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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Seeker of Truth who wrote (48531)	11/3/2001 2:17:00 PM
From: Mike Buckley	Read Replies (3) of 54805

Malcolm, But in any case we have to have a 5 year and a 10 year estimate. If such an estimate cannot be made then the stock is a wild gamble. I believe the use of long-term estimates are one tool that can be used in determining the fair value of a stock, but I don't think it's necessary to use them. Especially in the case of high-tech companies, so much can happen in a five- or ten-year period that the more we rely on such long-term estimates the greater chance we have of being wrong. If we're going to rely on such long-term estimates, I believe a more useful approach is to identify the growth required over a five- or ten-year period to justify the current price of a stock. Doing so helps us at least understand the parameter the current stock market is using. In extreme situations, examining those details will at least tell us whether or not the stock price passes the laugh test. As an example, if I had been interested in buying Siebel's stock at its all-time high, it would not have passed that test. Depending on the metric being used, the company might have had to grow earnings more than five times as fast as it had been growing them to justify buying the stock at that time. I don't think any rational person thought there was a reasonable chance that could happen. For many who owned the stock at that time, if it didn't pass the test that might have been a good sell signal depending upon a particular investor's philosophy about buying and selling. My point is that some times it might be better to assess the market's expected growth implied by the stock price than to come up with our own long-term estimates which are difficult if not impossible to reliably predict. --Mike Buckley

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