‘Oh, Inverted World’ is the title of the 2001 album of the US indie band The Shins. It's a good description of todays’ topsy turvey world created by loose monetary policy. One big distortion in the anomaly we see in stock pricing tied to business duration. Much-used discounted-cash flow analysis has become a misleading guide due to its assumption that a business exists in perpetuity. Yet the probability of businesses existing forever is neither high nor uniform. As discount rates move lower, assumed perpetuity supports claims that investors should pay more for growth. Recent hiccups for perceived growth stocks such as APN Outdoor, Blackmores and Surfstitch remind of the importance of matching reality to value. The long lives of the mines owned by BHP Billiton and Rio Tinto and the barriers to entry protecting the global pallet-pooling business Brambles might not give these stocks the short-term growth potential of their ‘capital-light’ peers. But analysis would suggest these unfashionable stocks are more likely to be sounder long-term investments than many of the stocks winning today’s popularity contest. (VIEW LINK)
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