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

To: porcupine --''''> who wrote (1428)	3/14/1999 8:44:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 1722

Porc, I basically agree with everything you said. >>Returning to definition #1, I know of no fundamental economic law that states that the profit margins, ROE, etc. that prevailed in the 1820's, 1890's, 1930's, and so on, are causally connected to what they will be in the present or the future.<< There is no economics law I know of either. My view on this matter is mostly one of risk/reward. The current bet is close to a 100% certainty that past relationships will not return. Current stock prices demonstrably reflect (valuations that is) that we are in a new era of high and sustainable ROE, a wide spread between cost of capital and its return on direct investment and a low risk premium between bonds and passive equity investment (stock and bond risk premiums). There is something inconsistent in this that one would expect to change (intuitively to me that is). Why should the spread be higher than usual on direct investment and lower than ususal on the passive investment in the very equity that stocks are in part a claim to. Everyone who is capable of it should just go into business for themselves because the reward is so much greater. Yet if they do you would expect more normal relationships to return. In my mind it's more or less an intuitive perception that the first 125 years was not an accident. There are some relationships that will be forced even if they are not identical to the past. For myself, if I can get a 15% return on captal from direct investment and stocks continue to get discounted at much lower rates of return than in the past, I will become an active investor. Wayne

To: porcupine --''''> who wrote (1428)	3/15/1999 12:18:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Porc, >>If the present economic value of all future payments to current labor is zero, and therefore itself not an asset, and if U.S. entrepreneurship, which is among the world's most vital, also has an economic value of zero, then, yes, the market price of all U.S. businesses must converge to the replacement costs of its assets in the long run.<< In order to be worth the value of the assets deployed, a business (as a going concern) must earn some minimum return on its invested capital. Let's call it 10% for this discussion. Otherwise why not invest the capital in bonds or another alternative and grow the capital faster. This is a somewhat traditional and logical view. If the labor etc.. is not generating 10% on the existing capital, it may be foolish to reinvest the profits. In fact, the business is worth less than the value of its current assets (as a going concern) and should be liquidated to maximize value. There are probably thousands of companies that fall into this category but continue to operate. There are thousands of others that just make the grade. Only those that will generate superior returns are worth more than their assets. I think the value of labor and entrepreneurship is part of those returns. >> Since these replacement costs always fall in the long run (the inverse of the fact that the productivity of assets always rise in the long run) then inflation adjusted stock market prices should have been falling for the past 200 years, instead of rising.<< The increase in the value of both replacement cost of total assets and market value of stocks is related in part to inflation and in part to the reinvestment of profits. Let's say a $5 dollar hammer generates 50 cents. If 10 years later it costs $10, hopefully it will generate $1. If I have replaced the $5 dollar hammer from depreciation and profits and bought a second one from profits I now have $20 worth of assets generating $2. This is an increase in assets and most likely market value of stock. There are accounting issues here for depreciation, but that is another topic that I would like to save for another time since we've covered that ground already. Wayne