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

To: cfimx who wrote (747)	12/23/1998 11:11:00 PM
From: Chuzzlewit	Read Replies (2) \| Respond to of 4691

Obviously, you didn't reread what I had written, so I will explain in greater detail. If you unitize a P/E you will find that the units turn out to be years -- a meaningless metric if you stop to think about it. That's why I divide through by growth rate. That gets rid of the year unit and leaves you with a number. So you get a much cleaner and meaningful metric. These numbers are not P/Es, and I never use P/Es. If you take the time to decompose the math, you will find that the method really is just a way of collapsing future earnings and puts a relative valuation on them. The problem is much deeper than simply getting rid of meaningless and confusing units. The problem is that using YPEG is much too simplistic because it is insensitive to externalities like risk-free interest rates or the consensus view of the economy. Clearly, one ought to apply different yardsticks for valuation under conditions of inflation and high interest rates then under conditions of deflation and low interest rates. What sense is there in using a common heuristic like a YPEG of 1.00 or less? Valuation is a very complex business. Not only do you need to know with some degree of certainty what the future cash flows look like, but you also need to know what the appropriate discount rates need to be. Those discount rates of course consist of a risk free rate of return (easy to estimate) and an appropriate risk premium based on the perceived riskiness of the forecasted cash flows. In point of fact, this task is impossibly difficult, unless of course you want to make a reer of analyzing one company. So I devised a simple technique that does away with the need to endlessly massage data. It really boils down to asking whether the price of growth in the stock you are examining is consistent with the cost of growth for the market as a whole. I find the S&P500 to be the best measure, because its components have been exhaustively analyzed. So, instead of reflexively deriding a concept which you do not understand, you might better spend your time dealing with the basic concepts I have outlined. I always welcome constructive criticism. Try this concept on for size. We agree that momentum investing is not investing at all, but is really gambling. But I think we disagree when we talk about "value" investing. I consider "value" investing a form of arbitrage against an arbitrary standard. For example, if you invest in a stock that you believe to be valued at 50% of its true value, and you buy today and the stock doubles tomorrow I would presume that you exit the position tomorrow. Is that investing? It seems to me that you consider it investing because the time frame generally lengthens substantially over my example. Finally, you asked about cash flow in Dell. That's fairly easy to calculate. It is pretty close to earnings less interest income plus depreciation less the value of stock options issued. There is relatively little in the way depreciation, and owing to Dells very short cash conversion cycle earnings are a pretty good surrogate. But, as I outlined earlier, it is unnecessary to go through detailed future cash flow projections. TTFN, CTC