Tested how? By having more money at the end than at the start? How do you know you wouldn't have made more or less with some other method? Where is the real testing here?
I trust you apply those same questions to your own methods. :-)
No matter what approach one takes, there is always the probability that more profit could have been made. Maximizing profits is a dream.
But what one can do is to compare the results of one's actions with what results of any true alternate actions would have been. Valuation is the last step in looking at a company, so the choices at that point are down to choices pertaining only to that company. I can buy/sell, not buy/sell, or look to buy/sell at some price $X. I think you can see that for the individual investor, it is pretty trivial to see the test results. Now certainly the number of testable events are too small to be statistically significant for the individual investor. However, there have been numerous academic studies testing the impact of P/E, P/S, P/CF, P/FCF and other iterations on results. These would seem to be the sort of testing you would like to see, and on a more statistically significant scale. Unfortunately for what I think you might be asking, they test large numbers of stocks, rather than being limited to any subgrouping.
Frankly, I just can't see Buffett throwing a bunch of numbers into a spreadsheet, getting out a 5.5 and deciding its a buy.
In fact, Buffett has stated he does not use a spreadsheet, a computer, or even a calculator. In a rare moment he did state "I am a computer" and there have been anecdotes as to his ability to manipulate numbers in his head. Quite impressive.
I am sure that his valuation includes numerical elements, but I am confident that it is a far more detailed study of where the company is today, where he thinks it can or will be in some years
Absolutely. One first determines the desirability of owning the business, then one looks to see if the price is acceptable.
Besides, by staying out of tech, most of the companies he is likely to be looking at probably would have trouble imagining 25% growth, especially on a sustained basis ... a very different realm of speculation than the 100% YoY growth we have seen in many of the companies we have looked at here.
Hmm...you aren't saying that speculation is more tested, are you? :-)
So what if Buffett doesn't buy tech? Other people use valuation in buying tech. The principles don't change.
Merely looking at a company closely enough to do a good FCF calculation is probably a good start on the kind of due diligence which helps a person to make sensible investing decisions, whether they calculate anything or not.
Absolutely.
I appreciate your efforts at being rigorous. Everybody should set a standard for judging the methods they are considering using.
- Pirah |
