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

To: Mike Buckley who wrote (47708)	10/9/2001 12:39:09 PM
From: Thomas Mercer-Hursh	Respond to of 54805

You and I are agreeing far too much lately. :) I don't find anything particularly wrong or surprising about that, but then I'm sure it won't last. In fact ... I was listening to the radio this morning and heard yet another instance of a current ad there for Deloitte & Touche in which they describe themselves as valuation specialists, citing, among other things, reassessment of goodwill. Glad someone has it figured out! Anyway, this lead to my thinking that one of my problems about valuation is that for the investor, the real "value" lies in the share price, not in some notion of cash flow or whatever. Cash flow et al are the sorts of valuation that D&T are talking about and are appropriate to expressing company health through financial statements or for acquisition decisions, but the investor is really only impacted by this through its reflection in share price, a coupling which is far from deterministic. While it would seem that there were some limits, e.g., the bubble and the response to it, these limits are quite elastic and seem to only dependably to exert themselves at extremes, rather as if the share price and the "true" valuation were connected by an elastic band. If the two get far enough apart, the band becomes taught and exerts tension to bring the two back together, possibly in a very dramatic fashion. But, when the two are close enough, the band becomes loose and the two are free to drift without forcefully impacting one another. My sense is that these connections are actually quite loose and that there are many factors not covered by valuation which affect the path of the share price over time. Thus, over any given period, even one long enough to qualify as LTB&H, a particular stock might be "in favor" and its price might thus be higher than fundamental valuation would indicate, even on a sustained basis, while another might be out of favor and be in the reverse situation. Thus, in modeling terms, we start out with current and historical financial condition, which often includes many items open to interpretation in terms of what is or is not an "operational" and on-going expense or income, proceeds to model the future performance of these financials based on factors rife with uncertainty (analyst's projections ... now really) and then, on top of it all, the actual share price is only loosely coupled to this whole thing. No wonder I am having trouble coming up with something satisfying!

To: Mike Buckley who wrote (47708)	10/10/2001 11:13:57 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 54805

Hi Mike: Probably the single biggest reason I believe in LTB&H is because I don't think there is a model that works in all situations. Because no situation holds forever, LTB&Hing allows the investor the necessary time to ride out the periods when a particular model or models don't work. This is a useful way of thinking about LTB&H. There is a converse however, which implies that when in situations where specific models do apply, then having bought time with LTBH one might cash it in. Or indeed where LTBH is provably the riskier way to achieve investment objectives. For example, let's say we have a reasonable and ambitious long term investor whose goal is to out-perform the S&P over 20 years by a factor of two. Quantifying this [11% avg return = 8x in 20 years, 22% LT Cap Gains Tax Rate] every dollar invested in day 1 is expected to yield about $11.79 after tax some 20 years later. Furthermore, let's say our prudent investor is also conscious of the Gorilla Game and used the methodology to select QCOM back in April '99 when it was at about $18, having doubled from prior trendline in a month... Tucked away into the long-term portfolio. Objective: April 2019, net out with $213 a share after tax. Not even a year later, QCOM's trading above $150 a share. Quickly, out comes the calculator. Our intrepid investor determines that she can GUARANTEE her investment objectives. Beat them by $100 per share actually. If she foolishly sold all for $140 and paid the tax man 22% on the gain to pocket $120, and then invested this in a tax free 5.5% government bond for the remaining 19 years... well she ends up with $313 per share. For sure. Zero risk. As opposed to entertaining the risk that QCOM's value proposition based on technology-ransom expires somewhere between now and then. Which is to say that LTBH was without question a riskier way of meeting the stated objectives. Even forgetting about valuation. I guess what sabotages most people's portfolios is the process of objective creep. It is very easy to enter a position with the goal of doubling one's money. But if it doubles overnight, the tendency is to hang on and see what happens. In the case of nominal gains, the LTBH principle is key in preserving tax efficient allocation of capital. But occasionally, and particularly in the case of spectacular gains, the principle "LTBH" is part of the value trap and needs to be viewed objectively. Which is to say, always with the objectives in mind, and against alternatives. John.