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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (881)4/7/1999 7:23:00 AM
From: accountclosed  Read Replies (1) | Respond to of 2794
 
Henry, I thought Fleck wrote a good article. I also believe your comments are appropriate. I would blend the two views and say that it is valid to make the type of comparison that Fleck made as a limiting case in order to set up valuation questions "what price growth?", "what risks are equity investors taking to participate in potential growth?", etc.



To: Henry Volquardsen who wrote (881)4/7/1999 9:33:00 AM
From: Freedom Fighter  Read Replies (1) | Respond to of 2794
 
Henry,

>>Even if you net out
the prospect of capital gains the reason to make an equity investment vs a debt
investment is that the revenues and earnings of a business can grow while the coupon on
a bond can't. As a disclaimer I am not defending the valuation of the market, just
pointing out what I believe is a weakness in that analysis. <<

For the vast majority of businesses it requires the reinvestment of earnings to produce the earnings growth. So one would have to construct a sort of bond interest reinvestment coupon to make a valid comparison.

Perhaps reinvesting all bond interest in similar bonds except for an amount equal to the dividends of the business/stock it is being compared to.

One could then see how many years it would take for the business yield to catch up to the compound interest of bonds performing like reinvestment.

I did that for the S&P vs. high grade corporates a while back and I will be dead by the time the S&P catches up. I am only 40 and quite healthy.

Wayne




To: Henry Volquardsen who wrote (881)4/7/1999 9:36:00 AM
From: Sam  Read Replies (1) | Respond to of 2794
 
Henry,
The other problem with BF's analysis is that the overvaluation is extreme in only a relatively small number of stocks, while there exists an undervaluation in a great many more stocks. I think this is true, anyway--I haven't personally done any detailed studies of this, but it is my distinct impression. Now undoubtedly this is true to some extent of all bull markets, but have the extremes been this extreme? Anyone know of any comparisons?
s.


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