Forum Archive Index - May 2004

["Fiona Phibbs" <fibz@xtra.co.nz>]

Hi Snoopy

 

I don't want to drag this out too long and bore the pants off the other sharechatters but I'm still not convinced that your calculation of a return of 2.5% percent or so above that obtained from investing in a risk free investment (Treasury bills)  is adequate enough return for investing in shares at the moment.  That risk premium is at the lower end of the range of overall historic premiums studied in the USA.  Look at it from an intuitive point of view - the risk premium for investing in shares should not be constant, it should depend on the state of the market.  As markets rise in value and become more fully valued shouldn't the risk premium rise to compensate investors for an increase in risk from entering the market at that point?  And more importantly act as a 'brake' to avoid overvaluing shares in that particular market.  My intuition tells me that that investing in the US market is in such a situation and to a lesser extent so are we here!   I'm finding it harder and harder to find real bargains in NZ. Whereas a quite a few years ago after the Asia melt down etc when I was using a smaller premium it was obviously a lot easier to find good investments and I have profited likewise.  What I am trying to say is that at the moment the risk premium I am using appeals to my intuition that the markets are starting to become more fully valued and thus more risky and so my valuations are more conservative to protect me from this.  On the other hand you are intimating that you are happy with the current risk of the market and don't perceive it to be as fully valued - and are thus placing a higher valuation on the stocks within.  We are on opposite ends of the continuum with respects to risk, but so be it, only time will tell. 

 

cheers Dean