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

To: tekboy who wrote (40192)	3/10/2001 12:01:25 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

tekboy, Great post. Thank you! I'd like to expand on a point you made. You wrote that "it is difficult to translate the qualities that distinguish Gorillas from other companies into the sort of traditional, highly quantified valuation metrics that valuation junkies usually rely on. This has meant that even some of the most serious students of valuation around here--Merlin and Lyre, for example--have found it difficult to use their valuation skills to pick good entry and exit points consistently." As much as I believe that valuation can be a tremendously helpful set of investing tools, I doubt that applying traditional valuation metrics to traditional companies' stocks will render consistently good entry and exit points. My point is that it doesn't matter whether we're talking about Gorillas or more traditional companies. If we could always be successful using those tools with traditional companies, I believe it would be relatively easy to tweak them to apply to Gorillas. I still have no idea what Gemstar's fair value is and I believe I could shoot holes in just about any argument for any proposed fair value, high or low. As another example, I bought Qualcomm for three-year-old at about $130, not having the foggiest idea at the time what the fair value was because I didn't (and still don't) know what the company's market potential is. (I do concede though that because of my uncertainty about the valuation, I reserved some funds and used them to buy at a later date in the $70s or $80s.) I do maintain though that using valuation tools can help us avoid many of the worst mistakes. Ironically, though, one of the reasons I believe in the value of long-term investing is because despite my best effort to value stocks, the best possible way to render long-term valuation relatively accurate is to hold the investment for a long time. --Mike Buckley

To: tekboy who wrote (40192)	3/16/2001 6:50:46 PM
From: Pirah Naman	Read Replies (1) \| Respond to of 54805

Valuation matters Here are some numbers to chew on. Let's say somebody bought a member of the G&K Index at its high of the past year, and held it still. Imagine they held it for 10 years total, and wanted a 15% per annum return. To simplify things, let's assume the high was exactly one year ago. To get the required return, how fast must the stock appreciate for the next nine years? That required rate of return is given by the third column of numbers in the chart below (RRR). Stock Current High RRR Tax return BRCD 30 133 37.60 120.2 CSCO 20 82 36.41 108.5 EMC 33 105 32.63 76.4 INTC 28 76 30.31 60.0 ITWO 17 100 41.99 170.9 JDSU 23 140 42.53 178.0 MSFT 55 115 26.59 38.2 NTAP 19 152 46.92 245.0 ORCL 14 46 33.10 80.0 QCOM 50 162 32.89 78.4 SEBL 26 119 38.09 125.2 SUNW 18 64 34.27 89.4 To explain the chart a little better - if a person had bought BRCD one year ago at 133 per share, then BRCD stock would need to compound at 37.6% per year for the next nine years to get the investor a 15% compounded return for the 10 year holding period. You can judge for yourself the likelihood of each of the above stocks hitting those rates of return. Does it make sense to sell? If you are sitting on a big paper loss, in a taxable account, selling is worth considering. Even if we are at the bottom. Let's assume that you pay a combined 35% (fed + state) tax. Again using BRCD for example, if you bought at $133, and sold now at $30, you would lose $103. But you would reduce your tax liability by $36 (35% of $103). Wait 31 days, and buy BRCD back. For you to lose on this strategy, BRCD would have to go up more than $36 - or 120% (see column 4 above, called "tax return") - in the next month. Of course, you should use your own cost basis and tax situation in making these determinations; get professional help if you need it. Does it make sense to buy? Some of the companies above are attractively priced IMO, based upon my methods and assumptions. (INTC, CSCO, and NTAP look best to me right now from a purely numerical standpoint.) Other valuation and pricing methods might give different results. I understand why folks like Pirah prefer to teach fishing rather than proffer fish, but it's most helpful for the thread if valuation junkies show their work for all to see, and show how it can improve their investing results over time. WIth Ltb&h, there aren't enough trades to demonstrate or prove much. Even if we started a hypothetical portfolio, the length of time for it to give enough evidence to "convince" somebody would be very long. If it makes sense to somebody that valuation (or pricing) exercises would improve returns, what is left to that somebody is to actually do the exercises. If it doesn't make sense to somebody that valuation or pricing exercises can help, then neither teaching them to fish or giving them fish makes any difference. - Pirah