Barron's Column 11/11/01

In the column titled, The Trader, the was an interesting paragraph regarding fair value for the S&P 500. Byron Wein is a well known Wall Street Guru and from the several times I've heard him interviewed he seems to be very reasonable and knowledgeable. The paragraph said that his model for valueing the S&P 500 puts fair value at 1350 which is quite a bit higher than it is now. He bases this valuation on an expectation of a 10% rise in profits for the S&P 500 in 2002. What's interesting to me is that if is model used an expectation of 7%, fair value for the S&P 500 is 1050. Ok there is quite a difference in relative terms but in my mind there isn't much difference in absolute terms. I guess the implication is that long term earnings growth rates must change a lot based on 10% vs 7% for next year. I guess it's easy to understand why the market has a lot of volatility.

Not to be short on this...but Barrons has consistently the worst advice of a major financial publication. Having a column called "The Trader" shows you what market they are trying to reach. Did you see their big ad in the WSJ bragging about how they called the bottom of the market right before it tanked again. They stink!

Barrons wasn't offering any advice here they were reporting on a "guru's" price model. The point is that a 3% difference in next years profits makes a difference of around 30% in valuations in someones valuation model. Does this seem high, low or right?

Sure if you project far enough ahead. I think it's pointless to consider that stuff. When managing money I think it's always best to manage against a benchmark and not worry about stuff like that.

If I understand correctly you aren't interested in what the fair value is for an index, is that correct? I always thought that valuations based on future earnings are the ultimate benchmark. Could be wrong but I also thought that the value of a company among other things is based on what it will earn in the future. However, I can accept that your apparent position that future earnings aren't important and I'm not being facetious when I say this either.

Exactly...it's I think pointless to worry about it. If you accept that any benchmark over a long period does X amount then what you do is manage against it depending on your expertise. If you have none than you should buy an index fund. If you think you can handle it then underweight or overweight certain sectors based on your expectations. I think the market is too efficient to get much excess return based on stock picking.

One thing for sure, is that seemingly small changes in earnings expectations (at least to me) can cause large changes in stock prices.

Oh what a suprise another publication can't predict where the market is going.Neither can anyone else for that matter as no-one has better than a 50% record prediting the market over the long run. But then people will sail around the world and the members of the flat earth society will continue to believe.


If you want to better your results focus in on the companies your buying and forget trying to predict the unpredictable. Be happy with the companies you buy even if the market were to shut down. Heck it closes every Saturday-Sunday and holidays and it hasn't bothered me yet.Happy Holidays. Lar

No one has a better than 50% record predicting the market in the long run? What does that mean? The market usually goes up so anyone who bets up is right more than 50% of the time. Know what you're talking about before posting.

As for focusing on the companies you buy...if you don't have a source of information the market hasn't already factored in, everything you do is worthless and basically a crapshoot. Buy an index fund or at least mimic it with individual stocks. At least there is less volatility there.

It wasn't a prediction, it was about fair value for the market. A 3% difference in one years earnings made an approximate difference of 30% in market value. The article wasn't predicting earnings either it stated that if earnings next years S&P earnings grew by 7% in the aggregate next year the model would show a fair value for the S&P 1050. If earnings grew by 10% in the aggregate next year the model would show a fair for the S&P of 1350. The focus wasn't on predicting the unpredictable it was regarding seemingly small changes in earnings expectations resulting in huge market moves. If we want to focus on something that is unpredictable we should focus on the future earnings prospects of individual companies and trying to predict what their earnings will be /images/smile.gif.

John


Are you losing it? I've attended about 10-20 meetings/seminars where people were predicting where the market is going as a matter of fact some of those names were pretty big people. Some said the market should go down some said up some said sideways. I think those are market predictions and most were wrong.So i guess you would say that people do better than 50%predicting ineterest rate since they have been trending down for the past 10 years. Wow!


B.s regards to a seperate source of getting information.Boy this gets old but here's another example;back in 1988 when Buffet bought coke an idiot could pick up the annual report and see their international sales were exploding,yet the market had not caught on.You had tons of time to buy the stock and still make a bundle just reading their annual report.Don't believe me look it up yourself.


Your confused in regards to the efficient market thesis.Because the maket is usually efficient doesn't mean it is always efficient. You just don't seem to get it. Hmm...

The difference between 10% and 7% is huge!


As you know, its the net present value of all

future earnings that matters.