You are right on both counts. If the company does not grow and pays out everything, it does not matter whether you bought 16%ROE@1PB or 8%ROE@.5B. You are also right that the ROE-based reinvestment/growth metric is very inexact for a lot of companies.
However, I still prefer the high ROE companies for couple reasons:
- High ROE may indicate moat (not always)
- High ROE gives management more flexibility where to put the CF. As you said, this might be positive - in case of Buffett - or negative in case of Intel/HP/etc. overpriced acquisitions.
- Pretty much no companies pay out everything, so as above it's better to have high ROE.
- High ROE gives me more confidence to hold on the stock even if business declines/etc. I am not good at holding marginal companies as they fluctuate.
- Like Paul Senior says, I look to discard companies, not to include more of them. Even with high ROE requirement, I hold ~60 positions. I don't want to have 300 positions by buying every company in the universe. Sorry, Paul. ;)
On the other side, I can miss turnarounds/snapbacks where a marginal company goes to (cyclical) trough and then runs up 2x as its fortune turns.
I hold one or two NCAV positions, some E&Ps and some (re)insurance companies where the high ROE requirement is violated. So far, not much success with NCAVs, big success with E&Ps coming from 2009 bottom and mixed success with (re)insurance. |
