วันพุธที่ 15 กรกฎาคม พ.ศ. 2558

The Fundamentalists’ Creed: You Get What You Pay For

 

The notion of present value is crucial to understanding the fundamentalists’ approach to stock valuation. It should also be important to lottery players, mortgagors, and advertisers. That the present value of money in the future is less than its nominal value explains why a nominal $1,000,000 award for winning a lottery—say $50,000 per year at the end of each of the next twenty years—is worth considerably less than $1,000,000. If the interest rate is 10 percent annually, for example, the $1,000,000 has a present value of only about $426,000. You can obtain this value from tables, from financial calculators, or directly from the formulas above (supplemented by a formula for the sum of a so-called geometric series).
 
The process of determining the present value of future money is often referred to as “discounting.” Discounting is important because, once you assume an interest rate, it allows you to compare amounts of money received at different times. You can also use it to evaluate the present or future value of an income stream—different amounts of money coming into or going out of a bank or investment account on different dates. You simply “slide” the amounts forward or backward in time by multiplying or dividing by the appropriate power of (1 + r). This is done, for example, when you need to figure out a payment sufficient to pay off a mortgage in a specified amount of time or want to know how much to save each month to have sufficient funds for a child’s college education when he or she turns eighteen.
 
Discounting is also essential to defining what is often called a stock’s fundamental value. The stock’s price, say investing fundamentalists (fortunately not the sort who wish to impose their moral certitudes on others), should be roughly equal to the discounted stream of dividends you can expect to receive from holding onto it indefinitely. If the stock does not pay dividends or if you plan on selling it and thereby realizing capital gains, its price should be roughly equal to the discounted value of the price you can reasonably expect to receive when you sell the stock plus the discounted value of any dividends. It’s probably safe to say that most stock prices are higher than this. During the 1990 boom years, investors were much more concerned with capital gains than they were with dividends. To reverse this trend, finance professor Jeremy Siegel, author of Stocks for the Long Run, and two of his colleagues recently proposed eliminating the corporate dividend tax and making dividends deductible.
 
The bottom line of bottom-line investing is that you should pay for a stock an amount equal to (or no more than) the present value of all future gains from it. Although this sounds very hard-headed and far removed from psychological considerations, it is not. The discounting of future dividends and the future stock price is dependent on your estimate of future interest rates, dividend policies, and a host of other uncertain quantities, and calling them fundamentals does not make them immune to emotional and cognitive distortion. The tango of exuberance and despair can and does affect estimates of stock’s fundamental value. As the economist Robert Shiller has long argued quite persuasively, however, the fundamentals of a stock don’t change nearly as much or as rapidly as its price.

 

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