Chuzz- I agree with you that, when trying to determine to price of a stock, or better said, the price in which one should buy and sell a stock, that price/valuation is where you start and spend most your time, and the price/valuation relationship has to make sense...but is this the only determining factor?
I simply don't think it is accurate to believe that the price of stocks (today or in the future) is going to solely be a function of free cash flows (and growth), risk-free rate of other investment opportunities, etc...
What I think you are telling me is that you are unwilling to invest in an asset in which you have to worry about these liquidity (and other) factors....you would rather justify your decision based on intrinsic value and price...and nothing else...and that these other factors that I've mentioned are, in your view, subject to rapid change and variance and can not be (possibly) accurately measured or understood (in order for you to make a better buy/sell decision).
Having said that (and, hopefully I am reading your right here..) this is not the same as saying these factors don't exist and don't have an influence...Let me tell you where I see a (potential) problem with what you said....
Let's look at a separate area: small-cap stocks...for the several years, these stocks have "fallen out of favor" with the market....on a valuation (PEG) basis, many of these stocks represent better values (again, on a relative basis) then large cap issues....but, if you would have been invested in some of these names, you would have made (in many cases) measly returns over the past few years.....most of those still holding on to these stocks figure: "Next year will be our year...and we will start to see above-average appreciation (vis-a-vis other assets)..to make up for the appreciation (we did not see) in the past couple years"...
But will they? What if these factors of liquidity, and other factors (ie. one more small example: foreigners are more likely to buy U.S. big caps then U.S. small caps..that is not going to change anytime soon) are permanant long-term (several year) trends that will have (have had) an influence in the marketplace....Are you going to (want to) be the investor who holds these undervalued assets, keep earnings measly returns, and is hoping against hope that these undervalued jewels get recognized? Being right about price/valuation, but being wrong about these other "factors" that play a (big?) role?
I propose that, yes, one day, these stocks will show a better return (than the last few years), but how much appreciation will you lose out on the meantime? What if, on a relative basis, because of these other factors I've mentioned, small caps will earn a weaker return -all other things being equal? It certainly appears that this has been the case...How else can one explain the stock performance of many by-all-appearances- healthy small-cap companies...
In my mind, the best thing to do when evaluating what companies to buy/sell is to place valuation/price first, but also look at liquidity and other factors.....with a clear emphasis on valuation/price.......That is why I am so excited about Dell....It certainly fairs well in the all meaningful valuation/price metrices (relative to all other stocks) BUT IT ALSO rides several other trends that favor issues of its kind....
In all honesty, if I thought for a minute that a major trend toward investing in small-caps was about to take place (and massive amounts of money were going to shift to these issues...).and I can't imagine a reason why...but let's just say that there would be......I certainly would have to reconsider if Dell would be the best place for (a good bit of my) money...because there are small caps stocks that (on a relative basis) are certainly cheaper than Dell..and if liquidity (and other) factors were more powerful in their direction....well....so my decision would have nothing to do with the price/valuation metrix, and in fact, in my scenario, Dell could become "out of favor"...producing the same price/valuation relationship as before, but the stock's price would, in all likelihood, drop because of these "other" factors...
Does this make me a momentum investor? Partially, perhaps..I dunno.. |
