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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Don Mosher who wrote (48091)	10/19/2001 10:37:01 AM
From: Judith Williams	Read Replies (3) of 54805

Don-- buy low, sell high Terrific post. Many thanks. You helped clarify some issues that had been nagging at me during the recent discussion of valuation. One of the problems I have with the valuation criteria discussed so far is that the solutions are somewhat hermetically sealed. If we accept that the economy and the stock market in particular act as as self-organizing dynamic systems, the market is itself made up of a network of subsystems. The closest analogy I have at hand is a study of a few years ago that looked at lion populations in the Serengeti. Some prides had a competitive advantage and flourished. Others got below critical mass and saw their territories challenged and their head lion defeated. This would, I think, compare, to an individual company's competitive advantage and where the pride is with respect to its "developmental curve"--in effect, where it is in terms of its "life cycle." But all prides suffer during a drought--the strong can hold on a little longer but eventually they too get parched. So that's the difficulty I have with the intersection of valuation concerns and GG. They are primarily company focused. We all accept the notion of TALC. We all accept that there must be some way of valuing companies--to get a notion of whether we are overpaying or finding a bargain. But even our concepts of ROIC and WACC--which seem to offer at least the prospect of a metric that levels the playing field--pay scant attention to macro elements. They build in a nod to the larger market ecosystem only in the risk-free rate and the tax rate. We can chart how a company is doing relative to its past performance if we use the same criteria over time. We don't get a clue about whether those results are company-generated or the product of some larger convergence within the market ecosystem. If we accept that technology is itself subject to a life cycle, I think we also must take that assumption a step farther and consider a follow on assumption--that the market ecosystem as a whole is subject to cyclicality. Right now our metrics for valuation are intrinsic--having to do with competitive advantage and where the company is in the TALC. I would argue that what we have seen over the last year and a half has little to do with either, and everything to do with systemic factors for which we have few metrics and even fewer insights into the interaction of the subsystem and the wider environment. Judith

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