Reginald, I'm going to drag you back into our argument for a minute:
I'm starting to think that the main difference between us is that you place a higher importance on the actual "velocity" of growth than I do. And that's why you want to see companies finding ways to spend all of their cash on investments in growth.
I'll agree with you that the many companies who can't find attractive internal investments large enough to consume all of their cash are likely going to grow slower than identical companies who can. And the fastest growing companies have the fastest growing stock prices.
What troubles me is that how do you value a company that never "outputs" value. And let's step aside from all that risk-adjusted textbook talk. You claimed that the minute a company stops being able to find investments for *all* of it's cash, it ceases to have value to an investor. So how can it have value before that? It's just not intuitive.
"The most valuable companies make the "best" investments with "all" of their available funds. While this is practically impossible, you must find the companies that come as close to this as possible. MSFT is a good example. MSFT spends a lot on investments, with a phenominally high return, therefore creating true value."
What true value? In this scenario, they are recycling all of their money. You don't get any of it. What is the value of an ever-expanding cash recycling machine that never outputs cash? Why would you want to pay for one?
"<My entire position is that after appropriate investments for growth have been made (like R&D and marketing), there is often free cash flow left over. Even Microsoft, with their massive investments that you pointed out, has free cash flow.>
I am not arguing this point. Your posts seem to be based on the assertion that I not a propenent of free cash flow."
I think you're purposely ignoring what I said there. I completely contradicted you. You maintain that MSFT recycles almost all of it's cash. I said "no, look, even after all that recycling, they let a few billion dollars escape". I can only assume that you are refering to your idea about not counting the costs of R&D and marketing, and thus MSFT spent it's FCF on those. Well if so, that's not really "free" cash flow is it? They needed it to fund their growth. We can't have it. I think you want to stamp out FCF!<G>
"Again, you are talking about value on a per share basis, and not corporate value. When a company can not grow corporate value any further, then there should be a warning signal. Like I said earlier, MSFT had plenty FCF when it developed Windows 95 and NT, INTC (in a capital intensive industry) had plenty of cash on hand when it developed the Pentium and Pentium II with the new socket architecture. Notice that these companies chose to grow the company with thier dollars rather than grow the theoretical value of individual shares (at the expense of company cash, possibly paying more than the cost of capital through the oppurtunity cost of foregone future cash flows from such exciting and fruitful projects).
<You are suggesting that a company has two mutually exclusive choices: invest for growth, or buy back shares.>
This is not true."
You are contradicting yourself here. Why must you insist that giving a bit of cash back to the shareholders indicates that there is exactly zero growth allowed in total corporate value. If you could admit that it's possible for a company to buy back shares and still grow as an entity, well I'd be very happy. Maybe you could humor me!<g> I still say whether the company grows as a whole, or my stake in it grows, or both, it's all the same to me as long as I paid an appropriate amount for that growth. I don't need my company to be in the Guiness Book of Records for fastest growth ever. I just need that growth to be enough for my purchase price to look like a good deal in retrospect.
"The reason is because they have better things to do with thier money. This is a good thing. In theory, there may come a time when they no longer have something better to do with it. When that time comes, investors should be aware."
*shudder*
Then they might have to give some to the shareholders!<g> Isn't that the pot at the end of the rainbow? Isn't the whole REASON that you want Microsoft to compound larger is because it just means there'll be more cash to go around at the end? If there is no end, how is there value? Alternatively, if there is no value at the end, how is there value now? Your philosphy is based on an abstraction with discontinuities. It relies on "faith". It's the greater fool theory, just worded in terms of the capital asset pricing model. You have to have faith that in the future, more people will want to pay more money for no cash.
"Without an offesetting measure of risk, one cannot truly guage whether one has acutally profited from one's endeavors in said company. "
C'mon now, get your head out of that textbook! Read what you wrote there! If you made enough money to increase your buying power, you actually profit. Your required rate of return is based soley on how much you want to increase your spending power in a given period of time. If the stock is risky because you don't understand it, don't buy it at all! If you understand it well enough to decide with confidence what the worst case is, and pay a low enough price to profit even in that worse case, where's the risk? Volatility? HUH? Why worry about short term stock price movements when you know that a) your company is strong, growing, and throwing off tons off cash, and b) the stock market rewards growth over the long term. If you're scared about volatility making it more expensive for companies to raise extra equity in the stock market, buy only companies with so much free cash flow that they can fund growth internally. Likewise for debt. It doesn't have to be so darn complicated! If you get rich, you win! If you don't, you lose. So what if you're stock bounced around a lot along the way?
"You are in error here. To be honest, it is the a smart error for it is the same error that invalidates basic DCF analysis, and that is the identification and timing of investments. If value is the same (remember that you equated FCF to economic profit which you then equated to economic profit which is knwo a value) is the same no matter how and where you account for R&D, as long as do account for it, then truly R&D intensive companies will be valueless until they have recouped all of thier R&D expenditures above and over the value lost due to teh time value of money. "
That's why I base my valuation on an estimated stream of FUTURE free cash flows. Not present. I look at all the wonderful R&D going on and figure, hey, this company is probably going to be making a lot more in the future because of this. I try to guess how much, then decide what it's worth. That's why I see value in MCD, even though they currently have almost no FCF. I think it's obvious that the huge investments they are making today will result in lots of future cash to throw around. But if I thought they they were going to keep spending it all forever, I wouldn't see value.
"Using your methodology, the project would be a failure if it does not generate $100 in the year the investment was made."
Whose methodology ae we talking about here? It certainly bears no resemblance to mine...
Reginald, I have to honestly say that we are so far apart here on ideology that we're not even speaking the same language. Neither of us is ever going to agree on what we are even arguing about. A lot of what I said above will obviously make no sense to you. I don't believe in the CAPM; I think it's a big pile of hooey. <g> I also don't give a crap who won a Nobel prize for it. You can say that there are mathematical proofs for it or whatever. I disagree with their conclusions as they relate to the real world. I'm not saying this to disparage your belief system. I feel I have no right to say that you're wrong, and that's not what I'm trying to say here. I disagree with you, that's all. You will not be able to change my mind. Thanks for arguing with me, it was healthy. But I think it's going nowhere. I'm impossible! <g>
Like I said, I will explore your website to learn more about your ideas. It's probably not worth your time repeating them here to an unresponsive jerk like me!
Regards,
Andrew |
