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

To: Bob Martin who wrote (579)	11/21/1998 12:35:00 AM
From: James Clarke	Read Replies (3) \| Respond to of 4691

Good discussion on an important topic. I also believe that P/E vs. growth is a starting point, but leads to no "rules". I know PEter Lynch did very well with it, but something tells me that that was not all he did. Flaw #1: Tell me what the growth rate in the future is going to be and I'll tell you what the stock is worth, but nobody can do that. Using the historic growth rate will get you in all kinds of trouble. Flaw #2: A bond has zero growth. Does that mean its worthless; i.e. a zero p/e equal to its growth rate? Of course not. Flaw #3: Interest rates. As interest rates go from 5% to 10% and back, the fair value multiples change. At lower interest rates, two things happen. First, a 15% grower is worth more than it was worth when interest rates were 10%. And second, the value of an additional point of growth will expand. That all said, earnings in today's environment are the basis for any study of growth. I can name a number of stocks which showed earnings growth completely unrelated to the economics of the business and fooled a lot of people. So the bottom line of investing is to understand exactly where those earnings are coming from before you start worrying about what valuation model to use. And last but certainly not least, to give our Dell friend something to think about - Dell was featured in Federal Express's annual report. What happens to Dell's quarter if Fedex goes on strike, as appears possible. Even if the world were perfect, Dell is still a sell at this price. I can't think of any stock that has been a good long term buy at 75x peak cycle earnings. JJC