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Bill Gross, Dividends, and the Nasdaq Composite

Do growth stocks need to fall another 90%?

Do the stocks on the Nasdaq Composite index need to fall another 90% before they're fairly valued?

You might think so if you've been reading the recent writings of Bill Gross, uber-manager of the  PIMCO Total Return (PTTAX) bond fund and two-time Morningstar Fixed-Income Manager of the Year. In a September letter to fund shareholders, Gross says, "Stocks stink and will continue to do so until they're priced appropriately, probably somewhere around Dow 5,000, S&P 650, or Nasdaq God-knows-where. ... Until then, stocks are losers and anyone who owns too many of them will be losers too."

He goes on to explain how he calculates the fair value of the Dow Jones Industrial Average. Now, Bill Gross is a brilliant guy, and when he speaks people listen. (I certainly do.) Anything he says carries a lot of weight among stock and bond investors alike. So I thought it would be an interesting exercise to take his logic one step further by applying it to the Nasdaq. If I were to use the same logic Gross used to get to a Dow 5,000 number and apply it to the Nasdaq Composite index, what fair value would I come up with?

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