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  • Benjamin Graham's Perspective on the Dow Jones [View article]
    There is no way that the US economy can grow by 10% for 10 years. Even China's growth rate might not be sustainable.

    However, the relationship between economic growth and EPS growth is not that strong. Economic growth counts for only 1/4th for EPS growth. US economy will probably grow around 3%; add 3% for inflation, 3% for dividends, 3% for stock buybacks --> EPS Growth ~10 is normal.

    One thing that is hard to understand is the EPS growth. Let's give an example. Consider a company that has 10m profit and 1m common stocks. EPS = 10. If the company buyback 100K stocks, there will be only 900K stocks left. New EPS = 10/0.9 = 11. Vadaaa, there is no earnings growth, but thanks to buyback program, EPS increased by 10%.

    I was not aware of the updated formula. I will check it tomorrow in library. The current AAA yield is 5.22, thus 4.4/5.22 = 0.84 . That means 16% reduction in Long-term fair value estimates according to the updated formula.
    Mar 11, 2011. 04:31 PM | 2 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    This is my personal opinion: Benjamin Formula consider only growth (It was assumed that the stock is already a strong dividend stock).
    However, this formula could be a better one in long run:
    Long Term Valuation = EPS x (8.5 + Average EPS growth + Average Dividend Yield)
    --> 50% percent from dividend yield and 50% from EPS growth. Now, the formula implements the trade-off between growth and dividend. There are some stocks which have both. Hopefully, I plan to share them in future articles.
    Mar 11, 2011. 01:44 PM | 3 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Trading will not make you rich, but it will make your broker wealthier. There is an exception : if the price gets way out of fundamental value range (such as late 90s Techno-mania) it is time to get out of market. [Cisco is still trading 75% lower than the 2000 peak] Dividend stocks offer good signal about when to get out.
    Mar 11, 2011. 01:39 PM | 4 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Until 1971, money was backed by gold. Inflation was not an issue until OPEC restricted the oil supplies.
    Mar 11, 2011. 01:32 PM | 1 Like Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Finviz offers only 5 years. You are right, it should have been 10 years. Taking 3/4th of the next 5 years' average could be a better estimation. (5 years of fast growth and 5 years of low growth)
    Mar 11, 2011. 11:22 AM | 1 Like Like |Link to Comment
  • 10 Growing Energy Stocks With Great Dividends [View article]
    (Average)
    China: 11% - 12%
    India: 8% - 9%
    Russia: 5% - 6%
    Brazil: %5 - 6%
    Source: WorldBank data.worldbank.org/ind...
    Mar 11, 2011. 09:49 AM | 1 Like Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    I was just reading the book and Benjamin Franklin totally agrees with you
    "Rule 4) Dividend Record: Uninterrupted payments for at least the past 20 years."
    Mar 11, 2011. 09:27 AM | 2 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    I know it looks quite complicated and hard to believe. A company size of GE, growing four-fold in a decade is impossible. However, this is not earnings growth. It is EPS growth. For a company with regular stock buybacks, EPS can grow even though earnings might stay constant. Surely, the formula has its shortcomings. I am working on a better fair value model. (which I plan to share with community soon)
    Mar 11, 2011. 08:08 AM | 4 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Dear Philip,

    I totally agree with you on the comments. You are right. Based on the formula, it looks like interest rates or inflation is not accounted for the valuation. I believe that number 8.5 has something to do with the inflation and nominal interest rates. During 1960s inflation rates was around 1%-2%.
    Mar 11, 2011. 08:05 AM | 2 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Average growth rate depends on your criteria. If you are talking about .DJI excluding dividends you are right. However, the historical EPS growth is around 10%-11%. (Think about stock buybacks). A better benchmark is the P/E ratio. 15 is the norm. Above 20 is overheated. P/E below 10 is an opportunity to dive in :)
    Mar 10, 2011. 06:18 PM | 3 Likes Like |Link to Comment
  • The Revival of Investment Banks [View article]
    Can you explain your question?
    Mar 10, 2011. 05:52 PM | 1 Like Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Are you sure they are lower than the last four quarter EPS? I used trailing EPS from the last year. MRK has an EPS of 0.27 and AA has an EPS of 0.22; I crosschecked my data sources with Google Finance and I seem to be correct. Your point is also valid. The current year's forecast should be included in a fundamental model. However, Graham suggested using 4 quarter trailing EPS which I used here.
    Mar 10, 2011. 01:20 PM | 1 Like Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    As an investor and economist, Benjamin Graham suggested many rules. They use a more restrictive rule where the Price to Book value ratio is essential. The formula I used was more academic: It is based on linearization of discounted future earnings model. Surely, the formula needs some more improvement (I need to factor in bond yields) Hopefully, I will come with a better article once I prove that formula is based on a fundamental model.
    Mar 10, 2011. 01:09 PM | 2 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    No. It is the average annual Expected EPS growth in next 5-10 years. This data is based on estimation. Therefore, it has a error margin (which can be quite large). I guess they survey the "experts" about future earning estimates. This is how they find the estimates.
    Mar 10, 2011. 01:03 PM | 2 Likes Like |Link to Comment
  • Benjamin Graham's Perspective on the Dow Jones [View article]
    Thank you for the comments. Your statement is absolutely correct. I guess, EPS growth estimates count for the better balance sheet.
    Mar 10, 2011. 12:52 PM | 2 Likes Like |Link to Comment
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