>I presume you've read ken fishers book, super stocks, the work on price to sales ratios.
Actually not. I have a little problem with Ken Fisher trading on his father's name, since Ken is a value investor, while his father broke new ground as a growth investor.
>his take on the significance of psr is vastly different than your views
I'm not sure we disagree at all on the principles. I have always conceded that value investing probably out-performs the market averages most of the time; albeit not over the last few years. This is because of the strong tendency for company performance to regress to the mean. Thus, poorly performing companies that survive tend to out-perform average companies. Further, I concede that one of the best indicators of value is a low PS ratio (although there is little need and almost no excuse for relying on dumb indicators to establish value.) Another, not quite as good indicator, is a low Price to Book ratio. Low PE's have questionable use for value investing, for lots of reasons.
That said, by no means is a high PS ratio necessarily bad. Think hard about this. Since the PS ratio is the mathematical equivalent of the PE ratio times the rate of Net Profit, what do you want to come down to give you a low, comfortable PS ratio - the PE ratio or the Profit Margin? A low PE ratio for WIND is foreclosed by the inevitability of wonderful things to come in the exploding embedded systems and, now, DSP sectors, so you can never have that with WIND. If you insist on low PE ratios, you need to look for cheap deals in the thousands of run-of-the-mill tech companies, you will not find then with the rare quality companies like WIND. And why would you want a low profit margin? The only reason is that you fear the current high profit margin might have to contract because of competition. Like MSFT and INTC, WIND is developing a powerful franchise that precludes competition from exerting pricing pressure. In fact the opposite is happening. Due to economies of scale (which are awesome in the software products business because of near-zero cost of production once fixed costs are covered) WINDs marginal rate of profit continues to increase year-on-year, and should do so for years to come.
If you are wondering how I can concede the usefulness of a low PS ratio, and be pleased with WIND's high PS ratio, it is because there is no conflict. If you want to invest with statistics on your side and make a couple of extra points above the averages, then screen for lots of low PS ratio stocks and place lots of small bets. You will probably be successful and meet your objectives, although frankly it will depend on the mood of the market (some considerable periods value investing may pale when compared to momentum investing, for example).
I do not want to make a couple of points more than the averages. I want to do much better than that, and without trading. Phil Fisher is the guru, not his son, Ken - although I am not disputing the efficacy of Ken's value approach. The key to Phil Fisher's type of investing is to find a few of the highest quality companies with wonderful prospects and invest big. These companies are excruciatingly hard to find and prove out, so you can only find a few. Phil Fisher invested in about one in every 250 companies he looked into.
If you find one of these nuggets, simple mathematics (posted a while ago) easily shows the PE ratio to be essentially meaningless, and for the reasons posted yesterday, you can expect a high PS ratio, at least when your company begins to show its colors, if not before.
There is scientific evidence supporting the long-term marginal benefits of value investing. Unfortunately, there is no scientific evidence pointing either way for the merit of the approach I recommend, nor can there be any. The reason is, virtually by definition, there aren't any samples large enough to provide statistically satisfying proof. There is anecdotal evidence but it doesn't prove anything. For example, I personally found a company I liked, followed it for a while, and finally decided to buy it significantly in the $2 to $3 range - even though the PE was around 800 and the PS was astonishingly high. I'm glad I didn't read Ken's advice before I invested. Three years later the company is in the $40s, which is pleasing but not surprising. Of course the company is WIND.
Had I value-invested instead, let's say with an 18% return, it would have taken me nearly 17 years to accumulate the same return. If the 18% was pre-tax, resulting in an after tax return of, say, 10%, it would have taken over 28 years to accumulate what WIND provided in just three years.
Phil Fisher talked about finding and owning great growth companies for sensational returns, like WIND. His son Ken is promoting a risk-reduced approach to enhance market return. In my mind, Ken's views about PS ratios are at most of passing interest to thoughtful investors. They are on par with buying utility companies for the dividend plus a little extra.
Allen |
