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

To: Bob Rudd who wrote (5041)	9/22/1998 12:15:00 AM
From: James Clarke	Read Replies (4) \| Respond to of 78481

This is my response to a post on the Buffetology thread which I thought might be a useful post here too. Let me have some fun with this one - I am going to repost the whole thing, otherwise the value investors on this thread will think I'm having delusions. This is the investor who has to sell before I will call a bottom. <<Also, re:<Oh, but Dell's earnings are going to double in two or three years. The risk is that EVEN IF YOU ARE RIGHT, and even if the stock trades at a high multiple of 30-35 at that time, you've lost money. And if you are notright, you're dead. > 1. How would I lose money if it doubled in the time period you mentioned? If it doubles, I have twice as much money? where does the loss come from? 2. Not to provoke a long tirade, but what is your argument for Dow 6000? IS it global depression? If this is the case what is to keep Coke and Gillette from going down further and even Berkshire? Are you saying sell all stocks and get into cash NOW? In my view a long bear market is provoked by the so-called external shock like an oil embargo, a quadrupling of the price of oil in the 70s. What is the external shock to the market in your view? jhg >> 1. Dell trades at about 75 times earnings. Even if earnings double in three years, and the stock winds up trading at a high multiple of 30 times those earnings, which it won't, you've lost money. This is pretty simple math. This is not my scenario, by the way. I did like the article, and have great respect for the business model. But so does Compaq, IBM, and every other potential competitor. The barriers to entry are weak, which means be careful. 2. Argument for Dow 6000. Hmm. I won't do the long tirade. But the return on equity on the Dow today is something like 19%, a historic high. The historical average is 11%. That tells me there is some downside in earnings. And you are paying a multiple of over 20x on those earnings, which are arguably at a peak. So take that multiple down to the historical average of 15x, and take the ROE down to - I'll give you 15%, which is generous, and you've got downside risk of what, 20% on earnings and 25% on the multiple. That tells me the downside risk is well below 6000. More like 4500-5000. And I guess that will answer the next question. I'd pay about $40 for Coke, and I do like the company, understand the business and want to own it. Gillette is probably getting close. High 20s? So what stops those from dropping lower? Absolutely nothing. And Berkshire too is still way higher than I would buy it for. Cash is nice right now. Like Buffett, I have no intention of being in cash when the next bull market starts, but I'm in no hurry. 3. What's the catalyst? Is it global depression? Have you read a newspaper lately? At least half the world is in a depression now. Where do you think Caterpillar was going to sell its next excavator, or Coke sell its next bottle of soda, and Gillette sell its next razor. These markets were their growth story a year ago. And it is spreading every day - just ask anybody you know in Brazil. How big a catalyst do you need? And there is no sign it is stopping. Buffett told us last week that he is a) more in cash than he has been in a long time, and b) he implied that he has not even started buying this "dip" because he is expecting something much worse. I agree with him 100% if this is what he was saying. There is a notion now that Buffett just buys good businesses, he doesn't time the market. That is garbage. Buffett has made fortunes timing the market since the 1950s. And I don't know of a case where he has been wrong on a major market call. He is making one now. And so am I. As I have said on other threads, I will buy big name stocks to hold forever when: 1) Internet stocks are in single digits...no speculation 2) Abbey Joseph Cohen has been completely discredited..."buy the dips" is ridiculed. 3) We have seen massive sales of mutual funds. 4) We see a bear on the cover of Business Week. That probably means Dow 5500 at least...at most rather. JJC