From: Ramez Naam (Exchange) (ramezn@EXCHANGE.MICROSOFT.com)
Date: Mon Oct 13 1997 - 20:27:51 MDT
> From: Eliezer S. Yudkowsky [SMTP:sentience@pobox.com]
> Whoa! Microsoft, there, is trading at 60 times earnings. 20 is
> considered
> rich. And Microsoft officials keep warning everyone that next year's
> earnings
> will not rise as sharply.
>
> In my opinion, this bull market is a bubble if I ever saw one. People
> are
> buying a stock in expectation that it will rise, rather than in
> expectation of
> receiving dividends. The only way to make money on this stock market
is
> if
> someone else pays an equal amount of money. In short, it's a pyramid
> scheme,
> not an investment strategy.
Eliezer, this is an interesting analysis, and there's some truth to it.
However, both Price/Earning ratios and the overall bull market are more
complex issues than is often conceived.
First, what level of P/E is healthy depends on the growth rate of the
company in which you're investing. "Growth" companies with 20% annual
profit growth routinely have P/Es of 20-25, as you suggest (even in a
much less bullish market than we have currently). Microsoft has had
profit growth rates ranging from 35-60% for the past 5 years.
Yes, every year Microsoft (and Intel and other infotech companies)
inform Wall Street that they cannot maintain this level of revenue
growth indefinitely. Then in the following year they maintain or even
increase their level of growth. Thus the Street has stopped listening.
I suggest these companies because infotech is still a nascent business.
The technology continues to evolve rapidly, and perhaps only 1/10,000th
of the market opportunities have been realized.
Second, your point about making money off of stock price rather than
dividends is an excellent one that few people realize the significance
of. What you may be missing is the potential of owning a stock to
realize future dividends at a higher rate. Ie, I may purchase Microsoft
stock now in the interest of making dividends off of it 5 or 10 years
hence. In this sense a high P/E ratio (and more generally inflated
stock prices as more money flows into the market) reflects longer-range
investing on the part of the public as a whole. It also reflects a high
degree of confidence in future economic growth. Which I'd expect you to
share.
An awful lot of money has moved into the stock market in the past few
years as interest rates have stayed low and bonds have been shown to be
a less effective long-term investment than stocks (they always were,
even when interest rates were moderate). Analysts expect an even larger
influx over the next 10-20 years as the baby boomers begin to inherit
and invest money from their parents generation. The larger the amount
of money invested in stocks, the higher prices will be overall.
To be clear, let me add that I think the current market is overvalued.
Perhaps by as much as 50%. A market correction may wipe out a year or
more of gains. Nevertheless, for the investor with a horizon of at
least 5 years, and preferably 10 or more, infotech is a very savory
investment.
Sadly I'm more or less ignorant of biotech firms. Could someone post a
list of the biotech industry leaders and any analysis of their strengths
and weaknesses?
> It's a pity Zyvex (nanocorp) doesn't take small investors.
Quite a pity indeed. I'd think that a group of extropians could
collectively pool funds to make a sizable investment. Would be
interested in communicating with anyone with a serious interest in this.
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