The Risk Premium Factor E-Book

Stephen D. Hassett

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 286

Veröffentlichungsjahr: 2011

Beschreibung

A radical, definitive explanation of the link between loss aversion theory, the equity risk premium and stock price, and how to profit from it The Risk Premium Factor presents and proves a radical new theory that explains the stock market, offering a quantitative explanation for all the booms, busts, bubbles, and multiple expansions and contractions of the market we have experienced over the past half-century. Written by Stephen D. Hassett, a corporate development executive, author and specialist in value management, mergers and acquisitions, new venture strategy, development, and execution for high technology, SaaS, web, and mobile businesses, the book convincingly demonstrates that the equity risk premium is proportional to long-term Treasury yields, establishing a connection to loss aversion theory. * Explains stock prices from 1960 through the present including the 2008/09 "market meltdown" * Shows how the S&P 500 has consistently reverted to values predicted by the model * Solves the equity premium puzzle by showing that it is consistent with findings on loss aversion * Demonstrates that three factors drive valuation and stock price: earnings, long term growth, and interest rates Understanding the stock market is simple. By grasping the simplicity, business leaders, corporate decision makers, private equity, venture capital, professional, and individual investors will fully understand the system under which they operate, and find themselves empowered to make better decisions managing their businesses and investment portfolios.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

List of Figures

List of Tables

Preface

EVOLUTION OF A THEORY

OVERVIEW

HOW THIS BOOK IS STRUCTURED

AS YOU BEGIN

Acknowledgments

About the Author

Chapter 1: Understanding the Simplicity of Valuation

RATES, COMPOUNDING, AND TIME VALUE

WHY TIME VALUE MATTERS FOR THE STOCK MARKET

VALUING A PERPETUITY

CONSTANT GROWTH EQUATION: THE KEY TO UNDERSTANDING THE STOCK MARKET

NOT THE FIRST TO TRY THIS

WHY GROWTH RATE AND COST OF CAPITAL MATTER

P/E RATIO EXPANSION AND CONTRACTION

CAPM, RISK PREMIUM, AND VALUATION

EQUITY RISK PREMIUM

IMPACT OF RISK PREMIUM ON VALUATION

CHAPTER RECAP

Part One: Exploring the Risk Premium Factor Valuation Model

Chapter 2: The Risk Premium Factor Valuation Model

THE RPF MODEL IS SIMPLE, BUT DOES IT WORK?

ESTIMATING THE RPF

POTENTIAL CAUSES FOR SHIFTS IN THE RPF

POTENTIAL WEAKNESSES IN RPF THEORY AND METHODOLOGY

ADJUSTED RISK-FREE RATE

COMPARISON TO THE FED MODEL

CHAPTER RECAP

Chapter 3: Solving the Equity Premium Puzzle

LOSS AVERSION

LOSS AVERSION AND CORPORATE DECISION MAKING

ATTEMPTS TO SOLVE THE EQUITY PREMIUM PUZZLE

IMPACT OF INFLATION ON VALUE

BACK TO LOSS AVERSION

OUR REPTILIAN BRAIN

CHAPTER RECAP

Chapter 4: The RPF Model and Major Market Events from 1981 to 2009

EFFICIENT MARKET HYPOTHESIS

HOW THE RPF VALUATION MODEL EXPLAINS BLACK MONDAY

2000 “DOT-COM” BUBBLE: RPF MODEL SUGGESTS SIGNIFICANT BUBBLE FOR THE S&P 500

HOW THE RPF VALUATION MODEL EXPLAINS THE 2008 TO 2009 MELTDOWN AND RECOVERY

MARKETS MOSTLY EFFICIENT AND RATIONAL, BUT PRONE TO MISTAKES

CHAPTER RECAP

Part Two: Applying the Risk Premium Factor Valuation Model

Chapter 5: Application to Market Valuation

BEWARE OF INTEREST RATES

EXAMPLE: APPLICATION TO THE MARKET IN LATE SEPTEMBER 2009

WHY THE SOURCE OF GROWTH MATTERS

CHAPTER RECAP

Chapter 6: Risk-Adjusted Real Implied Growth Rate (RIGR)

