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

To: Pirah Naman who wrote (39403)	2/16/2001 4:40:56 PM
From: Uncle Frank	Read Replies (1) \| Respond to of 54805

You stated that you have identified 3 g&k stocks that are superior to the rest in terms of valuation metrics. >> Where did I state this? I'm mystified. You're rather young for senior moments, Pirah. Just a few hour ago you posted: There are several of them which to me (based upon my calcs) appear attractively priced on the basis of free cash flow. My personal experience and observation is that companies priced attractively on this basis offer superior returns, even those companies which are slow growers. uf

To: Pirah Naman who wrote (39403)	2/16/2001 5:03:08 PM
From: EnricoPalazzo	Read Replies (2) \| Respond to of 54805

Then it certainly isn't worthwhile for you to do any valuation exercises. Thus, I would never suggest that you do any. And I will acknowledge that you may well be right. I will admit to curiosity as to how you reached your conclusion. After all, if you have evidence that my efforts are a waste, I could be convinced to do less work. I, for one, have calculated quite conclusively that valuation is of no importance whatsoever in Gorilla Gaming. However, I don't want to burden the thread with specific examples, or--worse--lead anyone astray... Pirah, if you'd like to share, share. Uncle Frank may not agree with your approach, but I think we all respect concise, cogent contributions with concrete examples. Coy allusions and vague ruminations are considerably less interesting (and polite). It's very hard to debate the merits of a DCF approach toward stock selection without specific examples of stocks and their purported intrinsic values. If you could maybe tell us which securities followed by this thread you feel are overvalued (i.e. priced above their DCF), we could engage a bit better. Ethan

To: Pirah Naman who wrote (39403)	2/16/2001 5:06:06 PM
From: Thomas Mercer-Hursh	Respond to of 54805

Then it certainly isn't worthwhile for you to do any valuation exercises. Thus, I would never suggest that you do any. And I will acknowledge that you may well be right. I will admit to curiosity as to how you reached your conclusion. After all, if you have evidence that my efforts are a waste, I could be convinced to do less work. It seems to me that there are several different roles that valuation metrics might play. If one computes these metrics along with all of the rest that one does in the process of profiling a potential Gorilla candidate, then one has that much more information. While the dominant criteria need to be qualitative, both in identifying the candidate in the first place and in deciding whether or not it really meets all tests, valuation metrics might well provide some extra information, e.g., a candidate that looked attractive in valuation might be one in which one might more easily take a starting position or, vice versa, one which looked particularly unattractive, especially in comparison with other gorillas, might be subjected to particularly intense scrutiny before taking a position. Both positions might likewise be modified by perceived or expected trends. This is quite different than using valuation to choose between alternative investments. It is all very well to say "Given three candidates which are equal in all other respects, one should choose the one with the most attractive valuation metrics" (not a quote, a statement of proposition). The problem with this position is that the first part of the proposition is never true. In G&K there are always going to be important criteria to distinguish among choices. This might be based on one's current positions or how secure one was in understanding the specific technology or some difference in position in the TALC or the quality of the value chain or the growth rate of the tornado or or or, but it seems to me that all of these are likely to be more important to most of us than any valuation screening. Valuation helps to confirm a choice or send us back for further study, but not to choose which primate among several to pursue. IMHO anyway.

To: Pirah Naman who wrote (39403)	2/16/2001 5:24:43 PM
From: Seeker of Truth	Read Replies (2) \| Respond to of 54805

Hello Pirah, I studied your posts which you kindly cited. I think they could be most valuable. I decided to junk my efforts and follow your scheme. BUT, I have some questions before I can understand your method. I understand clearly that a sum of money S at a distance of n years, which we discount at k, is worth S divided by ((1 - k) raised to the nth power). If our discount rate is 15% and the sum is 10 dollars and the time is 5 years from now then it's worth 10 divided by 1.15 to the 5th power. The latter is roughly 2 so the ten dollar bill of 2006 is worth 5 dollars to us here and now.. What I don't understand is how you derived the formula for the residual value. R = FreeCashFlow(next year)/(k - g). R is the residual value. k is our discount rate. In percent it's k%, in decimals it's 0.01 times k. g is the growth rate. This formula seems to come from heaven. Since I'm an atheist I just don't get this one. What if k = g? Then our Residual value is infinite? What if k is less than g? Then our residual value is negative? And what would that mean? I realize this may sound to some like an attack but I am strongly attracted to your scheme; I just want really to understand it. You are very kind to help us all with your instructions. I'm asking you this question on the thread because some other curious friends may be asking themselves the same questions. Yes Uncle Frank, the primary matters are all qualitative. Is the company a gorilla? Where's the value chain? What's the nature of the quasi monopoly which forces everyone else to build around their product? etc. etc. But having satisfactorily answered all these questions we still have to decide if we are paying too much. JMHO. By the way Don Mosher's post about WIND aroused my interest so I looked up the free cash flow, following your teaching. It doesn't seem to be growing appreciably. We seem to be too early for the tornado. So buying WIND at all looks like paying excessively. That's an interesting conclusion. Of course there's no certainty. Buying before gorilladom is established may of course be very profitable but the same could be said of betting on the horses etc.