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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (1403)	6/22/1997 9:21:00 AM
From: James Clarke	of 78744

<<ROE's do fluctuate>> I would not say that, because that would imply a little more randomness than exists. ROEs tend to regress to the mean. 30% ROEs tend to move in the direction of the average, as do 5% ROEs. Unless there is some long term competitive advantage (or some long term competitive disadvantage). If this is the case, then (except for some truly unique companies in Buffett's portfolio) you would want to screen for LOW ROE, not high ROE. I do like the Lynch point you cited. You could look for ROEs that are reasonably high, but not high enough to attract everybody and their dog to enter the industry. And to answer the question of what I like now based on this logic - very little, although there are some very cheap small caps out there. Many companies with below average long term ROE selling at twice book value. Anything with reasonably high profitability is in the stratosphere by any historical standard. Cash looks just fine at this point, and I am trying to raise some. Just trying to discipline myself to sell one dog for every winner.

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