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Strategies & Market Trends : Value Investing

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To: Bob Rudd who wrote (16248)	1/22/2003 12:27:34 AM
From: Bob Rudd	Read Replies (1) of 78595

OT sort of: On the subject of technology and R&D I read a book on tech investing by Michael Murphy, a fund manager and newsletter writer in the mid-90's. The central theme was that R&D should be considered like earnings since a rational company would not invest in R&D unless the outcome had a favorable expected value. Murphy's theory was that one should look at a multiple of earnings + R&D instead of PE for tech companies. So a company with a pile of R&D but skimpy earnings might be undervalued by the former measure but overvalued by the latter. The R&D componant would capture future prospects. I found this concept intuitively appealing, but before betting any real money on it, I put together a spreadsheet based on what was in the book then looked at what had happened in the 18 months or so since the one in the book had come out. It wasn't pretty. Revisited it a year later - still not pretty. And this was well before tech bear that began 2/2000. The conclusion I came to was that a whole lot of R&D is money down a rat hole, which may partially explain, but doesn't necessarily justify why the proven winners get bid way up.

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