<Off Topic> Re: Wall Street and Michael Murphy
Brian,
You wrote in your last post:
AMAT's low eps forecast for FY98 is $1.69 and KO's consensus is $1.74. AMAT's growth rate is approximately twice that of KO so in theory AMAT should be trading at twice the level of the sugar-water maker. If KO's price were applied to AMAT, that would put AMAT at about $128!!!
...and...
I am not arguing that AMAT is worth quite that, but this illustrates my point perfectly. People flock to what they know and understand. KO is valued as such because it has a steady earnings stream and operates in a simple business.
This second point of yours is absolutely right, but it's just this that makes the first point wrong! Predictability is valuable. AMAT's future earnings are less certain than Coke's, i.e. riskier. People demand a premium to take on that risk. You are certainly going to be willing to pay less for a given amount of AMAT expected earnings (including growth in the expectations) than for the same amount of Coke's, because it's riskier -- that's theoretically correct. So, AMAT is not "in theory" worth twice KO's p/e.
After playing this game for a couple of years, I can honestly say that I believe the "experts," by and large, are clueless. People have the notion that they have informantion we individual investors aren't privy to and thus cannot compete with them. If this is the case, why are 87% of them underperforming the S&P in any given year?
Well, this is only really true if "any given year" is 1995,1996, or 1997 :-) There's actually a fairly good reason why active portfolio managers have had such a hard time beating the S&P 500 recently, and that is because the index is very heavily weighted toward the largest capitalization stocks; 50% of the weight is in the 50 biggest stocks! Most active managers are reluctant to place such a big bet on the very large cap stocks as a group vs. stocks in other size ranges. But in the last three years, it has been a very successful bet! So, portfolio managers have had a heck of a time keeping up with the index. Now, I would agree with you that "we individual investors" can compete with the professionals. After all, we have a couple of big advantages: we can buy and hold, and we can choose to take on more risk than institutions will -- on average, over time this will be rewarded.
They upgrade after the fact and downgrade after the bad news has been released. Manic-depressives in suits is what Warren Buffet calls them.
Well, can't argue too much with this. There's no question that analysts tend to be behind the curve. On the other hand, it can be demonstrated that analysts' consensus forecasts do have value for making investment decisions.
Now, my point in saying these things isn't to paint a glowing picture of the Wall St. establishment, which certainly has its flaws. It's just that I think that the caricature of Wall Street that Michael Murphy presents is pretty much a fiction that he peddles for purposes of his own. The basic reason that investment professionals find it so hard to beat the market isn't just their stupidity or some systemic flaw in most of Wall Street, it's that the market is really pretty efficient; and it's efficient because there are so many really smart people out there trying so hard to beat it!
Finally...
Technology frightens many people. Just think of anyone of an older generation trying to program a VCR.
Hey, my 70-year-old mom can program her VCR just fine! :-)
Good luck.
==John
P.S. You thought your post was long, eh? |
