! I accept that our government is likely to bail out a very large corporation. But that gives me little comfort to invest. The simple continued existence of a corporation does not represent to me a sufficient margin of safety. I believe that there is a greater margin of safety in a business being financially strong and not potentially needing such a safety net. In the event of a recession, it is invariably the leveraged firms which suffer the most. I am not taking any position on whether a recession is on the way. But it seems to me that for investors to earn extraordinary profit from investing in GM, any "value" must be realized prior to the onset of the next recession. Axel