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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Thomas Mercer-Hursh who wrote (47914)10/15/2001 3:57:49 PM
From: Stock Farmer  Read Replies (3) of 54805
 
Thomas - my concern is that one requires a method to value gorillas. Having none just will not do.

Your analogy of someone walking into a store is not quite correct. For in that situation, one is exchanging value (money) for the goods and the various merchants might indeed wish to compete for the business.

However, in this case, it is more like a soup-kitchen where someone wanders in hungry from the street and refuses serving after serving until such time as he sees a properly filled out health inspection sheet. Feel free to go hungry.

This is not to say that one is perfect and the others are busted. Just that having none at all just won't do.

It's really quite simple.

One should not expect a company to be worth more than what it will generate. Except for circumstances which are derivatives of the greater fool theorem and/or which average out over the long term.

We can discuss and debate this sum. And the various methodologies that go into making it. But not calculating it or even guessing at it is an abdication of responsibility. Or at least the makings of buying of a pig in a poke.

And when the market is laden with folks dispensing advice about the shares they are selling to you... (which, by the way, includes the company's management), there is a certain misalignment of interests.

So we need a number. There are many ways of getting this number, most of which have buried someplace inside the making of an educated guesstimate.

Often folks do this without even thinking about it.

For example, anyone recommending we buy QCOM at $50 is automatically implying that they think the economic value that will be generated by the company will be at least 35 B$ in constant dollars.

I suggest it will be more fruitful to test the basis of this belief rather than test for silver-bullet type one-size-fits-all valuation tools. You might be amazed what gets stirred up when you ask the question "why do you think Qualcomm will generate more than 35 B$ worth of profit".

John
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