Valuation matters
Here are some numbers to chew on. Let's say somebody bought a
member of the G&K Index at its high of the past year, and held it still.
Imagine they held it for 10 years total, and wanted a 15% per annum
return. To simplify things, let's assume the high was exactly one year ago.
To get the required return, how fast must the stock appreciate for the next
nine years? That required rate of return is given by the third column of
numbers in the chart below (RRR).
Stock Current High RRR Tax return
BRCD 30 133 37.60 120.2
CSCO 20 82 36.41 108.5
EMC 33 105 32.63 76.4
INTC 28 76 30.31 60.0
ITWO 17 100 41.99 170.9
JDSU 23 140 42.53 178.0
MSFT 55 115 26.59 38.2
NTAP 19 152 46.92 245.0
ORCL 14 46 33.10 80.0
QCOM 50 162 32.89 78.4
SEBL 26 119 38.09 125.2
SUNW 18 64 34.27 89.4
To explain the chart a little better - if a person had bought BRCD one year
ago at 133 per share, then BRCD stock would need to compound at
37.6% per year for the next nine years to get the investor a 15%
compounded return for the 10 year holding period. You can judge for
yourself the likelihood of each of the above stocks hitting those rates of
return.
Does it make sense to sell?
If you are sitting on a big paper loss, in a taxable account, selling is worth
considering. Even if we are at the bottom. Let's assume that you pay a
combined 35% (fed + state) tax. Again using BRCD for example, if you
bought at $133, and sold now at $30, you would lose $103. But you
would reduce your tax liability by $36 (35% of $103). Wait 31 days, and
buy BRCD back. For you to lose on this strategy, BRCD would have to
go up more than $36 - or 120% (see column 4 above, called "tax return")
- in the next month. Of course, you should use your own cost basis
and tax situation in making these determinations; get professional help if
you need it.
Does it make sense to buy?
Some of the companies above are attractively priced IMO, based upon my
methods and assumptions. (INTC, CSCO, and NTAP look best to me right
now from a purely numerical standpoint.) Other valuation and pricing
methods might give different results.
I understand why folks like Pirah prefer to teach fishing rather than
proffer fish, but it's most helpful for the thread if valuation junkies show
their work for all to see, and show how it can improve their investing
results over time.
WIth Ltb&h, there aren't enough trades to demonstrate or prove
much. Even if we started a hypothetical portfolio, the length of time for it
to give enough evidence to "convince" somebody would be very long. If
it makes sense to somebody that valuation (or pricing) exercises would
improve returns, what is left to that somebody is to actually do the
exercises. If it doesn't make sense to somebody that valuation or pricing
exercises can help, then neither teaching them to fish or giving them fish
makes any difference.
- Pirah |
