Wikinvest Wire

What investment advisers won't tell you

Tuesday, February 02, 2010

In his weekly commentary, John Hussman explains something that few investment advisers seem to understand and even fewer would share if they did - that much of what passes as conventional wisdom in valuing stocks is nonsense.

Over the years, I have frequently emphasized that stocks are not a claim on "forward operating earnings." They are not even a claim on reported net earnings (and should not be valued as a blind multiple to a single year's results in any event). They are a claim on a very long-term stream of future cash flows that will actually be delivered to investors as dividends, or retained on their behalf as an increment to the book value of the company.
IMAGE Importantly, the ability of companies to increase book value over time has been a critical determinant of long-term earnings growth, and is likely to be even more important in an economy where debt financing is increasingly constrained.
Go read the whole thing if you've ever wondered why no one seems to care about dividends anymore. One shouldn't have to think too hard about why, over the last 20 years or so, Graham/Buffett style analysis of stocks has been usurped by more "contemporary" valuation techniques showing that stocks are not overvalued.

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Anonymous said...

The dividend yield is still half the historic norm. Maybe people are afraid to accept the implications of this.

Anonymous said...

True book value is not easily computable for companies like Microsoft.

Anonymous said...

Also, Buffett reports GAAP Book Value as opposed to TANGIBLE Book Value. I can grow my GAAP Book Value merely by overpaying for acquisitions, as Goodwill will inflate the per share GAAP Book Value. I agree that tangible book value is somewhat meaningless for tech (and many other) companies, but it is important for Berkshire Hathaway and other financial companies. I haven't gone back and tracked Berkshire's growth in tangible book value over the years, but it's a fraction of the growth in GAAP book value. Of that I'm certain.

Anonymous said...

Yes, it's very hard to evaluate Microsoft and all current tech companies, but, not for the reason you think. They all are plundering the H1B visa program, and in the process DESTROYING Computer Science as a Career in the US. So, yes we will see if Microsoft is not worth 10 Cents on the Dollar in 20 years. And, what Foreign Country is writing and selling OS's into the US market.

Stupid Capitalist's, give them what they want and they destroy themselves.

davlanta said...

But but but, Bush passed the dividend tax cut so companies would pay MORE dividends. Is this another failure of tax cuts to trickle down and deliver?

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