Apollo, when you talk about the safety of owning Intel, in contrast with the higher risks for SanDisk, you bring up an important point for investors. One would expect SanDisk to grow its earnings at a faster rate than Intel, and eventually that growth would be reflected in the stock price, which, other things being equal, would outperform Intel.
Instead of looking only at respective rates for earnings growth, an investor might want to look at expected value, which is defined as a reasonable target price for the stock, multiplied by the risk level for reaching that price. In a smaller stock like SanDisk, the risk level will be higher than that for Intel. That is, the probability of reaching the higher price will be lower. If you roughly estimate the growth rates for the two companies and the risks involved, then you might conclude that Intel would be as good, if not better than SanDisk as an investment because the expected value of the investment is higher than for SanDisk.
But other factors may change this equation. For example, smaller companies generally grow faster than larger ones. Dominant companies generally are safer than smaller players, if only because they have the ability to influence product prices. This is where I would give the edge to SanDisk. While both SanDisk and Intel are dominant companies, SanDisk dominates a faster growing part of the market and can be expected to grow faster than Intel, which dominates a different, slower growing market. Being in a dominant position, regardless of the proprietary product question, reduces the risk of owning a company by a large margin.
SanDisk, moreover, is not lacking in key intellectual property. There are enough patents that are still essential in producing flash memory to give SanDisk a competitive edge over those who would work around the patents. All these factors are hard to quantify, especially in trying to predict the impact on future earnings. One additional factor is important to me in deciding where to invest, and that is management quality. SanDisk is exceptional in this respect. Here is where I am in total agreement with the investment approach of Warren Buffett: You don't sell good management. You buy it and expect to hold it forever. This is why I give the edge to SanDisk as a reasonable investment.
Art |
