Great series!

You mention that reputation/size matters. Are there any “poker” aspects of reputation that can be detrimental? For example, if you develop a reputation for consistently making good purchases do brokers catch on and markup prices with the idea that your interest in a bond is evidence of underpricing?

Josh

You are looking for the following post:

http://alephblog.com/2007/07/09/the-fed-model/

Mr. Merkel specifically mentions your concern:

“The fourth limitation: a high earnings yield might reflect low earnings quality or profit margins higher than sustainable. No doubt that is possible, and particularly in the current era. On the flip side, there may be times when a low earnings yield might reflect high earnings quality or profit margins lower than sustainable. A rule is a rule, and a model is only a model; they don’t reflect all aspects of reality, they are just tools to guide us.”

A while back (I can’t find the exact post), you said investors should prefer corporate bonds over stocks if the BBB yield was at least 3.9% higher than the earnings yield (E/P)

Lately, the “E” in E/P has become a work of fiction writing for many companies. More importantly, the “E” is just an accounting entry – subject to a lot of FASB vagueness and subjective interpretations.

I prefer to look at real cashflows, because those are much more difficult to fudge, at least on a long term basis

If I look at dividends paid (which unlike eps are real money) — what sort of yield spread should an investor look for?

And a related question: if I must look at earnings yield, does the 3.9% spread work when looking at “normalized” earnings? Seems like a 10yr average might be too insensitive / trailing — by the time you saw a 3.9% spread, it would be too late to make a trade

Thank you in advance for your thoughts