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

To: EnricoPalazzo who wrote (43708)	6/21/2001 12:48:26 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 54805

Hi ardethan - no problem. The topic is complex, is it not? It's late at night, but I'll try again. I understand your point about the calculation I am suggesting. Yes, it gives a net earnings less than if only profitable companies are included. And I agree fully. I also appreciate that you and indeed most on the G&K thread have little use for these unprofitable enterprises, or indices for that matter. Or at least you find them "uninteresting". And finally, I get the point that you do not see applicability of such a macro indicator to the micro case. And agree that there is no direct or causal link. From this basis of understanding each other, I think we can proceed? The first fog of confusion seems to be my purpose. I am looking for a macro indicator. Something that tells me where the whole market is going to go. Broadly speaking. You say you find this uninteresting. I suggest you should find it very interesting. Take a look at your Siebel stock price and overlay it with Nasd. Adjust the vertical scales so they are equal (gorillas should out-perform indices) The resemblance is remarkable at least in shape despite the lack of weight that Siebel ever had in the index. This is evidentiary of a herd mentality. Imagine for a second if you had been given the NASD curve pre-plotted for the past 5 years to now... last year... If you known that NASD would follow its shape and suspected that SEBL would approximate the curve, would you have made different decisions say 12 months ago? Very interesting! It's kind of the same as saying "looks like rain", even though there's no rain falling and you can't tell when or where it will rain. Useful. So the value of a macro tool is just this. It doesn't matter that it is precise. But it must be representative. Which brings us to the treatment of unprofitable companies. Like Amazon for example? LVLT and the host of startup carriers? Hmmm... seems to me that they can be contributory, even causal to exactly the sort of mess we want projected on our heads up display. There is another reason. You may personally avoid unprofitable companies. But there are lots of folks besides you on the planet, many of whom hold shares in these other companies. Some of them also buy and sell shares of your gorillas too. So if these folks suddenly decide to stop buying shares for whatever reason, they may just as well stop buying Gorillas too. Which will cause the price of your gorillas to plunge. In case you hadn't noticed. This crash was NOT YOUR FAULT, it was all those other idiots who decided they weren't going to pay what the stock was worth, right? So my macro indicator should contain within it what the idiots see as well as what the smart people see. Which means it should include the money that idiots are losing as well as money that smart people are gaining. So the total amount of money being made is probably the sum of what the smart people are or are not making plus what the idiots are or are not making. This total tells me how well "the economy" is doing in terms of raking in cash. Net sales minus Net expenditures = Net Earnings. By itself this is a great indicator. But it needs to be normalized against something, and that something must be related to price - because we are trying to get a macro indicator: buy, sell... If the economy is making less, that's not a problem as long as we're (all of us) not paying as much... Stands to reason if the economy is doing way better, we would pay more. The idea is not to say "pay more", "pay less", but to get a relative view of how much more or less would be proportionally fair given the growth or lack thereof in our economy. Hmmm... sounds like "PE" to me. I need an equivalent of price. Well, that would be what folks are paying for their slice of the economy. Easy. I can just add up the total market cap of all companies. The next question is "is the economy generating enough value to support the price. That's where this macro PE thing comes from. It is useless by itself and bears no relationship to any particular company. Except insofar as it gives an accurate picture of whether the total price of all of the companies out there is supported by the total economic power they are generating, net of losses they are also generating. Kind of like inside a company. That's all it is good for. Comparing this to a company's PE is easy. But not very meaningful. When I compute this kooky number and it is at all time historic highs, all I can conclude is that it can't stay this high. Which is the "force of gravity" that I was posting about. It is much harder to increase the "E" side than it is to decrease the "P" side. So when this number is high you can expect prices to be overstated... in general. Generally pulling down on ALL stocks, Siebel as well as WebVan. Some more susceptible than others. Does this compute? As to your confusion over The Whole versus The Sum of the Parts? I was trying to say: If the economy (calculated as a whole) isn't worth what is being paid for it at the moment (calculated as the sum of the parts)... then something is bound to give in the long run. Either the price will correct, or the economy will correct. Or both. Reversion to the mean or revision of the mean. The principles of free-market economics have not changed since biblical times, so expect the mean to remain constant. Presto. Price corrects. Generally price follows the economy, as it should. So if the whole (net earnings in economy) is greater than the sum of the parts (market capitalization), then you can expect price to follow upwards. Or vice versa downwards. So keep your eyes on the total profits (and losses) of the market versus the price to be paid for it... and you have a very good idea of how the total market is going to move. Not certainty, but a good general feeling. John.