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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Dave who wrote (15203)	8/15/2002 8:05:25 AM
From: Dale Baker	Respond to of 78602

Dave, you have obviously given the ROE issue a lot of thought. How would you evaluate MAXF on those criteria? biz.yahoo.com Thanks.

To: Dave who wrote (15203)	8/15/2002 11:06:50 AM
From: Paul Senior	Read Replies (1) \| Respond to of 78602

Dave, I guess I'm just dancing around this ROE thing and am not relating it as clearly as I would like to value investing. About the the first ratio I investigate in a screened stock is current ROE. If it's low, and other metrics are attractive, I'll likely eventually look at past ROE figures to see if I can ascertain the company's ROE potential based on its past performance. That said, it is paradoxical in that I can - and have a few posts ago - shown that many successful professional value investors do not use ROE in their stated methodology. This is the Ben Graham value thread: he has not recommended ROE as a metric for either his defensive or aggressive investor. So here I need not be apologetic when I say a stock having a low ROE does not disqualify it as potential purchase for me. A general question for me is how does one use ROE in screening for companies where the price of the stock is 2, 3, maybe 6 times book value. A standard answer for value investors suggests such stocks - not being low price/book - ought to be passed-by automatically on a p/book screening. But Buffett followers (who are users of ROE metrics) might say these high ROE, high price/book stocks are among the best investments. So is there a general way to screen for "attractive" high/pb stocks? For discussion purposes I chose to take on a specific subsection of stocks: Buffett stocks(which are already preselected by Mr Buffett or surrogate as good businesses and having good and honest management). Can one look at this subsector of stocks by price, book value, and ROE and come to some formulaic conclusion as to whether those stocks might be close to being cheap (buys) or close to being expensive (sells) for a value investor? I'm saying yes. I gather you are saying no because other factors have to be considered: ROIC, ROA, off-balance sheet financing, etc. And that since the three examples I gave are in diverse business, that has to be allowed for as well. You might be right. How about if we then take the discussion from the theoretical to the applied? Given that Mr. Buffett is the greatest investor in modern times, and the stocks I referenced are the stocks he owns, then I suggest it behooves every investor to look at those stocks for themselves too to see if they meet their criteria for purchase. (Or if Buffett stocks are too expensive now, at what price would the investor buy those stocks.) Have you applied your must-do's to these stocks and if so, what have you concluded? Paul Senior

To: Dave who wrote (15203)	8/15/2002 1:17:45 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78602

Dave, >if one relies on ROE alone, that might be flawed. > For example, a company that utilizes a high degree of >leverage to generate assets may show an abnormally >high ROE Agreed by definition, but since I usually do not buy companies with high leverage, I don't really care about this problem. As you say, if debt/equity is high, then good-bye. :-))) >one should not compare ratios of companies in different >industries to determine whether or not one company is >a buy in view of another. I totally disagree with this. If a company earns only 4% ROE, I don't care whether it is in the money printing industry. I will instead buy a company from manure industry that earns 25% ROE. Tell me why I should buy the 4% money printing company? Because it has higher ROE than another money printing company that earns only 1% ROE? I don't see logic there. And if the whole industry earns high ROE - e.g. pharmaceuticals - I would buy the whole industry and don't buy anything from e.g. paper industry. Yeah, I know, I should diversify. I do that in my 401(k). Jurgis