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For years, two great armies of investors have done battle on Wall Street. In one camp stand growth investors, willing to pay dearly for companies they believe can generate big profits for years to come. In the other camp are value investors. Theyll buy only into companies with real assets and solid earnings in the here and now and at bargain prices. As yet, value investing is more a framework than a set of codified rules. It relies more on forecasting, even though Benjamin Graham and David Dodd, who laid the principles of value investing, frowned on forecasts. BusinessWeek (2004) reports: "When you look at the Russell 1000 Value and Russell 1000 Growth indexes, which are now 25 years old, value beats growth by three percentage points a year, on average. Economists . . . using their own indexes, show value beating growth by an average 2.6% a year over 75 years."
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Question 1. With reference to the case above, critically evaluate the relevance of prospective analysis in an investment setting.
Question 2. Assume you are an expert in financial analysis and an investor has approached you seeking advice on investing in the Nairobi securities exchange (NSE). The investor is considering investing in shares of any two companies but from abundance of caution, he has requested you to analyze any three companies listed in the NSE from which he will pick the best two. Based on the analysis approaches outlined in the case above, analyze any three NSE listed companies of your choice and advice the investor accordingly.
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