Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Stock Farmer who wrote (43608)	6/18/2001 12:21:08 AM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

John, Thanks again for taking the time to explain your perspective in such detail. Many of us can be accused of overextending conversations of this sort. But if they are so, I believe that they become that in the pursuit of understanding. In that case, I prefer that conversations err on the side of being overextended rather than that they err on the side of being abbreviated with the result being a misunderstanding or a partial understanding. I think the hard part is when the results cause an involuntary violation of faith "I have to own XYZ, it's a Gorilla" can collide with "you'll never get $xx a share back in anything less than a century". I agree completely, which is why I and a few of us (you've probably noticed that it's a rather small few of us) try to impress on the thread the importance of valuation. The really sad fact is that I believe most people reading this thread make no attempt at valuation other than in the vein of "the price has dropped 50% so it must be at least a reasonable value now if not a great value." I believe I'm objective enough about my investments that I haven't succombed to the specific problem you eloquently described. Yet there are times when a stock I own becomes overvalued. When that happens, I find myself dealing with a scenario that is almost as difficult. I know the impact of paying capital gains taxes over a thirty year period. (You may or may not have been around to see the informative discussions a long time ago in reaction to spread sheets I provided showing the severely negative impact taxes have because payment of them removes assets from the benefits of long-term compounding.) So, when a stock becomes highly overvalued, I go through the mental gyrations of wondering if I should "lock in" my profits and pay the taxes. I can do my dead level best at evaluating the prospects of a product category and the extent that its growth will inure to the benefit of the specific company in question. Even so, more often than not I can't specifically identify the presumed growth justifying holding a richly overvalued stock in such a concrete manner that I can comfortably put it in a cash flow or whatever model I want to use. Yet on the other hand, the anecdotal evidence is that in the case of a relatively young dynamic company dominating a relatively young, dynamic industry, years down the road time and time again it seems to be proven that selling when the stock had appeared to be "overvalued" proved to be a horrible mistake. And for the first time in my investing career, I've got a reasonable explanation as to why that is probably true. It's because of the sustainable, competitive advantage so clearly articulated in the manual, but not in a quantitiatve way that I'm comfortable including it in a PE, PEG or DCF analysis. We also agree that use of PEG is an art. Where we seem to disagree is the usefulness of this art. You take E (a number prone to financial engineering) and multiply it by G (one good guess). And get another number. I can prove to my satisfaction that this third number is unrelated to the economic value of the firm. I'm not sure we're in tremendous disagreement about that. There may be no disagreement. I don't believe any model should be the only valuation model used in a buy-or-sell investment decision. Where I agree with you is that in certain circumstances, that third number can be proven to have no economic value to the firm. But not in all circumstances. The operative word is "proven," and its context is as you mention, to the best of my (our) satisfaction. My approach is to see if indeed there is any merit to that third number. (I'd do the same for the fair value implied by a DCF or any valuation model.) Sometimes I can arrive at some pretty substantive stuff that says it looks like hogwash and sometimes it looks like it's credible. But because there are SO MANY aspects of a company that can't be quantified as to the impact they have on its future, that anything I come up with is at least somewhat circumspect. (Or at least that's my particular approach as a measure I use to ensure that I'm not kidding myself and living in La-La Land.) As an example, I can tell you that if I had tried to prove in a quantitative way to the best of my satisfaction all the stuff about Siebel and Qualcomm that comes into play, there's no way I would have invested in either. And I'd be one heck of a lot poorer because of that decision. It might be explained by an aberration in the form of an unprecedented economic expansion, but the fact is that I'd be poorer if I had waited until I could "prove" those things to myself. So, my choice has been to establish a range in which I'm willing to accept what I percieve the risks to be. I use the metrics in the manual combined with an application of valuation and hope for the best. I don't have all the answers. I don't have most of them. But I do believe the profits I've experienced over the last ten years can't be attributed solely to the raging bull market. And I don't believe all the mistakes I've made have been because I've relied somewhat on my application of valuation rooted primarily in PEG ratios. I don't even believe the worst mistakes I've made have been rooted in how I've applied them. (Apollo -- that's your setup. :) That leads to my reaction to a point of yours: As for the public investors, yes, they took it in the teeth. Maybe I'm too much of an idealist and you're too much of a cynic. I think the individual investor has done exceptionally well in the last 30 years, and probably 95% of them without using a valuation model of any kind. To pre-empt your counterpoint :) that I'm the one who brought up the point about the professional investors, I'm simply using them as anecdotal evidence that DCF isn't such a better valuation tool than all the others. I assume the pros have done well over time also, though there is the point that the mutual fund industry on the whole has been a glaring travesty. Great discussion! --Mike Buckley