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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Pirah Naman who wrote (39363)	2/16/2001 3:16:13 AM
From: Seeker of Truth	Read Replies (1) \| Respond to of 54805

Pirah: Thanks for your reply. I've never understood the concept of discounted cash flow as it applies to a company that lives a long time. For example, Texas Instruments made big money from semiconductors in the 1960's and they are still around. If we own a mine, maybe we can calculate the amount of ore that's left and knowing that money two years from now is worth less than money next year etc. we can calculate the present value of the mine. But how do we sum to infinity for a long lived entity? Besides, even if we could do that sum would it be relevant to us? We won't be around forever to enjoy the earnings. Somebody after us will say why did Grandpa buy this? and dump the stock for some price or other. A charity will cash it in etc. Elsevier rushed in, in the early seventeenth century to profit from Gutenberg's technology. They were the first big book publisher and they are still around. But I'd be willing to bet that there is no continuity of ownership between the Elsevier family then and the present owners. We have to assume that the stock will be sold. When it is sold, a reasonable price sounds to me like the same pretax return that, let's say, a two year bond gives. I said 20 times earnings but the exact value at this moment is probably 17 times earnings. The bond is "safer" but the return is limited at the start. The stock has no floor or ceiling so that should average out to be the same, appealing to different buyers, of course. The expectation value is greater for the stock but people need to be relaxed about their savings. For definiteness I fixed the selling time at ten years out Somebody in my family has owned shares of Microsoft for 14 years but I'm willing to agree with AeroKat that such events are too rare to even consider. But ten years is less rare. So I think it's a realistic period given, as I said that fast growth was maintained for longer than that period by typical gorillas such as IBM, Cisco and MSFT. Intel might be another example. How about ORCL, I don't like the person in charge but the growth has been there and looks likely to continue given their dominance in the data base management program field. Ten years probably isn't unrealistic for them either. Anyway, arbitrary as all those assumptions are, I think the method is way better than qualitative judgements. Your suggestion about free cash flow for 4-5 years out and comparing with the S&P 4-5 years out sounds attractive also. But the free cash can be used for acquisitions and then we have to wonder if the acquisition was needed for future growth and in that case is it really free cash? I'm not rebutting you; I just don't understand that matter. It's similar for capital expansion. The money could have been used to buy back stock or, thinking like an antique, disbursing a dividend(!). Was the capital expenditure a necessity? If it was a necessity then is the cash flow "free"? Warren Buffett has many times stressed the difference between a company that continually throws off cash, like his candy company, and a company which continually requires new capital expenditures. By the way, I reiterate that if we have to assume a noticeable decay of the growth rate over the ten year period, then hardly any of our favorite gorillas is worth buying even at last Tuesday's bargain prices. The quantitative difference in returns between a continued fast growth for ten years and a decaying growth rate is, as you of course know, simply enormous.