Speaking of dismal, DOW 5000, and a LOSS ON DELL. to ALL, What do you think of this frightening post to me from a Berkshire Hathaway owner?
To: jhg_in_kc (300 )
From: James Clarke T
Let me have some fun with this one...[You are]... the investor who has to sell before I will call a bottom.
<<Also, re:
1. How would I lose money if it doubled in the time period you
mentioned? If it doubles, I have twice as much money? where does the
loss come from?
2. Not to provoke a long tirade, but what is your argument for Dow 6000? IS it global depression?
If this is the case what is to keep Coke and Gillette from going down
further and even Berkshire?
Are you saying sell all stocks and get into cash NOW?
In my view a long bear market is provoked by the so-called external
shock like an oil embargo, a quadrupling of the price of oil in the 70s.
What is the external shock to the market in your view?
jhg >>
1. Dell trades at about 75 times earnings. Even if earnings double in
three years, and the stock winds up trading at a high multiple of 30
times those earnings, which it won't, you've lost money. This is pretty simple math. This is not my scenario, by the way. I did like the article, and have great respect for the business model. But so does Compaq, IBM, and every other potential competitor. The barriers to entry
are weak, which means be careful.
2. Argument for Dow 6000. Hmm. I won't do the long tirade. But the
return on equity on the Dow today is something like 19%, a historic
high. The historical average is 11%. That tells me there is some
downside in earnings. And you are paying a multiple of over 20x on those
earnings, which are arguably at a peak. So take that multiple down to
the historical average of 15x, and take the ROE down to - I'll give you
15%, which is generous, and you've got downside risk of what, 20% on
earnings and 25% on the multiple. That tells me the downside risk is
well below 6000. More like 4500-5000.
And I guess that will answer the next question. I'd pay about $40 for
Coke, and I do like the company, understand the business and want to own
it. Gillette is probably getting close. High 20s? So what stops those
from dropping lower? Absolutely nothing. And Berkshire too is still way
higher than I would buy it for. Cash is nice right now. Like Buffett, I
have no intention of being in cash when the next bull market starts, but
I'm in no hurry.
3. What's the catalyst? Is it global depression? Have you read a
newspaper lately? At least half the world is in a depression now. Where
do you think Caterpillar was going to sell its next excavator, or Coke
sell its next bottle of soda, and Gillette sell its next razor. These
markets were their growth story a year ago. And it is spreading every
day - just ask anybody you know in Brazil. How big a catalyst do you
need? And there is no sign it is stopping.
Buffett told us last week that he is a) more in cash than he has been in
a long time, and b) he implied that he has not even started buying this
"dip" because he is expecting something much worse. I agree with him
100% if this is what he was saying. There is a notion now that Buffett
just buys good businesses, he doesn't time the market. That is garbage.
Buffett has made fortunes timing the market since the 1950s. And I don't
know of a case where he has been wrong on a major market call. He is
making one now. And so am I. As I have said on other threads, I will buy
big name stocks to hold forever when:
1) Internet stocks are in single digits...no speculation
2) Abbey Joseph Cohen has been completely discredited..."buy the dips"
is ridiculed.
3) We have seen massive sales of mutual funds.
4) We see a bear on the cover of Business Week.
That probably means Dow 5500 at least...at most rather.
JJC
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