Yes, I guess I did miss the second question.

First of all, as you’ll see from my book, growth rate P/E doesn’t have linear relationship as your example would suggest. I suggest after certain level of growth, in the book I used 16%, to reduce P/E points further i.e. from 0.65 to 0.5 for 1% of growth. Finally, In calculation of margin of safety we make two adjustments: for business and financial risks.

I hope I answered your question.

Best,

Vitaliy

Thanks for you reply. II need to go back to re-read the book.

How about my 2nd question regarding margin of safety. I think you missed it.

Thanks.

If you are interested in taking a look, on my site, I compared and contrasted your thesis that we are in a secular range-bound market in stocks with Jim Rogers’s thesis that we are in a secular bear market* for stocks coinciding with a secular bull market in commodities:: Jim Rogers versus Vitaliy Katsenelson, Part I.

*Rogers seems to have a similar opinion to yours on the state of U.S. stocks, despite this slight difference in terminology.

If you bond yields 10%, as I mention in the book, you’d have to adjust the zero growth P/E down, a lot.

Alex,

My observation about yield is based is from my experience.

On AMEX, I have no doubts that their defaults in the short run will be exceed expectations of many.

Also, are you skeptical about AMEX’s emphasis on small business accounts? In their talking points, the growth of the small business portfolio seems to correlate with increasing concentration in housing bubble locations.

Great website, and congratulations on the JOSB analysis.

But there are a couple issues puzzling me that I hope you can shed some light on.

First is the linear relationship between dividend yield and P/E. Say, currently bond yield is 10%, and company A with average risk has zero growth but consistent dividend yield same as bond yield, 10%. Based on your model, the fair P/E is 8 + 10 = 18 times. But that doesn’t look right. Why would I want to pay 18 times earning for the 10% yield when I can get the same return risk-free? What have I missed?

Secondly, it is the interpretation of the (risk-unadjusted) margin of safety = initial required rate of return - dividend yield - earning growth.

Say, my initial required rate of return is 30% and a company grows at 30% and offers zero dividend. Based on your model, my required margin of safety is 0%. It is because the expected growth is covering it. That doesn’t sound right. I would imagine the opposite is true: high the growth is, more risk one expects and more margin of safety one needs. What looks concerning is the margin of safety contains the same risk element (i.e. growth) it tries to compensate for. As an analogy, it’s like a bank underwrites mortgage insurances for its own mortgages on its own book. The risk is not hedged but just moved from left pocket to right pocket. What do I miss?

I am looking forward to your reply.

I added a link. Take a look.