Global Value Investing

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A multifaceted approach to value investing with stock valuation based on intrinsic value estimated from cash returns, appraised value of assets, and other facets of value.



Bull & Bear Profile


S&P 500 Fair Value


Dow Price-to-Value Graph   |   Dow Analysis   |   DJIA 1998   |   DJIA 1997

Is the U.S. stock market currently in a bullish (expansionary) phase, or is it in a bearish (contractionary) phase? Is one of these two phases currently much more dominant than the other? Look at a quarterly profile of the Dow (DJIA or Dow Jones Industrial Average) component stocks for 1998 or 1997.

First published on May 26, 1896 with a measurement of 40.94 points for 12 stocks, the DJIA is no longer an actual average due to stock splits and other recapitalizations. The base expanded to 30 stocks, the stocks comprising the index have changed over time, and the stocks are not limited to industrial companies. The only current DJIA stock included in the original average is General Electric, and it has not always been included in the intervening period.

A tabular presentation of the transformations of the DJIA appears in connection with an article in The Wall Street Journal, 27 October 1999, page C15, entitled "Dow Industrials Shift May Bring Increase in Index-Based Funds" which reports four new additions to the DJIA effective 1 November 1999. The table is headed "Shuffling of the Blue Chips" and subheaded "How the 30 Stocks in the Dow Jones Industrial Average Have Changed Since Oct. 1, 1928". It states: "Unlike past changes, each of the four new stocks being added doesn't specifically replace any of the departing stocks; it's simply a four-for-four switch."

It helps to remember that accounting price-ratios and market-price multiples are not stock valuations but rather are merely indicators of possible over-pricing or under-pricing by the market. In short, price is not value.


You can see a graph of a Dow Price-to-Value ratio at the Cornell GSB Parker Center and return by using the Back button on your browser. The point of presenting this graph is to illustrate the important difference between the concepts of price and value. Individual stocks, groups of stocks, and proxies of the stock market as a whole fluctuate between periods of over-pricing (P/V greater than 1.0) and periods of under-pricing (P/V less than 1.0). These alternating periods of over- and under-pricing constitute a special type of bull-and-bear market cycle in contrast to merely rising and falling prices.

Caveat Intrinsic economic value is properly calculated from discounted cash flows using an appropriate interest rate and estimated future cash earnings. This is not the method used to calculate the Price-to-Value ratio that is graphed at the referenced site.

The academic authors model the time-series relation between price and value as a co-integrated system so that price and value are long-term convergent. There is no reason why price and value should ever necessarily converge. The authors use a variant of the dividend discount model called the "residual income" formula which is sometimes referred to as the Edwards-Bell-Ohlson valuation equation, an accounting approach applied mechanically to all stocks with public financial reports. In addition, this "intrinsic" value is calculated using industry-specific risk premia for discount rates. Industry- and company-specific premia are supposed to measure something called "risk" in pricing models, but they are not valid for individual stock valuation pursuant to intrinsic value investing. The company-specific risk factors of so-called "size" and "book-to-market value" are logically circular and reduce the asset pricing model to economically-meaningless tautologies and or market-generated autoregressions, a.k.a., market timing.


You can see a Dow Analysis at and return by using the Back button on your browser. Be prepared to wait for the scripts to run. The point of presenting this information as well as the DJIA 1997 and DJIA 1998 decompositions is to demonstrate the wide differences among the constituents of the Dow Jones Industrial Average of 30 common stocks. The Dow is not a homogeneous whole but rather can be quite heterogeneous among its parts, and the Dow is not THE market.

You can see the averages calculated for the following selected criteria for the 30 stocks comprising the DJIA:

You also may see a ranking of the 30 Dow stocks based on each of these criteria.

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