<Reg, I'm no investment guru, but isn't all this valuation stuff based on long-term estimations/projections?>
In a nutshell, I base it on past performance, projected earinings and potenial as well the competitive environment.
<but you seem to be trumpeting your success wrt. NSCP on relatively short term market fluctuations. >
Please don't take what I say out of context (not as if you are doing it on purpose, but I don't want it to seem as if I was bragging). I never trumpeted any success. Instead I was simply correcting the assertion that I was wrong. When I am wrong, I will have no problem admitting it, but when I am right I simply don't want to be inaccurately accused of being wrong.
<And what is "fair market value" if it's not the price the markets set?><but you seem to be trumpeting your success wrt. NSCP on relatively short term market fluctuations. >
That is an age long debate among academicians and professionals alike. From a certain vantage point, one could say that "fair market value" is whatever the markets offer for said asset. But then you have what one could call the "theoretical market value" (don't quote me on this) which is the mathematically dervied value for said asset. Keep in mind that the majority of pricing models for market related assets were originally based on derivatives of such a model.
I understand you assertion that "fair market value" is whatever the market pays for an asset. But oftimes, the market is driven by imperfect information, and it is this imperfect information in combination with a lack of knowledge of the "theoretical market value" that leads to profitable pricing imbalances. Examples of this are scattered throughout the history of the markets and it is how risk arbitragers make thier living, and a very good one may I add. Buffet, is a successful value investor, but Soros sports a better 15 year record (at least that is what he says, Buffet has been in the business longer than Soros). Soros has succesfully made over a billion dollars net, in one year by manipulating the lack of perfect knowledge of market participants and thier inablity to gauge an assets "theoretical fair value." When the actual market price diverges X% from the theoretical market price, a profit oppurtunity develops. These oppurtunities are often short to medium term in nature due to the fact that those in the know in the market tend to rush in and take advantage of such imbalances for profit which results in the imbalance being corrected, thus acting as natural keepers of the equilibirum. This scenario has manifested itself in NSCP over the last few months. During NSCPs recent fall of over 60%, their long term earnings projections have not diminshed (actually I think they have increased), and its foreseeable competitive situation has not changed by a factor that woudl justify a 60% shift in valuation (we all knew MSFT existed and knew of their predatory habits BEFORE NSCP even had an IPO). The reason for the drop was the manipulation of entities that desired to profit from the discrepancy between NSCP's theoretical valuation and its actual market valuation. If you noticed, NSCP found support in its deep correction right about where my discounted cash flow analysis says is a fair valuation (the upper bound). Trust me, if NSCPs market price were to fall below its DCF valuation price, it would not stay there for long due to the actions of those who recognize the undervalued asset. This said, keep in mind that it works both ways. When NSCP market price reflects an overvaluation, it will correct as well.
<But the classic Benjamin Graham (sp?) style analysis was based on book value, which at the time was mostly real stuff like factories, real estate, and cash on hand, not? What does MSFT list as its book value?>
The "classic" Graham style does not work well with software companies IMHO. This is probably why Buffet does not invest in MSFT, he states that he is not comfortable in attemtping to value software companies. Disounted Cash Fow analsyis is a much more suitable vehicle for valuing software companies. Balance sheet methods (such as book value) are best suited for industrialzed and first generation service industries. For modern service and information industries, DCF is much more revealing. Remember, that one can adhere to Graham value principles and still use DCF. If I am not mistaken, Graham basically did not want ot overpay for assets.
Hope this answers your questions, cheers. RCM
PS
If I am not mistaken, Barron's named NSCP as one of the most overvalued companies in the market. Then again, Barron's, as a publication, is much more pessimistic than I am so it hurts to agree with them. |
