Historical Results and Commentary
May 11, 2006
Holdings
|
|
May-06 |
|
1 |
F |
|
2 |
NBG |
|
3 |
PCLN |
|
4 |
NKE |
|
5 |
BA |
|
6 |
VRSN |
|
7 |
SNP |
|
8 |
CAT |
|
9 |
INTC |
|
10 |
C |
|
11 |
CA |
|
12 |
FNF |
|
13 |
MS |
|
14 |
TKC |
|
15 |
HMC |
|
16 |
CRYP |
|
17 |
X |
|
18 |
AAPL |
|
19 |
COP |
|
20 |
ACH |
Performance of Individual Stocks For last 3 months:
|
May-06 |
|
|
FNF |
13.30% |
|
COP |
13.39% |
|
CAT |
16.18% |
|
NKE |
-3.38% |
|
BA |
22.03% |
|
VRSN |
-3.12% |
|
SNP |
12.70% |
|
PCLN |
31.45% |
|
INTC |
-8.58% |
|
C |
8.79% |
|
CA |
-8.68% |
|
F |
-12.72% |
|
MS |
6.99% |
|
TKC |
-0.51% |
|
HMC |
23.92% |
|
CRYP |
34.71% |
|
X |
31.24% |
|
AAPL |
1.25% |
|
NBG |
5.80% |
|
ACH |
2.09% |
Total Increase (Decrease) since last quarter: 9.34%
Additions: None
Subtractions: None
Commentary: For this quarter’s commentary I am going to run a historical simulation to calculate the cost of equity (Ke) for the S&P 500 since 1929.
Just for fun, I took the dataset from Professor Schiller at Yale and the BEA and tried to answer a silly question: if you could go back in time to 1929 and could see all the future earnings of the S&P 500, what discount rate would be appropriate to use for calculating the cost of equity for the index. To do this silly experiment, I used the following basic equation for the valuation model:
T=20
Value of S&P 500 = ∑ CF to S&P
500/(1+Ke)^T
T=1
Where:
CF to S&P 500 equals the earnings of the index over the next 20 years
Time period examined = 20 years
There is really no good reason for just looking at just the next 20 years, other than that I felt this was a happy compromise that would both yield a large number of data points and still look at an ample enough timescale to be reasonable. Appendix 1 shows the results.
The results give an average equity risk premium of 635 basis points above the long interest rate, with a standard deviation of 577 basis points. In other words, equity risk premiums fluctuate a lot. The following chart shows the wide range in absolute fluctuations of Ke derived:
Additionally, the cost of equity can be thought of as a premium above (or a discount below) some sort of benchmark risk free rate, as the following graph shows.
The main conclusions from this analysis are:
- After 1932, the S&P equities merited a positive premium above long term bond yields. In other words, an investor with a 20 year horizon would always have done better investing in the S&P 500 than in government bonds for any 20 year period after 1932, assuming securities were purchased and then held to maturity after 20 years.
- Equity risk premiums fluctuate a lot, probably to such an extent that their prediction is next to impossible
- It is almost impossible to correctly estimate the proper value of a stock using a DCF valuation, because there are so many variables that could impact the Ke component (not to mention the large range of variables impacting cash flows to equity!)
