Archive pour 31 — Investment

What’s Left of the Firm Foundation?

What’s Left of the Firm Foundation?

A renowned rabbi, whose fame for adjudicating disputes had earned him the reputation of a modern-day Solomon, was asked to settle a long-standing argument between two philosophers. The rabbi listened intently as the first disputant vigorously presented the case. The rabbi reflected on the argument and finally pronounced, “Yes, you are correct.” (more…)

Two Important Caveats

Two Important Caveats

The four valuation rules imply that a security’s firm-foundation value (and its price-earnings multiple) will be higher the larger the company’s growth rate and the longer its duration; the larger the dividend payout for the firm; the less risky the company’s stock; and the lower the general level of interest rates. (more…)

One More Caveat

One More Caveat

So market prices do seem to have an inherent logic. In each of many recent years, stock prices have been closely related to differential patterns of expected growth as well as to the other “fundamental” valuation influence so important to proponents of te firm-foundation theory. It looks like there may be a firm foundation of value after all, and some jokers in Wall Street actually think you can make money knowing what it is. (more…)

Testing the rules

Testing the Rules

With the rules and caveats in mind, let us take a closer look at stock prices and examine whether the rules seem to conform to actual practices. Let’s start with Rule 1 – the larger the anticipated growth rate, the higher the price of a share. (more…)

Level of Market Interest Rates

Determinant 4 : The level of market interest rates

The stock market, no matter how much it may think so,does not exist as a world unto itself. Investors should consider how much profit they can obtain elsewhere. Interest rates, if they are high enough, can offer a stable profitable alternative to the stock market. Consider periods such as the early 1980s when yields on prime quality corporate bonds soared to over 15 percent. Long-term bonds of somewhat lower quality were being offered at even higher interest rates. (more…)

Degree of Risk

Determinant 3: The degree of risk

Risk plays an important role in the stock market, no matter what your overeager broker may tell you. There is always a risk – and that’s what makes it so fascinating. Risk also affects the valuation of a stock. Some people think risk is the only aspect of a stock to be examined. (more…)

Expected Dividend Payout

Determinant 2: The Expected Dividend payout

The amount of dividends you receive at each payout – as contrasted to their growth rate – is readily understandable as being an important factor in determining a stock’s price. The higher the dividend payout, other things being equal, the greater the value of the stock. The catch here is the phrase other things being equal. Stocks that pay out a high percentage of earnings in dividends may be poor investments if their growth prospects are unfavorable. Conversely, many companies in their most dynamic growth phase often pay out little or none of their earnings in dividends. But for two companies whose expected growth rates are the same, you are better off with the one whose dividend payout is higher. (more…)

Expected Growth Rate

Determinant 1 : The Expected Growth Rate

Most people don’t realize the implications of compound growth on financial decisions. It is often said that the Indian who sold Manhattan Island in 1626 for $24 was rooked by the white man. In fact, he may have been an extremely sharp salesman. Had he put his $24 away at 6 percent interest, compounded semiannually, it would now be worth over $50 billion, and with it his descendants could by back much of the now-improved land. Such is the magic of compound growth. (more…)

Theory of Stock Prices

Theory of Stock Prices

The Firm-Foundation

The greatest of all gifts is the power to estimate things at their true worth (La Rochefoucauld, Reflexions; ou sentences et maximes morales). (more…)

Some Other Bubbles of the 1980s

Some Other Bubbles of the 1980s

The late 1980s also had its share of spectacular booms and busts in more prosaic companies, whose concepts caught the fancy of Wall Street. Whereas many investors lost 75 percent of their initial purchase price in the biotech boom, others saw well over 90 per cent of their investment dollars disappear while chasing these other concepts. (more…)

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