Jay: "One could use the model you used initially, to select these
companies, in conjunction with the current social/political tones of
the day or moment..... Porc, My thought is: If this can be
quantified. Would it allow you to see the shift in the tide to a
down trend, far enough in advance, to adjust before, you would
have to make a mad scramble to adjust your portfolio?"
This is part of porx "3rd Era" concept. (I can't quantify it
though.)
The 1st era, the last stages of which spanned the better part of
Graham's career, was the boom/bust phase of Western Capitalism.
(East Asia is just entering it for the first time.) In that era,
companies sold below book value at the trough of the economic cycle.
If they recovered, so did their share price. If not, they went
bankrupt and you got your principal + margin of safety back from the
proceeds of their liquidation in bankruptcy.
The 2nd era, during which Buffett got rich, was the era of Cold
War-Welfare Capitalism's "permanent" inflationary bias. People were
always willing to pay another nickel for a familiar brand of razor
blades, newspaper, soda pop, etc.
The 3rd era, the current one, is one of long term falling prices
(and costs) in the area of the economy that shows the most growth:
technology.
In addition, all the criticism notwithstanding, regulators in the
2nd half of the 20th Century have been far more successful than in
the 1st half. A lot of people alive today have no historical memory
of how the Western world lurched from one political and economic
catastrophe to another in the 1st half of the Century.
Partly, it is because a lot of people who run things are
aware of these disasters that we have avoided many of the mistakes of
the past. And, elderly investors who haven't forgotten the Great
Depression, as has been pointed out, still keep a lot of money in
CD's, remembering as they do both the deflation of the 30's and the
inflation of the 70's. So, there is plenty of fuel left to fire the
securities markets.
And, partly it is because regulators now see their role as being
referees, not active players on the field.
My conclusion from this is that neither the general economy, nor the
securities markets, are as cyclical as they once were. Therefore,
so-called "cylical" stocks are being undervalued. Valuations on the
financial stocks have largely caught up. "Heavy metal" stocks, like
GM, haven't -- but, I predict that they will.
And then, there is the aging of the boomers. Think of it this way:
When boomers were in their 20's, the Intrinsic Value of blue jeans
(i.e., their ability to cover our legs) did not go up -- but their
prices did. Now that a lot of us have moved on, denims are no longer
a major growth industry -- yet designer jeans still command real
prices unimaginable in the 50's.
Likewise, now that mutual funds are more "trendy" than designer
jeans, stocks sport prices higher than historical averages. When the
boomers retire, this trend will moderate. But, premium stock prices
won't necessarily disappear entirely -- just as pricey designer jeans
haven't disappeared entirely.
Meanwhile, East Asia is transitioning from Mercantilism to
Capitalism. Therefore, they won't be over-investing in excess
capacity, and underconsuming, to the same degree as in the past.
Removing this artificially propped up excess supply from the world
economy will help extend the current recovery. Most likely, I see
the latter half of 1998 as "the pause that refreshes", like 1994,
when the Market was flat, waiting for profit growth to resume.
My best guess is that the current recovery will extend into the 1st
or 2nd year or of the Gore administration -- 2001 or 2002. We will
then have a brief, shallow recession, after which moderate but
relatively stable growth will continue.
When the boomers retire, I don't foresee wholesale disinvestment
from the Market. A lot of Generation X'ers don't trust the
government to provide for them. And, a lot of today's immigrants
have very high rates of savings and investment.
So, I continue to see the Market as mildly, but not wildly,
overvalued. If I knew how to time Markets perfectly, I might be out
of stocks right now. But, I don't. Therefore, as a long term
investor, I would rather pay "too much" for a stock whose earnings
are growing at 20%+ annually than in a bond paying single digits.
Reynolds Russell
web.idirect.com
"There are no sure and easy paths to riches in Wall Street
or anywhere else" (Benjamin Graham) |
