Preface
Thomas Edison once was asked if he was disappointed by the huge number of failures he experienced on his way toward developing the light bulb. He is said to have replied that these were not failures at all. Each was, after all, a step in weeding out all that would not work in the creation of the final product.
Similarly, this book is mainly the result of many things that ultimately did not work to my satisfaction during my professional career. Early on, I became frustrated with historic price-to-earnings (P/E) analysis. There was, for a start, no objective basis to ascertain what reasonable P/Es should be. Furthermore, the uncharacteristic inflation of the late 1970s and early 1980s introduced complexities that seemed outside the range of P/Es historically experienced. To make things worse, the formation of the Financial Accounting Standards Board (FASB) in the 1970s was the harbinger of countless revisions of accounting rules, the end result being that intertemporal comparisons of earnings over long, historical market periods became problematic in the extreme.
The microchip revolution and the accessibility of cheap computing power in the early 1980s held out the possibility that dividend discount models (DDMs) would provide a systematic basis for evaluating common equities. However, for most companies, the net present value attributable to near- and intermediate-term dividend flows was not significant. Instead, the major contributor to net present valuation was the growth ...
