Uncle Frank, I recommend that we consider G. Moore's "Living on the Fault Line" as volume 2 of the manual. On page 72 he gives his thinking that we can't extrapolate numbers forward more than 2-6 quarters. Beyond that the comparisons between companies have to be based on gorilla qualities. This says in effect that we can't solve the evaluation problem. We may think that NTAP is a gorilla in a more enormous market even than CISCO. It gets and deserves a higher P/E, P/S P/book etc. But how much higher? We have no answer.
I have two ideas to toss out, maybe both of them are worthless.
I. The penalty of being an intellectual.
There are of course tremendous rewards for being an intellectual but there also penalties, even in the stock market. To an intellectual the future is more real and more important than it is to an average person. Given a choice between a stock CURRENTLY growing its sales and profits at 50% per year, and a stock which is now growing at 25% a year but in a couple of years looks highly likely to start growing at 100% a year for several years, an intellectual would favor the latter, because a calculation will show a superior return. But I suspect that the market place, more often than not will favor the first stock. I was surprised to see the recent rapid advance of GMST stock price. Nothing relevant to the long term future of the company has been announced recently. What happened? Q2 earnings, belatedly announced, looked good. Similarly we put a higher value on QCOM when they demoed HDR in later 1999. But that's a product for 2002, or at the earliest late 2001. The market above all wants to know what's happening right now. When the answer is nothing in particular, probably a deceleration of growth until the next stage of CDMA appears on the market, then the market marks the stock down. So it seems if we want to make the most money we have to put somewhat more emphasis on the immediate future relative to the long term. Naturally the long term is paramount, but we can't neglect the near term. Being intellectuals it is sad to contemplate a possible end of life some billions of years in the future when the sun cools. The character in Chekov's Three Sisters talks about life 200-300 years from now; that's a true intellectual. But we have to look at other people's thoughts when we plunge into the real world of investing.
II. How many years of gorilladom does the present price anticipate?
Let's assume that eventually all companies become average companies. The average company is worth about the same as cash. ie. a short term bond. A certain inflation protection of the stock and yield protection of the short term bond more or less cancel each other out. The current P/E of cash is about 16. So we can calculate how many years of growth at the current rate would be required for the earnings to reach 1/16 of the present price of the stock. This has no predictive power for the detailed future of the stock but if gorillas as a whole needed 10-15 years to catch up with the yield of a bond then cash might temporarily be more profitable.
Any comments, people?????????????? |
