09-07-2013, 09:49 AM
Great post, KenBob -- thanks. I'd love to understand your method a little better, any chance you could give an example applying it to some company?
Generally, it sounds like a somewhat complicated approach, though. I fear that models relying on expected return, future inflation rates, discount rates, and the such give a false sense of precision. Of course it can be an illuminating exercise, but it is so nearly impossible to predict those things with any accuracy (in my opinion), especially more than a few months out, that the results seem to me very suspect. Which is ok so long as you are not putting too much stock in them.
Personally, I am much more comfortable using P/E (both current and current relative to historical), but keeping always in the front of my mind that it is a crude tool with several important weaknesses, and that it is only one part of a stock's story.
Generally, it sounds like a somewhat complicated approach, though. I fear that models relying on expected return, future inflation rates, discount rates, and the such give a false sense of precision. Of course it can be an illuminating exercise, but it is so nearly impossible to predict those things with any accuracy (in my opinion), especially more than a few months out, that the results seem to me very suspect. Which is ok so long as you are not putting too much stock in them.
Personally, I am much more comfortable using P/E (both current and current relative to historical), but keeping always in the front of my mind that it is a crude tool with several important weaknesses, and that it is only one part of a stock's story.