I understand your logic and I appreciate your

reply to my message. However, you are off the mark a

little.

First, the Buffett example about the

newspaper valuation was not supposed to be an exact example

of how he does it. He was using that as an example

of how the market values stocks generally.

I've

read that section about 50 times and nowhere does he

specifically come out and say that's how he does it or how he

figures out the discount rate. I have read quotes by him,

however, in which he says you should not use any risk

premium, but use a margin of safety when estimating future

growth in earnings. Come to think of it, even the

Hagstrom book quotes Buffett as saying that. The reason

Hagstrom's valuations all came out so low (i.e. for Disney,

Coke, ABC, etc.) is because Hagstrom didn't cut 50% off

the intrinsic value as an acceptable buy price. He

just took the full I.V. using the 9% rate as the buy

price, which of course was higher than the current

market price of those stocks. Almost ANY stock has an

I.V. higher than the market price if you do it this

way. Go ahead and discount Coke's earnings out right

now using a 12% growth rate for 10 years and 5% after

that, and a 9% discount rate. You'll see what I mean.

It gives an I.V. higher than today's market price.

Would you then conclude that Coke is undervalued at 51

times earnings?

Of course not. You have to discount

Coke's earnings out at about 7%, and then take 50% of

the I.V. as an acceptable buy price. Even then, it's

overvalued.

If you try to predict earnings AND future interest

rates, you're trying to do the inhuman. No one can

predict future interest rates more than a few months out.

In 1991, if rates were 7.7% when Buffett wrote his

piece and he used a 10% discount rate, that would be a

30% premium over the then current long bond rate.

Today's long bond rate is 5.6%, and 30% above that is

about 7.25%. You have to use the percentage premium he

used, not the absolute number. Otherwise, the logic is

flawed. So I guess maybe I should be using 7.25% instead

of 7%, but again the Buffett example was not meant

to be that specific.

I still say you can't

predict something like interest rates, whether they'll go

up or down, and so the only thing you can do is use

the current rate and go off that. It's hard enough to

predict future earnings. Use a margin of safety for that.

If interest rates go down from here (they just

might), you may be using a margin of safety on your

discount rate that prevents you from buying some great

stocks at bargain prices.