RE: Extropy Investing Group

Ramez Naam (
Mon, 13 Oct 1997 19:27:51 -0700

> From: Eliezer S. Yudkowsky []
> Whoa!=A0 Microsoft, there, is trading at 60 times earnings.=A0 20 is
> considered
> rich.=A0 And Microsoft officials keep warning everyone that next =
> earnings
> will not rise as sharply.
> In my opinion, this bull market is a bubble if I ever saw one.=A0 =
> are
> buying a stock in expectation that it will rise, rather than in
> expectation of
> receiving dividends.=A0 The only way to make money on this stock =
> if
> someone else pays an equal amount of money.=A0 In short, it's a =
> scheme,
> not an investment strategy.

Eliezer, this is an interesting analysis, and there's some truth to =
However, both Price/Earning ratios and the overall bull market are more
complex issues than is often conceived.

First, what level of P/E is healthy depends on the growth rate of the
company in which you're investing.=A0 "Growth" companies with 20% =
profit growth routinely have P/Es of 20-25, as you suggest (even in a
much less bullish market than we have currently).=A0 Microsoft has had
profit growth rates ranging from 35-60% for the past 5 years.=A0

Yes, every year Microsoft (and Intel and other infotech companies)
inform Wall Street that they cannot maintain this level of revenue
growth indefinitely.=A0 Then in the following year they maintain or =
increase their level of growth.=A0 Thus the Street has stopped =

I suggest these companies because infotech is still a nascent =
The technology continues to evolve rapidly, and perhaps only 1/10,000th
of the market opportunities have been realized.=A0

Second, your point about making money off of stock price rather than
dividends is an excellent one that few people realize the significance
of.=A0 What you may be missing is the potential of owning a stock to
realize future dividends at a higher rate.=A0 Ie, I may purchase =
stock now in the interest of making dividends off of it 5 or 10 years
hence.=A0 In this sense a high P/E ratio (and more generally inflated
stock prices as more money flows into the market) reflects longer-range
investing on the part of the public as a whole.=A0 It also reflects a =
degree of confidence in future economic growth.=A0 Which I'd expect you =

An awful lot of money has moved into the stock market in the past few
years as interest rates have stayed low and bonds have been shown to be
a less effective long-term investment than stocks (they always were,
even when interest rates were moderate).=A0 Analysts expect an even =
influx over the next 10-20 years as the baby boomers begin to inherit
and invest money from their parents generation.=A0 The larger the =
of money invested in stocks, the higher prices will be overall.

To be clear, let me add that I think the current market is =
Perhaps by as much as 50%.=A0 A market correction may wipe out a year =
more of gains.=A0 Nevertheless, for the investor with a horizon of at
least 5 years, and preferably 10 or more, infotech is a very savory

Sadly I'm more or less ignorant of biotech firms.=A0 Could someone post =
list of the biotech industry leaders and any analysis of their =
and weaknesses?

> It's a pity Zyvex (nanocorp) doesn't take small investors.

Quite a pity indeed.=A0 I'd think that a group of extropians could
collectively pool funds to make a sizable investment.=A0 Would be
interested in communicating with anyone with a serious interest in =