<Reginald, so what your saying is these inside the Wall Street specialist boutiques have access to these empherical models that Fidelity's Magellan fund with 70 billion dollars doesn't??>
I sense some sarcasm in your tone. Let me give you a quickl education. Like i stated previously, DCF and true value investing are no secrets at all. The theroretical underpinnings have been around for 30 years and are taught in every major B school.
Institutional investment performance is dependant on many factors, one of the primary being the size of the fund. That is currently Magellan's problem. Although initially spectacular in performance, as the fund got too large, performance lagged the benchmark averages. The reason why? Simply too much money. The same problem that IBM appears to have with thier investment portfolio (excess cash). Magellan has more money than it can strategically place in positive alpha (overperforming) investments, therefore it must place them in neutral or negative alpha investments. This is the reason why many funds close their doors to new investors once they reach a certain size, it degrades overall performance. The boutiques defintitely don't have that problem. If anything, it is the other way around for them.
As for empirical models, like I stated earlier, it is no secret either (especially considering the fact that I pointed you to a free downloadable version on my site just a few posts ago). Consider the model an advanced calculator (most of them are simply very advanced spreadsheets). The valid assumpations must go in to the calculator in order to get valid answers to come out. You are inferring that the knowledge is in the model. It is not, the knowledge is in the person wielding the model, the model simply sifts the information input appropriately. It is that sifting where the model does its job. If it sifts according to unrealistic rules and conditions, it will yield distorted results when compared to reality. That is the major weakness in most sellside analyst models. They subscribe to accrual accounting measures when valuing stocks. The problem with that is that accountants rarely trade stocks, therefore the accrual accouting method tends to be inaccurate and unrealistic. Intel, which invests heavily in R&D, advertising and has high amortization and depreciation rates is a perfect example. Each of the categories I mentioned are highly distorted by the earnings model. If I were to increase my amortization adn depreciation schedules, my earning will go down, but my cash profit situation will remain the same. If I were to increase my advertising and R&D (given the fact that I have the FREE CASH FLOW to comfortably accomplish such) my earnings would go down (accrual accounting measures unrealistically consider these line items expenses), but the value of my enterprise, especially in a growth situation, will go up. Why? Because the tax man walks away with less of my money (taxes are applied after both of these line items), the possiblity of expanded market share has increased (due to new product development from R&D and new customer base from advertising). Now if you were to capitalize the forecasted earnings from a company that had the aforementioned line items maxxed out, and did the same for a company that kept them to a minimum, the second company, according to the P/E approach would be the most valuable. The problem is, in the real world, it is the first company that is the most valuable (assuming thier investments paid off in an efficient manner, which is a story for another time).
<Okay Reginald, I'll give you the benifit of the doubt that you do. I request you report all your buy and sell actions on this thread for the next year. If your model is so incredible, it should become obvious very quickly.>
Now seriously, why should I do that. I am in attempt to share my opinions with others, not to prove to you how well I invest. You are free to research all of my opinions if you feel they are inaccurate. You can even do it at my site (cheap plug:-), it has over 500 mb and 1,200 links of finance stuff, much of it is freely available.
RCM
rcmfinancial.com |
