Ardethan,
>-in exactly what way is growing from 100 billion to
>1 trillion different than growing from 10 billion to
> 100 billion. Is this difference greater than the
>difference between growing from 1 billion to 10 billion?
>The answer probably seems obvious, but i'd be curious
>as to the explanation.
Let's first clarify what we are talking about.
If we are talking about market cap, you know that this
is just an expression of investors' sentiment and it could
go to the Moon or the next galaxy - it is limited
only by the total amount of money - which I don't
understand as non-economist.
But let's say we are talking about revenues, which
influence earnings and market cap.
Then it all depends on the market(s) and - as UF pointed
out in private message to me - on TALC. :-))))
So if I wanted to obtain an answer for a concrete
company, I would try to figure out its market and
that would be a rough estimate of how much it could
potentially grow. For some products the market is
rather small - e.g. I once looked in investing into
bridal gown company (!) - for some, huge.
However, all of them have upper limits.
>You seem to be implying that there is some
> theoretical limit as to the market capitalization
>of a company, and in particular that this
>theoretical limit has something to do with the GDP
>of the U.S. Could you explain that?
When we start valuing megacaps, sometimes estimating
company's market becomes slippery. First, some markets
are expected to grow at high - sometimes unreasonable -
rates. Second, one can always argue that companies
will expand to other markets ala GE, BRK, MSFT (Xbox),
INTC (networking), etc. As GGs you understand that
both of these issues are wrought with danger.
First, high growth rates end with tornado end.
Second, expanding to other markets is usually difficult,
because company's competitive advantage does not reach
there. Even more, other markets may be saturated,
have their own competitors, may have low margins, etc.
So these are natural limitations on the growth.
Since these natural limitations are sometimes forgotten
it is useful to look at rather simplistic and
artificial numbers. US GDP is one. Buffett also
quoted in his 98 Fortune article another: Fortune 500
1998 profits: 334 billion. Now we can come to
Jurgis' totally outrageous claims:
1. No company is likely to become much larger than
10% of US GDP. Antitrust laws is one limiting
factor. Natural barriers is other. Note: I don't
forget international sales. This is just an
outrageous claim after all. :-))))
2. No company is likely to earn more than 10%
of Fortune 500 profits. Same reasons + competitive
nature of our society.
Now, Buffett optimistically estimated US GDP growth at
5% and he made similar claim on Fortune 500 profits, so
one cannot just say: "Hey, my XXX gorilla will be 20% of
current GDP in 10 years, but then GDP will grow 20% per
year, so XXX will be less than 10% of future GDP".
So in a pinch, check if your prognosis for favorite G
expects it to have sales over 10% of GDP or profits
greater than 10% of Fortune 500. BTW, I would be
conservative and lower these limits to 5%.
>[BRK]They achieved 32% over the past year.
>BRKA's market capitalization is still growing at that
> rate (haven't checked cash flow).
Buffett's results are intentionally lumpy. In 1999
growth of book value was 0.5% (!), in 2000 - 6.5%
and even these numbers mean little. Earnings
over last 5 years are all over the place as are
revenues.
I will repeat that market cap increase is not
a good parameter. It would be easy to increase it
at any percentage rate if it first dropped
to 0. :-))) BRKA did drop from ~80K per share in 1998 to
~40K per share in 2000, so the recent rebound only
brought it back to old highs.
Overall valuing BRK is a nightmare, so I won't go
into that. There are some people who have done it
but I would not even try to understand if they are
correct.
Jurgis - BRK is a "faith in Buffett" stock |
