Fam Wencong, Kenneth

My Diary

Finding The Appropriate Discount Rate

Published: Sunday, May 17, 2020

If you read my previous post here, I said that finding r was hard when trying to value stocks. This is because there are multiple ways to do so. This article aims to help me with some of my questions. I am trying to build and manage a portfolio of 2 to 10 stocks to beat the market.

I have decided to use the historical prices of the S&P500 as my observation data. Data collected from 01-10-09 to 01-09-19.

My research and findings:

  • The average yearly return of the S&P500 is 10.35%.
  • It has a 1 Standard Deviation of 8.67%.
  • April and July are the worst-performing months.

Excel Data & Preparation Download Link:

https://gurumonkeys.com/wp-content/uploads/2020/05/SNP-Workbook.xlsx

It is also tricky in finding the long run growth rate (g). I use GDP for this. According to other analysts, GDP Annual Growth Rate in the United States is to stand at 2.30 in 12 months time. In the long-term, the United States GDP Annual Growth Rate is projected to trend around 2.50%.

Your stock valuation model will depend a lot on your assumptions. Good luck investing and trading. Follow me @ gurumonkeys.com (my blog) and @ eToro for more opinions and views from me.