Andrew:
You wrote:
**************
I ask again, what if we go into a prolonged bear market, and the growth companies with great FCF sell at an FCF multiple of 8 for years because everyone is so pessimistic (like they were in the 70's). Since you paid a 14x, you stock is way down. For potentially years. What will you have to calm your frustration? How will you be able to say "I paid a fair price for a great company, and when times get better, the market will recognize this"? What if 14x isn't a fair price? Maybe it is, but whenthe rules change for a while, how will you know? That's why I see value in MCD, and you guys don't. My method allows for changes.
**************
I would argue that if anything, your method leaves you more prone to
such frustration. There are two reasons for this. First, as we discussed already, with long operating periods even a total slug of a
company will appear undervalued. Given this, what does such a test
tell you? Not much. It can be used to weed out something incredibly
overpriced and that's it. Second, your method allows for changes in
both directions. I have doubts about VL's ability to forecast for the
next four years, but I have even stronger doubts about any of us making good forecasts for much longer periods of time.
If you see value in MCD, I think you have to credit it to being your
subjective judgement. I don't mean that in a bad way; as I've stated
a couple of times, I think Buffett's success is far more due to his
subjective judgement than to his valuationn technique.
BTW I think you did a much better job explaining the PM-FCF connection than I did. Also I am aware of VL's practices, but they shouldn't
distort EVERY stock to the extent that jbe and I diverged.
Pirah |