ANALYZING INDIVIDUAL COMPANIES WITH RIGR

RIGR ANALYSIS OF APPLE AND GOOGLE PRE-EARNINGS ANNOUNCEMENT

CHAPTER RECAP

Chapter 7: Valuing an Acquisition or Project

BRIEF INTRODUCTION TO VALUING AN ACQUISITION OR PROJECT

TRANSLATING YOUR WORLDVIEW INTO NUMBERS

SETTING THE COST OF CAPITAL

EXAMPLE: UTILITY ACQUIRING A RISKY ASSET

SELECTING THE INVESTMENT FORECAST TIME HORIZON

THE ALL-IMPORTANT TERMINAL VALUE

CHAPTER RECAP

Chapter 8: Case Study 1

CALCULATING ENTERPRISE VALUE AND STOCK PRICE

SCENARIO ANALYSIS

CHAPTER RECAP

Chapter 9: Case Study 2

CHAPTER RECAP

Chapter 10: Using the RPF Model to Translate Punditry

READ CAREFULLY, THEN ANALYZE

WHAT HAVE I GOT TO LOSE?

BEWARE OF OVERSIMPLIFICATION

CONFUSING HEADLINES AND MISGUIDED BLAME

ALMOST NAILED IT

GRAHAM AND DODD

THE WRONG DISCUSSION

DUMB MONEY AND BUBBLES

THE RIGHT DISCUSSION

CHAPTER RECAP

Chapter 11: Using the RPF Model for Investment and Business Strategy

ESTIMATING FAIR VALUE: HOW TO IDENTIFY AND EXPLOIT BUBBLES

BEWARE OF RPF SHIFTS

INVESTING IN INDIVIDUAL COMPANIES

REPORTED EARNINGS CAN BE MISLEADING

HOW TO APPLY THE RPF MODEL TO DAY-TO-DAY BUSINESS DECISIONS

CAPITAL STRUCTURE AND RISK IMPACT COST OF CAPITAL

OPPORTUNISTIC ADJUSTMENTS TO CORPORATE CAPITAL STRUCTURE

CREATING A SENSE OF URGENCY

AVOIDING VALUE DESTRUCTION

VALUE CREATION

KEY MERGER-AND-ACQUISITION VALUATION CONCEPTS

INFLATION IS THE ENEMY OF VALUE

FINAL THOUGHTS

Appendix A: Mobile Apps: The Wave of the Past

MOBILE PAST–RIM MISSES THE NEED FOR APPS

MOBILE TODAY–THE NEED FOR APPS

LOOK BACK TO SEE AHEAD–MOBILE WILL FOLLOW PC EVOLUTION

IMPLICATIONS–THE END OF WALLED GARDENS

Appendix B: Technology on the Horizon: What if Moore's Law Continues for Another 40 Years?

Appendix C: A Simple and Powerful Model Suggests the S&P 500 Is Greatly Underpriced

RISK PREMIUM FACTOR VALUATION MODEL

WHAT IT MEANS TODAY

Appendix D: S&P Index Still Undervalued

WHAT IT MEANS TODAY

Appendix E: 30 Percent Value Gap in S&P 500 Closed by Rise in Treasury Yields, Price

HOW DID THE GAP CLOSE?

DEVELOPING YOUR OWN FORECAST

Appendix F: Making a Case for Salesforce.com Valuation

Glossary

Notes

PREFACE

CHAPTER 1

CHAPTER 2

CHAPTER 3

CHAPTER 4

CHAPTER 6

CHAPTER 7

CHAPTER 8

CHAPTER 10

About the Companion Web Site

Index

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Copyright © 2011 by Stephen D. Hassett. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Hassett, Stephen D., 1961– The risk premium factor: a new model for understanding the volatile forces that drive stock prices / Stephen D. Hassett. p. cm. — (Wiley finance series ; 702) Includes index. ISBN 978-1-118-09905-6 (cloth); ISBN 9781118118597 (ebk); ISBN 9781118118603 (ebk); ISBN 9781118118610 (ebk) 1. Stocks–Prices. 2. Corporations–Valuation. 3. Business cycles. 4. Stock exchanges. I. Title. HG4551.H34 2011 332.63′222—dc23 2011017550

To Anne, Sarah, and Charlotte Hassett

List of Figures

Figure P.1 S&P 500 Actual vs. Predicted, 1986–February 2011 (Monthly)

Figure P.2 S&P 500 Actual vs. Predicted, 1960 to 2010

Figure 2.1 10-Year Treasury Yields, 1962 to 2011

Figure 2.2 S&P 500 P/E Actual vs. Predicted 1960 to 2010 (Annual)

Figure 2.3 S&P 500 P/E Actual vs. Predicted, 1986 to February 2011 (Monthly)

Figure 2.4 S&P 500 Actual vs. Predicted, 1960 to 2010 (Annual)

Figure 2.5 S&P 500 Actual vs. Predicted, 1986 to February 2011 (Monthly)

