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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (241)	4/23/1998 10:21:00 AM
From: Daniel Chisholm	Read Replies (2) \| Respond to of 1722

Wow, what a meaty answer! You sure gave me a lot to chew over. What I've gotten out of your posting so far is that being capital intensive is essentially a "risk factor" (vulnerability to competition, inflation, economic downturns), which lowers the quality (durability) of earnings. I found your quote of Buffett to be particularly distressing, "The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage." The fatalistic tone of the inevitability of inadequate returns seems to be in stark contrast to CAPM theories. Yet I'm unwilling to discard Buffett's analysis until I am doubledamnsure that I know better than him (this may take a while... ;-) Things such as beer, steel, cement, DRAM, microprocessors and jet aircraft are indispensable to my concept of civilization and the good life. Yet the analysts and thinkers I hold in the highest regard tell me that the industries that manufacture these important, indispensable products aren't worth the capital they consume. And industries that manufacture products I use, enjoy and respect, but which I could very well live the rest of my life without (Coca Cola syrup, Gillette brand razor blades), have an intrinsic advantage that may be captured by (merely) competent day-to-day management to produce long term exceptional returns on capital. It almost doesn't seem fair! ;-) The capital intensive businesses I listed in the previous paragraph are different in certain aspects. They are all capital intensive, which traditional Economics 101 might suggest would be "barriers to entry" (and hence such capital intensive industries might enjoy fat margins - ha!). Some of these industries require real proprietary brainpower (Intel, Boeing), yet in the end what they produce end up being commodities. As much as I admire the accomplishments of Intel's brilliant chip designers, I'm perfectly willing to use an AMD microprocessor, and fly in an Airbus. What is it about non-capital-intensive enterprises? Their resistance to certain types of adversity (inflation, economic fluctuations, minor margin erosions) makes them solid values, standing in contrast to the ephemeral and intangible nature of their core assets (Coke's irreplaceable brand, a service company's Rolodex of personal contacts). - Daniel