Hi Jeff, yep, I believe that market value regresses to the mean that economic value represents. Imagine a double helix without the middle connectors. Each rod twists around the other rod. Take that double helix and set it at a 45 degree or so angle on an x-y axis. The upward trend represents the growth that a company will experience over time. The double helix represent economic value and market value. Market value always circles around economic value. Economic value goes up and down, but with a company like Cisco, on average over the long term, it goes up. So that is the best way to picture the relationship between economic and market value. They are inextricably linked over the long term, but in the short term you can have some wild gyrations. Currently, Cisco is in that wild gyration mode, where the value is 2.5 to 3 times what it should be. It could continue this way for another year or two or many years, but eventually it will intersect with economic value and perhaps even decrease below it. Then it will cycle up again. Due to animal spirits and supply and demand, it's almost impossible for us to guess where the market will move the stock in the short term. However, we can with a greater degree of accuracy guess what the true economic value of the firm is based on their estimated cash flows. In my opinion, it is the most sophisticated measurement available to us for determining economic value. Based on that, you can make good long term decisions, as long as you take into account your risk tolerance. Right now, I wouldn't say it's wrong to invest in Cisco, but I would say that it is considerably more risky given the market's comparative valuation vis a vis its economic value.
Believe me, Jeff, I don't want to believe Cisco is overvalued any more than you do. I long to have back the $66 a share that has evaporated since the highs of March 2000. But being a realist, I believe the risks of owning this stock are greater than I'm willing to tolerate, especially given that my other investments continue to perform very well. So given that and about 6 to 12 months of debate on Cisco's value, I sold all my remaining shares today. I'm taking the money and putting it to work with my financial planner. So consider this a good omen, Jeff. Since I've sold all my shares, now the stock price is free to rise dramatically. LOL!
Best of luck to all Cisco longs. May I be as wrong as wrong can be about this stock! I'm sure I'll be glad if I turn out to be wrong, considering that many of my mutual funds own Cisco. ;) |
