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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Proud_Infidel who wrote (30592)	5/25/1999 9:08:00 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 70976

The key to understanding what he is saying is the investment time horizon. Indeed if a company can be assured any rate of growth which is significantly above the bond yields for a very long period of time, no price is too great. The problem is that you cannot be assured of the growth rate for more than 2~5 years. This is because as soon as it becomes clear that there is money to be made in that business, competitors will come en masse. Not to mention that the company may fail on itsown for reasons beyond its control. Here is another way to look at it. You can consider stocks as "bonds" with variable interest payments (i.e. earnings). So calculate the present value of a "bond" that will pay you increasing amount of interest at a rate of 8% for the next 100 years and you will see what Old Ben is telling you here. regards, Sun Tzu P.S. As I've been saying for a long time, it is the investment horizon that matters the most.

To: Proud_Infidel who wrote (30592)	5/25/1999 9:19:00 PM
From: Sun Tzu	Read Replies (1) \| Respond to of 70976

In case anyone is curious the multiplier which they assign to a company with an EGR of 20% is 48.5. Anyone whoever argued that AMAT was overvalued with a 50 P/E would probably get an argument from Ben Graham, Warren Buffets teacher. Did he say over what time span the company is expected to grow 20%? Did he say that this growth rate was to be consistent or merely an average growth rate over a certain period of time? Without answers to these important questions, you may be misreading him. Just ask Warren if AMAT, MSFT, or any of the techs meet the buy standard set by Graham. It's o.k. if you can't reach him, just check to see how many of these stocks are in his portfolio <G>. Sun Tzu

To: Proud_Infidel who wrote (30592)	5/26/1999 1:10:00 PM
From: Robert O	Read Replies (2) \| Respond to of 70976

BK, I remember reading that and thinking it was an interesting concept. I mean if companies are valued as just discounted cash flows, then a company that will ultimately grow infinitely large should demand any price today. I tried to think it out as follows. A Perpetuity = Cash Flow/Interest Rate. So a $50,000 perpetuity a year (to forever) requiring a 10% rate puts today's value as $50,000/.10 = $500,000. A growing perpetuity = Cash Flow/(Rate-Growth). If, ultimately the numerator is infinitely large, one could argue today's value must be infinite as well. Of course knowing growth will continue is key since if it didn't one would be hesitant to back up infinite trucks for the promise of the massive future value of the company. So time is important. Also, I agree that 8% is somewhat arbitrary for the authors to use since even a company that is guaranteed to grow forever at any positive rate above inflation also would become infinitely large. Where are the math Phds on the board... there are some interesting 'large number' paradoxes that might help illuminate this better. RO

To: Proud_Infidel who wrote (30592)	5/26/1999 4:14:00 PM
From: Math Junkie	Respond to of 70976

I think the key is in the following statement: The valuations of expected high-growth stocks are necessarily on the low side, if we were to assume these growth rates will actually be realized. If you could assume with 100% confidence that you would actually have that much growth, i.e., a guarantee, then your investment could be made to grow arbitrarily large just by waiting the required length of time. It is the absence of a guarantee, i.e., risk, which reduces the value of such investments. The amount of the reduction depends on the market's assessment of the risk that the projected growth rates will not be realized. Since future earnings growth cannot be known in advance, that is why "There is really no way of valuing a high growth company(with an expected growth rate above, say 8% annually), in which the analyst can make realistic assumptions of both the proper multiplier for the current earnings and the expectable multiplier for future earnings." IMHO.

To: Proud_Infidel who wrote (30592)	5/28/1999 12:53:00 AM
From: shane forbes	Read Replies (1) \| Respond to of 70976

Brian: I found that quote interesting. My best guess is that he assumed the discount rate to be 8%. Therefore if a company is growing faster than this same 8%, the present value of the cash flows is infinite. Hence any price the market pays is too low. For instance: consider this stream of cash flows growing indefinitely at 9% and discounted at 8%: (1.09)/(1.08) + (1.09)^2/(1.08)^2 + .... each term is greater than 1 and there are infinite such terms. Hence the present value is arbitrarily larger than any number the market wants to assign. In mathematical terms the series does not converge. There is nothing magical about the number 8. This is why I suspect that something like the above is going on. Now if he said pi or e or one of those fun numbers that show up unexpectedly in infinite series then I would have been really thrilled!