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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Seeker of Truth who wrote (25750)6/3/2000 11:14:00 AM
From: Mike Buckley  Read Replies (1) of 54805
 
Malcolm,

my own limited experience (45 or so years)

LOL!

[Is] stock X ... too high to buy at the current price? Or too high to keep?

I do think those are valid questions if for no other reason than the fact that the answers might cause us to search for equally strong companies with relatively lower valuations. Having a realistic concern about price also helps us hone our skills so we don't simply buy every stock with a great story. When we dig for the details, we often learn that some of the stories have a good deal of tarnish.

For me, the question about price at the time of purchase is more important than after I own the stock. And it doesn't matter whether it's a first purchase or a subsequent purchase. The reason price matters less to me after I own a stock is that I never know when a press release will come out the next day making a fairly high valuation seem more reasonable.

In addition to (or instead of) using forward PEs, I tend to look at PSRs. Earnings can be affected by a lot of astute business decisions because it involves management's use of the revenue. Measuring the market cap relative to the company's revenue is pure, simple and unaffected. One of the major issues that makes PSRs vary is profit margins. So I look at PSRs and profit margins together. Net margins are still affected by management's use of revenue, so thinking of margins and PSRs together incorporates earnings and revenues in an indirect sort of way that makes sense to me.

I'll post a separate message on a somewhat related subject.

--Mike Buckley
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