Forum Archive Index - May 2004

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Dean,
 
> 
>I'm am interested in the reducing the risk of buying when 
>markets are high.
>Do you have any ideas on this?
> 

I think you have to look back in history to find out what high, average 
and low really mean.    'Apparently' the long term average P/E ratio for 
US shares is around 15  (I think that is DOW type shares, not 
NASDAQ).  That corresponds to an earnings yield of 6.66%.

When a market crashes, not all shares crash.  Of those that do crash 
not all crash by the same amount.  Based on the assumption the 
higher a share is, the further it has to fall, one strategy might be to 
keep all the shares you own on a P/E of less than 15.    If you can't find 
any shares you want to own with a P/E of less than 15, that might be a 
signal to get out of the market completely!    

Of course you have to remember there are two ways a P/E  can fall.   
The price can go down, or the earnings can go up.

> 
>>So your inclination is to sell out, and what, put the money in the
>>bank?
> 
>Are you kidding?
>If you have identified what you think is a good company with good
>business fundamentals then you should hold 
>it as long as they continue, maybe
>even buying more when the market crashes. My goal is to hold good
>businesses as long as they continue to be just that. Like I said in
> earlier emails the best returns take time, far too many people rent
> stock IMO.
> 

OK, if that is what you believe how do you reconcile your DDM model, 
which let me remind you, valued WRI at $1.21?    Your model is telling 
you WRI is 20% overvalued at $1.40, yet you are not selling.

SNOOPY




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