Friday, March 03, 2006

When is value, value?

Synonym for Value: Warren Buffett.

My internet friend, Roger Nusbaum, had something to say about value and the perception of value with a recent comment he made. He was discussing a comment that I'd made relating to value or perceived value in some of the emerging markets.

I'd suggested that, in comparison to the S&P 500 - with its' 18 PE ratio and projected earnings growth over the next year of about 10%, didn't necessarily represent good value in comparison to some emerging markets. Particularly Brazil, Korea and Russia, who have projected earnings growth of 11% or better, and PE ratios are below 12. A good combination of growth and value, I thought.

In Roger's comments, he makes a good point that cheap isn't always value, and that many of these markets have traditionally traded at low PE ratios. All true.

However, growth with value almost invariably gets noticed, and the lower risk profile that many emerging markets now have makes for safer investments than in years past. Many of these economies now have good free trade agreements, floating currencies, and generally more stable economic situations. In my opinion, this is part of what is leading investors to willingly pay more than ever for emerging markets: lower risk and a superior growth profile.

The inverse is of course true for the US market, with its continued burgeoning trade and fiscal deficits. If these trends continue, not only will the US currency continue its' descent, but even its' markets will eventually be revalued lower.

Cheap isn't necessarily good, nor is expensive wonderful. It must all be considered in its' rightful context: value.

"Price is what you pay - Value is what you get."

Warren Buffett


The Confused Capitalist

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