Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
For one thing, back then the average stock’s price/earnings ratio
was around 8. Today, it’s above 20. Equity yields have accordingly
plummeted. “Remember, when I wrote this we had just come out of
the 1968-1974 recession,” he says. “The median decline in the New
York Stock Exchange was 60 percent, while it was around 80 percent
on both the American Exchange and the over-the-counter market.
Cash dividends are now much less important because corporations
and investment firms aren’t as interested in them. If you get a cash
dividend, you have to pay up to 40 percent of it in taxes. Companies
have learned that buying back stock, instead of paying dividends,
puts everyone ahead of the game. If you take your appreciation in
the form of a capital gain instead, your tax load is cut in half.”
Papp further argues that Graham’s favorite yardstick, book value,
has no real value today. “Restructuring, inflation, and the accounting
rules have destroyed it,” he maintains. “Most important, our society
has moved from steel to silicon. In silicon companies, book value
walks out the door every night. There isn’t any. Microsoft has no book
value. Most of the electronics companies trade based on intelligence,
not book value. Brick and mortar don’t count as much any more.
Things really have changed. I love to say the four most dangerous
words in the English language are not ‘this time it’s different,’ but
rather ‘history always repeats itself.’ There are general trends that you
learn from history, and you better know them. But they’re different
every time.”
For this reason, Papp thinks people who do relentless back-testing
and look at what worked on Wall Street in the past are wasting their
time. “You can go back and do something that worked in hindsight
and find it doesn’t work now because things change so fast,” he insists.
“Among other things, our economy is fundamentally different. Yes,
we will still have recessions, but they won’t occur as often. Why do
I say that? Just look at what caused recessions over the last 200 years.
Almost every time, inventory problems were to blame. Now you have
computers telling you how large your inventory is. Surprise inventories
are what caused the problem. You don’t get them anymore. The restructuring
of our society over the last decade has worked because
the computer has made it possible. Years ago, my peers and I lived
in a society where the chairman of a company had to wait until his
middle managers accumulated all the sales figures they got from going
out in the field before he would react. Today, that chairman can look
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