akidron, you said: if your view is very long term the odd ten points or so really doesn't mean much
Sorry, I must take issue. You were probably being ironic, but there are many people who make similar statements in earnest. There is a widespread attitude that, as long as you buy quality companies with growing earnings, you can pay any price, buy in at any PE, and do OK long-term. This is dead-wrong.
It's easy to buy great companies at high PEs. It's easy to buy third-rate companies at low PEs. The hard task, and the only way to beat the index funds long-term, is to buy companies with great long-term prospects, on the rare occasions when they are cheap. Those occasions may be very rare indeed. The last time MSFT was on sale was 1987. I'm hoping DOJ really crucifies them, so I can buy the stock at a PE below their growth rate. If you didn't buy CSCO in mid-1994, you had to wait 3 years before they were out of favor and buyable. Sure, you could have bought CSCO at a PE of 40 lots of times, but your returns would not be very impressive.
If you are going to hold AMAT for several years, your entry point is critically important. A few points difference in the buying price makes a huge difference in the final percentage return. Lets assume you sell AMAT at 120 in the year 2002. Buy at 30, and you made 400%. Buy at 40, and you made 300%. The "odd 10 points" made a 100% difference.
Another rationalization for buying high was recently made by Brian. Use trailing 12 months earnings, and today's PE looks uncomfortably high. No problem. Just use 1998 earnings. Don't worry about the fact that those estimates seem to change a lot. And if that isn't good enough, just keep on going into 1999 and 2000 and...... Eventually you can calculate a PE that allows you to believe the stock is undervalued. Let's see, they will earn $9.00 a share in the year 2010, so they are an incredible deal at a PE of just 4! |
