Based on discussion with J Mako, I am trying to speed-re-read "Super Stocks". Some observations:
- People who talk about PSR (positively or negatively ;)), usually have either not read "Super Stocks" or decided to ignore Ken's repeatedly stressed advice only to apply PSRs to Super Companies. It seems that people like to simplify their arguments (both positive and negative) and they just can't handle PSR-SuperCompany-Only metric. Disregarding Ken's advice though leads to a lot fake arguments against PSR, like "PSR does not show profitability". Yes, it doesn't, but you're ignoring "Super Company" part. ;)
(It's the same with Piotroski score. People either don't read Piotroski's paper or read it and discard the note that it should be applied to weak companies coming out of crappy business year.)
- Great ideas that tech research is commodity while marketing (it's not really marketing, Ken is not precise here, but think Apple, Microsoft, etc.) is what makes tech company great. This was really idea before its time that was then polished in Gorilla Game/etc.
- Chapter 7 is a must read for anyone who thinks we are in the midst of great depression/recession. It's all about the prices of IBM/EK/CAT/... during the real Great Depression. (No they were not trading at 0.001 PSR or 0.01 P/B ;)). It also raises the issue that I have heard mentioned by perma bears: the high margins can contract a lot during bad times, so 5 P/E on high-pre-crisis margins becomes very expensive price if margins dive. Note that this has not happened yet. We are still in a very high ROE/margin environment even considering 2009 crash. Ken wrote his book during very low ROE/margin years. Longs/bulls should hope that we don't go into a low ROE/margin decade again, since that would lead to a real "lost" decade.
PSR currently does not work well because we have been in a high ROE/margin environment for a long time. This explains the loss of PSR utility much more than Ken's recent claims that it has been overused.
More later. :) |
