Hi Huey - great post. Quite a tidy summing up.
However, it is not fair to say that TFM demonstrates a "total neglect of valuation". Also, I don't think it's a black and white case.
Perhaps I should explain.
As I recall, in TFM there are a number of compelling arguments presented as to why a variety of valuation methodologies are difficult to apply correctly to the GG.
I personally think that many of Moore's assumptions were rather broad-sweeping and rested on low and shaky ground. Much of which was revealed as swamp during the recent flood. But a few hills have become obvious above the water level too. So it's really not fair to imply that Gorillas and Valuation are inconsistent.
Because I don't mean to imply that valuation is always incorrect when "applied to gorillas". I mean that the difficulty of correct application occurs within the context of The Game! Which is an important but subtle distinction.
Strictly speaking if one follows The Game then aren't the appropriate times to buy limited to (a) in the bowling alley, or (b) early in the Tornado? I apologize for not making the reference specific, but I do not have a copy of TFM handy now. Indeed, my own experience indicates that it is hard not to under-estimate the economic value generation during these intervals.
We all know folks who purchased Cisco in the pennies for example. Back then and without an understanding of the Gorilla Game, it looked like too steep a price to pay. Our friends have played the game well and could enjoy hundred-fold returns in their lifetime. Which is pretty darn good as a LTBH position goes. These are the true GGamers.
Outside the game, one might discuss methods and techniques transforming a Fat profit into an Obese one. There is value in this. But not infinite. For there is the law of diminishing returns to contemplate. The same amount of effort might take us from Obese a bit farther along the alphabet to Obscene maybe... Meanwhile, in any attempt to harvest gains there is always the risk of ending up at the wrong end of the alphabet, perhaps all the way to Abysmal.
So the merit of optimizing one's gains depends to a degree on the gains one already has secured!
Hence I can understand Buffet's keeping of KO. He's going to earn back his investment, probably several times over by the time he's done. At least compared to the opportunity cost. Not to mention that dumping 8% of KO is not going to be easy without creating a bit of a shock.
The same is NOT true for folks buying teensy slices of "gorillas" at just any old stage in their lifecycle or at any old price. Particularly once the Tornado has obviated itself. At this point as I have already commented, it seems that the error bias in valuation methodologies tends to overshoot. So while LTBH may indeed render disproportionate profitability (Gorillas are the Tech equivalent of "excellent" companies), it is more likely that a profit optimization strategy is warranted. Particularly if one wants to minimize the possibility of attracting learning opportunities ;)
I have noted that this thread seems to apply the game with a later bias. Qualcomm for example WAS a good GG Game buy, back in April/May of '99. Same with Cisco in 1995. And to these and others to various degrees in the interim. At least this is what appears obvious with the benefit of 20:20 hindsight. What is less clear is the merit of a purchase today going forwards. Thus my opinion that valuation matters in such later-stage purchases.
It is a matter of degree rather than absolute dogma.
So I believe we have been stumbling about in the distinction between techniques for investing in Gorillas per-se versus playing the pure Gorilla Game. In the former case I strongly suggest that valuation matters big time, and is indeed a primary consideration - just as it is with investment in any "excellent" company. I find it difficult to contemplate anything but profit as my primary concern as an investor... I am not yet wealthy enough to have made the transition towards philanthropy.
But in the latter case (the pure Gorilla Game) the difficulties of accurate valuation at precisely the right time to buy tend to bind its practical use. One runs the risk of avoiding a good GG investment if one applies standard valuation rules of thumb. Which makes sense. In the bowling alley or just as the Tornado materializes is when we face the question "is this for real"? The risk is high. So too should be the reward potential. And it is.
But once the tornado is for sure, the risk of the mass market "piling on" is not to be taken lightly either. And thus the reward potential diminishes and may even turn quite negative. At which point, valuation really matters.
This thread appears to straddle the boundary between these two views. Hence I think the very thought provoking discussion we've been having on "valuation".
John. |
