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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: cfimx who wrote (312)	9/22/1998 3:29:00 PM
From: Joseph G.	Read Replies (1) \| Respond to of 4691

<< Is is certain, but will not grow.>> Only if you keep it under mattress. If you buy another bond with interest received ... You're trying to include compounding in stock return, and to exclude it in bond returns.

To: cfimx who wrote (312)	9/22/1998 3:31:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 4691

Twister, Let's take a look at the numbers on Gillette. During the last 10 years its EPS grew at a 17% annual compounded rate. (That's using an est. for 98 earnings of $1.45) Of this growth half of it (8.2% each year on average) was from expanding profit margins, meaning that EPS would have grown just 8.8% a year had margins held at their 1988 level. Given the fact that top line growth the last 3 years is barely above 4% you may be lucky to get that 8.2% EPS growth in the coming years. If margins decline you may actually get NO earnings growth. Where will it come from? So your assertion that this "coupon" of earnings will grow between 5 and 15% a year is very unlikely. In my earlier post I raised into question whether earnings growth from the market as a whole can match the yield on the 30-year Treasury, around 5%. Since then I have read the following by Martin Sosnoff in Forbes: The bull market of the Nineties was fueled by rising profits, but it's getting harder and harder to make a case for long-term profitability compounding at more than 4% per annum. forbes.com The point I was making is purely mathematical. If earnings do not grow faster than the rate of a fixed instrument, you would be better off buying the fixed coupon and reinvesting its proceeds each year. Aside from preferential tax treatment, you would come out ahead. The conclusion- that this assumption that the market P/E belongs above the reciprocal of the Treasury yield is false because you must consider the growth of earnings as well. Sorry I didn't state this more forcefully. -Robert