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

To: EnricoPalazzo who wrote (48007)	10/17/2001 10:20:14 AM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 54805

Ardethan, >-in exactly what way is growing from 100 billion to >1 trillion different than growing from 10 billion to > 100 billion. Is this difference greater than the >difference between growing from 1 billion to 10 billion? >The answer probably seems obvious, but i'd be curious >as to the explanation. Let's first clarify what we are talking about. If we are talking about market cap, you know that this is just an expression of investors' sentiment and it could go to the Moon or the next galaxy - it is limited only by the total amount of money - which I don't understand as non-economist. But let's say we are talking about revenues, which influence earnings and market cap. Then it all depends on the market(s) and - as UF pointed out in private message to me - on TALC. :-)))) So if I wanted to obtain an answer for a concrete company, I would try to figure out its market and that would be a rough estimate of how much it could potentially grow. For some products the market is rather small - e.g. I once looked in investing into bridal gown company (!) - for some, huge. However, all of them have upper limits. >You seem to be implying that there is some > theoretical limit as to the market capitalization >of a company, and in particular that this >theoretical limit has something to do with the GDP >of the U.S. Could you explain that? When we start valuing megacaps, sometimes estimating company's market becomes slippery. First, some markets are expected to grow at high - sometimes unreasonable - rates. Second, one can always argue that companies will expand to other markets ala GE, BRK, MSFT (Xbox), INTC (networking), etc. As GGs you understand that both of these issues are wrought with danger. First, high growth rates end with tornado end. Second, expanding to other markets is usually difficult, because company's competitive advantage does not reach there. Even more, other markets may be saturated, have their own competitors, may have low margins, etc. So these are natural limitations on the growth. Since these natural limitations are sometimes forgotten it is useful to look at rather simplistic and artificial numbers. US GDP is one. Buffett also quoted in his 98 Fortune article another: Fortune 500 1998 profits: 334 billion. Now we can come to Jurgis' totally outrageous claims: 1. No company is likely to become much larger than 10% of US GDP. Antitrust laws is one limiting factor. Natural barriers is other. Note: I don't forget international sales. This is just an outrageous claim after all. :-)))) 2. No company is likely to earn more than 10% of Fortune 500 profits. Same reasons + competitive nature of our society. Now, Buffett optimistically estimated US GDP growth at 5% and he made similar claim on Fortune 500 profits, so one cannot just say: "Hey, my XXX gorilla will be 20% of current GDP in 10 years, but then GDP will grow 20% per year, so XXX will be less than 10% of future GDP". So in a pinch, check if your prognosis for favorite G expects it to have sales over 10% of GDP or profits greater than 10% of Fortune 500. BTW, I would be conservative and lower these limits to 5%. >[BRK]They achieved 32% over the past year. >BRKA's market capitalization is still growing at that > rate (haven't checked cash flow). Buffett's results are intentionally lumpy. In 1999 growth of book value was 0.5% (!), in 2000 - 6.5% and even these numbers mean little. Earnings over last 5 years are all over the place as are revenues. I will repeat that market cap increase is not a good parameter. It would be easy to increase it at any percentage rate if it first dropped to 0. :-))) BRKA did drop from ~80K per share in 1998 to ~40K per share in 2000, so the recent rebound only brought it back to old highs. Overall valuing BRK is a nightmare, so I won't go into that. There are some people who have done it but I would not even try to understand if they are correct. Jurgis - BRK is a "faith in Buffett" stock