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

To: Thomas Mercer-Hursh who wrote (47882)	10/15/2001 12:18:53 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 54805

Thomas, Before answering your questions, I'll tell what I use for valuation. It is pretty simple approach which has its positives and drawbacks. :-) It may be a good platform for your "backtesting" exercise. :-) As the basis I take the "Buffetology" spreadsheet available at valuestocks.net It requires 10 years (or less if you're comfortable :-))) historical ROE, current dividend payout, current market cap, current equity and that's it. There are couple other parameters: 10 yr low and high PE, short-term interest rate, marginal income tax rate and cap gains tax which I set and forget. Note: I set 10 year low and high PE to 15 and 25 for all companies - I think that using actual numbers does not give much advantage. Now what the spreadsheet does is really simple. It assumes 10 year forward growth using the last 10 year average ROE and calculates the earnings in 10 years from now. Then it multiplies it by low, average and high PE and gives you the future market cap. And finally it calculates the after-tax annual rate of return from current market cap to the one in 10 years. So now I can answer your questions: >In the current topic, which aspects do you see as > requiring or [currently] relying on art? Mechanic use of the spreadsheet does not require art. The artistic part is: 1. Does a company even qualify to be used in the spreadsheet? Since we want at least 15% 10 year average ROE, not many companies qualify mechanically. But there are some companies that may qualify mechanically, but would have to be discarded "artistically". BTW, G&Ks are natural candidates to include, since GG assumes that they can maintain their positions and -hopefully- ROEs for long term. 2. What is the forward 10 year ROE? Using average historical 10 year ROE is fine sometimes, but not so good in other times. Concrete example: can MSFT, ORCL, CSCO maintain their historical high ROE and growth from here on? I doubt it. 3. Finally, there is some art in choosing buying and selling points. I.e. you should buy if expected annual return is >15%. But when should you sell? At expected return <10%? 5%? 1%? I don't know. I would like to see this approach backtested and you almost talked me into doing that. But then as I said, I currently don't have time. ;-) Couple anecdotal "proofs": when ORCL and ADBE tanked couple years ago they were definitely in the buy range according to the sheet. I did not buy them though... :-((( Jurgis - hey this thing is TOO simple... :-P