Figure 2.6 RPF vs. Fed Model

Figure 4.1 Actual versus Predicted during October 1987 Crash

Figure 4.2 Interest Rate Impact on October 1987 Crash

Figure 4.3 Actual versus Predicted during 2000 dot-com Bubble

Figure 4.4 NASDAQ January 1999 to May 2002

Figure 4.5 Dot-com Bubble Close Up

Figure 4.6 Actual versus Predicted and Rf (Monthly) during 2008 to 2009 Meltdown

Figure 4.7 Actual versus Predicted (Daily) during 2008 to 2009 Meltdown

Figure 6.1 Real Implied Growth Rate (RIGR) Distribution (October 7, 2010)

Figure 6.2 S&P 500 RIGR Distribution (October 7, 2010)

Figure 6.3 S&P 500 RIGR Distribution (December 31, 2010)

Figure 9.1 Value of U.S. Construction Put in Place (Constant 2000 Dollars)

Figure 10.1 S&P 500 Annual Earnings (1871 to 2010)

Figure 11.1 Predicted and Actual Converge—Late 2010 through Early 2011

Figure C.1 S&P Historical Average (Actual vs. Predicted), Y/E Data 1960 to 2009

Figure C.2 S&P Historical P/E (Actual vs. Predicted), Y/E Data 1960 to 2009

Figure D.1 S&P 500 Index (Actual vs. Predicted) Month-End Data 1986 to December 2010

Figure D.2 S&P 500 P/E (Actual vs. Predicted) Month-End Data 1986 to December 2010

Figure F.1 Salesforce.com Change in Gross Profit versus Change in SG&A

List of Tables

Table 1.1 PV of $5 at 5 Percent

Table 1.2 Equivalence of Selling Shares Instead of Dividends

Table 1.3 Growth Drives P/E

Table 1.4 ERP Drives Valuation

Table 2.1 RPF Valuation Model R-Squared Results

Table 2.2 Estimated Risk Premium Factors

Table 2.3 RPF Valuation Model R-Squared Results

Table 2.4 RPF Valuation Model R-Squared Results with 30-Year as Rf for 2008 to 2011

Table 3.1 Inflation Drives Valuation

Table 5.1 Interest Rate Impact on Market P/E

Table 5.2 Constant ERP Implies Fixed P/E

Table 5.3 TTM S&P 500 Operating—Q3 2009

Table 5.4 Meltdown and Recovery

Table 5.5 Impact of Growth Expenses on Valuation

Table 5.6 Cost Cuts vs. Top-Line Growth

Table 6.1 Changes in Predicted, Actual, and RIGR in Late 2010

Table 6.2 Computer Software Industry RIGR Analysis—October 7, 2010

Table 6.3 Computer Hardware RIGR Analysis—October 13, 2010

Table 6.4 Computer Services RIGR Analysis—October 13, 2010

Table 6.5 Computer Hardware RIGR Analysis—October 19, 2010

Table 6.6 Computer Services RIGR Analysis—October 19, 2010

Table 6.7 Post-earnings Change in RIGR

Table 7.1 Basic DCF Example

Table 7.2 Revenue Model for MobAppCo

Table 7.3 10-Year Projection

Table 7.4 Terminal Value Inputs

Table 8.1 Cost of Capital for MobAppCo

Table 8.2 Example Valuation: MobAppCo

Table 8.3 Growth Business Terminal Value Multiple

Table 8.4 Adjustment for Midyear Discounting

Table 8.5 Adjusted Annual Cost of Capital to Reflect Debt Capacity

Table 9.1 Cost of Capital for a Cyclical Business

Table 9.2 Example Valuation: Cyclical Business

Table 9.3 Analysis of Construction Trends

Table 9.4 Long-Term Real Growth Rate (Construction Put in Place)

Table 9.5 Cyclical Business Terminal Value Multiple

Table 9.6 Calculating Intrinsic Share Price

Table 11.1 Drivers of Convergence—Late 2010 through Early 2011

Table 11.2 Acquirer and Target P/E Example

Table 11.3 Combined Value

Table 11.4 Acquisition with Synergy

Table F.1 Salesforce.com (CRM) Year Ending January 31

Preface

Meet Charlie, just your typical office worker, who spent many years getting beaten down in his office football pool. Each week he'd put in his $10, and each week he'd lose. Charlie loved football and was always supremely confident in his picks; he just couldn't pick against the spread.

One day, Charlie was home looking over the coming week's games. His young daughter asked what he was doing. He explained. Then, thinking about his poor track record, he asked his daughter if she'd like to help. She was thrilled.