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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 (372)	6/7/1998 8:30:00 PM
From: Freedom Fighter	Read Replies (2) \| Respond to of 1722

Reynolds, >> Two excellent articles in Barrons this week. >> One on accounting gimmicks at >> Sunbeam ... >I agree. The prudent investor must not only analyze the >numbers, he or she must also make (in my opinion >partially subjective) judgments about whether or not to believe >management. I am not familiar with Sunbeam, but I thought the article made a persuasive case that the accounting gimmicks were somewhat decipherable by a careful analysis just by looking at the numbers. At the very least there were a number of red flags. Ones that we should all be on the lookout for. These days I trust almost no management except for the handful who have made public statements about what's really going on these days and the companies they are associated with. (Warren Buffett, Laurence Tisch, Joe Steinberg (Leucadia) and a few others)

To: porcupine --''''> who wrote (372)	6/7/1998 8:38:00 PM
From: porcupine --''''>	Respond to of 1722

An analogy (that I hope isn't flawed). Back in 1980, Warren Buffett came to the conclusion (after years of hectoring by Charlie) that "cheap" assets are not necessarily undervalued, and fully priced ones are not necessarily overvalued. In this (basic) context, he famously wrote: "better ... a good business purchased at a fair price than ... a poor business purchased at a bargain price." (See: berkshirehathaway.com I wonder if it is a valid analogy to hypothesize that a great economy at a high price is a better value than a terrible economy at a great price.

To: porcupine --''''> who wrote (372)	6/8/1998 12:10:00 AM
From: porcupine --''''>	Read Replies (1) \| Respond to of 1722

<< I think the point you've made recently (was it on your Web site?) about the price of a company tending toward the replacement cost of capital sounds more intuitively plausible, and is food for sober reflection. >> It's in the article you referred me too, at: forbes.com which reads, in part: "He has shown that we now have enough data to test James Tobin's "q" theory, first propounded in 1969. Briefly, q theory says that the value of business assets-as reflected in stock prices must revert to the cost of replicating those assets." It's been 25 years since then, so my recollection may be off, but wasn't James Tobin of the "10%-annual-inflation-is-good-for-the-poor" school of Developmental Economics in the 1970's? If so, Latin America should have the fewest poor people by now -- and Germany should have the most poor people. In any event, to say that in a free market prices received tend to converge to costs incurred is hardly an original insight. But, as has been discussed, is Microsoft's Intrinsic Value only the replacement cost of real estate, office furniture, desktop PC's, and CD-ROM stamping machines? Or, does it also include patents, team cohesion, entrepreneurship, market dominance of a critical bottleneck in a growing industry, etc.? Why did Warren Buffett say that if he had $100 billion he couldn't build a better soda beverage company than Coke? This brings up another example of the undercounting of equity I have written about. Someone added up Coke's marketing costs over the past umpteen years. The researcher went on to argue that the value of these expenditures did not disappear in the year expended. Instead, it is their accumulated cost that still inheres in one of the world's most recognized brand names. It turns out, if GAAP had allowed that amount to be capitalized on the asset ledger, instead of requiring it to be expensed on the income statement, Coke's ROE would not seem so off-the-graph, and by implication unsustainable, after all.