Jim:
Why do you say " If you can buy a cyclical at 12 times mid cycle earnings, that's not investment. That's theft. "
If you are intending to convey that buying a cyclical at 12 times mid-cycle earnings is a good investment, I would like to hear more about why you think so.
Does it mean that you think that, say, a 14x multiple for a company,in normal times, growing at say, 10% annually, is a good deal?
Basically, I look at it this way:
Assume a 14x multiple with a 7% growth rate in earnings and a long-term 4% inflation rate. For a long-term investment (eliminating taxes), I'd say my money is growing at 7% per year the first year, and with the increase in 'real' earnings, this 8% increases over time. I'll do a spreadsheet to get a 50 or 100 year IRR.
Compare this to an apartment building, which you can buy at 10x pretax earnings and expect to grow, more or less, at inflation plus population growth, maybe 5.5%.
The risk of the company is doubtless much higher than that of the apartment what with competition and obsolescence.
When I was buying mid-size businesses in the 1980's I pretty much got turned off when the multiple exceeded 6x operating profit (not cash flow).
What is the long-term average multiple of earnings on Wall St.
Any reaction?
Peter |
