James, you raise the heart of the issue -- estimates for future growth. The short answer is that we don't know what the future will bring, nor can we know. I was specifically asked about Dell, so I answered in that context. I also own other companies that I believe are great growth stories. I guess the principal issue I'm trying to raise is that it's a mistake to focus so closely on "value" that you lose sight of the future, and I think the future is what investing is all about.
Because of the great deal of uncertainty, multiperiod valuation models are notoriously poor. Besides which, the weighting seems to be entirely too much in favor of the near term. So let's go back to a long term hold of mine, TYC. I originally bought the stock at approximately $6 (split adjusted) in 1986. It is currently trading at around $71, so my holding period rate of return is around 23%, not including dividends. Supposing I "overpayed" by 50% ($9/share), my annualized rate of return would fall to a little less than 19%. Sure, not as nice as 23%, but not bad. The point that this illustrates is that while it is always nice to get the stock at a "bargain" price, if you are investing in growth companies, that should be less a concern than identifying a good prospect for a long term hold.
I think my logic concerning P/E is pretty straight forward. In a nutshell, investing on the basis of P/E is like making a decision based on where conditions were in the past. Take a natural resource company like a gold mining outfit as the clearest example of what I'm talking about. Clearly, the value of the company is tied to the current value of gold, not the past value. And the cost that the company incurred in buying the land is clearly irrelevant to its value. But focusing on the historic P/E is logically disconnected from what I assume we would agree is the value of the company. If you agree with this premise, then it is reasonable to conclude that both the book values as presented on the balance sheet, and historic earnings are irrelevant to valuation.
The only real quibble I have with the philosophy and techniques of Buffetology is that it was not designed to deal with companies in hypergrowth.
Back to Dell for a moment. Dell is a vastly different company today than it was in 1995 when you evaluated it. I too looked at it in '95 and passed because I didn't see the promise of growth. And in fact it took another year before growth really began to emerge, and it began to emerge as their business model was transmogrified into what it is today. And like you, I need to see performance, so I waited another year to make sure I wasn't dealing with a flash in the pan. But, in the past year and a half I have been amply rewarded, and that is the key: hypergrowth in these kinds of companies tends to persist for considerable periods of time.
My point was not to trash anybody. A friend asked to repost a comment I had made on another thread. The response I got was to put words into my mouth ('bet he wasn't talking like this back in October ...'), and to ascribe an investing philosophy to me which is anathem to my way of thinking ('momentum investing'). So I'm truly sorry if I ruffled some feathers around here, but I felt the need to defend my views in the context of ill-informed attacks.
I also note that the attacker has yet to retract his foolish comments, but insists instead, on twisting my comments to fit his prejudices.
Happy holidays, thread.
TTFN,
CTC |