Appendix 1: Data
|
|
|
Derived
Cost of Equity (Ke) |
Long
Interest Rates |
Equity
Risk Premium |
|
1929 |
|
-4.363456303 |
3.6 |
-7.963456303 |
|
1930 |
|
-3.018367899 |
3.29 |
-6.308367899 |
|
1931 |
|
0.582920309 |
3.34 |
-2.757079691 |
|
1932 |
|
9.222289055 |
3.68 |
5.542289055 |
|
1933 |
|
12.48431274 |
3.31 |
9.174312738 |
|
1934 |
|
8.399620031 |
3.12 |
5.279620031 |
|
1935 |
|
11.35562861 |
2.79 |
8.565628611 |
|
1936 |
|
7.097488792 |
2.65 |
4.447488792 |
|
1937 |
|
4.907685874 |
2.68 |
2.227685874 |
|
1938 |
|
11.33481721 |
2.56 |
8.774817213 |
|
1939 |
|
10.67954775 |
2.36 |
8.319547746 |
|
1940 |
|
12.0935952 |
2.21 |
9.883595197 |
|
1941 |
|
15.36951976 |
1.95 |
13.41951976 |
|
1942 |
|
19.26882554 |
2.46 |
16.80882554 |
|
1943 |
|
18.09732094 |
2.47 |
15.62732094 |
|
1944 |
|
16.58231881 |
2.48 |
14.10231881 |
|
1945 |
|
15.89706316 |
2.37 |
13.52706316 |
|
1946 |
|
12.69595267 |
2.19 |
10.50595267 |
|
1947 |
|
17.33486986 |
2.25 |
15.08486986 |
|
1948 |
|
20.02765868 |
2.44 |
17.58765868 |
|
1949 |
|
21.05627211 |
2.31 |
18.74627211 |
|
1950 |
|
19.72689178 |
2.32 |
17.40689178 |
|
1951 |
|
15.8409274 |
2.57 |
13.2709274 |
|
1952 |
|
13.86628219 |
2.68 |
11.18628219 |
|
1953 |
|
13.26536483 |
2.83 |
10.43536483 |
|
1954 |
|
14.65019314 |
2.48 |
12.17019314 |
|
1955 |
|
9.894508239 |
2.61 |
7.284508239 |
|
1956 |
|
7.440397286 |
2.9 |
4.540397286 |
|
1957 |
|
7.583531992 |
3.46 |
4.123531992 |
|
1958 |
|
9.626916423 |
3.09 |
6.536916423 |
|
1959 |
|
6.165653767 |
4.02 |
2.145653767 |
|
1960 |
|
6.471836212 |
4.72 |
1.751836212 |
|
1961 |
|
6.95167401 |
3.84 |
3.11167401 |
|
1962 |
|
6.09138825 |
4.08 |
2.01138825 |
|
1963 |
|
7.981473532 |
3.83 |
4.151473532 |
|
1964 |
|
6.873374537 |
4.17 |
2.703374537 |
|
1965 |
|
6.233531849 |
4.19 |
2.043531849 |
|
1966 |
|
5.948264048 |
4.61 |
1.338264048 |
|
1967 |
|
7.962913234 |
4.58 |
3.382913234 |
|
1968 |
|
7.161603021 |
5.53 |
1.631603021 |
|
1969 |
|
6.94829493 |
6.04 |
0.90829493 |
|
1970 |
|
9.303574975 |
7.79 |
1.513574975 |
|
1971 |
|
9.803703315 |
6.24 |
3.563703315 |
|
1972 |
|
9.586351781 |
5.95 |
3.636351781 |
|
1973 |
|
8.718543275 |
6.46 |
2.258543275 |
|
1974 |
|
12.86211949 |
6.99 |
5.87211949 |
|
1975 |
|
19.12641638 |
7.5 |
11.62641638 |
|
1976 |
|
14.5838159 |
7.74 |
6.843815899 |
|
1977 |
|
14.63562404 |
7.21 |
7.425624044 |
|
1978 |
|
18.75078949 |
7.96 |
10.79078949 |
|
1979 |
|
17.93119829 |
9.1 |
8.831198287 |
|
1980 |
|
16.74782016 |
10.8 |
5.947820158 |
|
1981 |
|
13.94083172 |
12.57 |
1.370831716 |
|
1982 |
|
17.08303163 |
14.59 |
2.493031626 |
|
1983 |
|
14.23408314 |
10.46 |
3.774083141 |
|
1984 |
|
12.89844948 |
11.67 |
1.22844948 |
|
1985 |
|
13.16836186 |
11.38 |
1.788361858 |
|
1986 |
|
10.81823018 |
9.19 |
1.628230184 |
|
1987 |
|
8.416197685 |
7.08 |
1.336197685 |
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Historical Results and Commentary