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

To: Jurgis Bekepuris who wrote (240)	8/10/1998 12:04:00 AM
From: James Clarke	Read Replies (2) \| Respond to of 4691

Jurgis - thanks again. my post was not to blow off your ideas by any means - over the next week or so I want to at least do a 5 minute drill on each of them. On your questions, I absolutely believe that Buffetology model is valuable. Michael has posted his version of it, and I have my version of it. It started as "by the book" and I have been adjusting it to reflect the realities of each investment I look at. What makes a model great is that 1) it is simple (I call it "elegant") - believe it or not, my version of that seemingly complicated Buffetology analysis has only 4 inputs. So it takes me just a minute to tell mathematically whether the price of a stock I am looking at has the right number of zeros on it. On the first cut, that's all I want to know. If the price is 50% overvalued on a simple analysis, there is no reason to waste time doing research. AND 2) You can easily adjust it to reflect a different scenario. For example, you can just as appropiately (perhaps more) use this model for a declining ROE scenario. One more thing - you mentioned something in passing that struck a thunderbolt in me. Pepsico. They're a borderline investment now under the Buffett criteria, but if they spin off their bottling like Coke then ROE will go up. I'm with you on that. BUT, it will not be worth any more unless your financial case goes much further than that. Because return on equity will go up a lot, BUT THE DENOMINATOR (the "E" - equity) WILL DROP A LOT AT THE SAME TIME. What that spinoff would be is getting rid of a lot of equity with low earnings power attached to that equity. The ROE will rise, but how much "E" to have "R" on will be left? That's what you've got to be thinking about. Another fascinating thing I find about this Coke-Pepsi debate is that many investors buying Pespi for the bottling spinoff story passionately believe that Coke is overvalued. They can't have it both ways.