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Tuesday, November 15, 2011 — In Chapter 5, we detailed the inherent limitations of financial analysts and how those limitations impact the accuracy level by those analysts in forecasting Apple’s P/E ratio. We also detailed the principle of using “Reasonable Conservatism” to model, forecast and invest based on determining where Apple’s floor might be. Instead of investing on high Apple can go at the most aggressive end of the spectrum, investors should formulate their investment strategies based on their well-reasoned determination of where the floor happens to be with Apple.
In this chapter, we get into the actual elements that go into the forecasting models that try and predict Apple’s future P/E ratio. FIrst, let me say that this is an extraordinarily complex and often-time, a subjective science. While earnings is very data oriented, forecasting Apple’ P/E ratio requires a lot of very subjective conclusions. People can disagree on the scope as well as the degree of impact that these different elements have on Apple’s overall P/E ratio. Yet, experience goes a very long way in being able to accurately assess each of these elements appropriately.
Many of you won’t agree with me on the conclusions I draw and that’s totally fine. I’m extremely confident both in my abilities, and on my handle of the material. This all will come down entirely to your depth of experience with the equity markets. This is why extraordinary financial analysts tend to fail when it comes to forecasting P/E ratios. They simple cannot wrap their mind around or simply do not have the requisite experience to properly assess the subjective market analysis component of the equation — which is probably the most important in this case. Let’s begin. In no particular order, these are the elements that impact and determine Apple’s trailing P/E ratio and which should be thought about when forecasting future trailing P/E ratios: