Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: James Clarke who wrote (303)	9/22/1998 12:31:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 4691

Mike, I agree completely with your post on Dell and the market in general. We have a current situation of high corporate profits being valued at high multiples, not a situation that gives one a lot of confidence. I am not quite as sanguine as you in predicting further large declines, but do not rule out the possibility. I think a more likely outcome is the market will experience a decade of lower than average returns to balance the higher than average period we have just come out of. There is one area that does still look grossly overvalued however, and could still see large percentage declines, even from the present levels. What area is this? Internet stocks? No, I am referring to "Buffett- style" stocks. Now before I am branded a heretic and banned from this board let me explain. I am not suggesting that Buffet is not the genius he is reputed to be. I would wager that WB already is fully aware of everything I am about to say. I am talking about these large consumer franchises stocks of which KO, G, and PG are prime examples. All three of these companies have been through a golden decade, one that will be impossible to duplicate in the next 10 years. During this golden decade net income as a percent of revenues has virtually doubled for all three of these companies. Revenue growth on the other hand has been non-spectacular. Now simple mathematics tells you that it was the growth of the margin that resulted in the marvelous earnings growth and it was this earnings growth that fueled the P/E expansion that drove the stock price. If you take away this margin expansion, what do you have? Slow growth companies valued at growth stock prices. Yes, the companies might be great and their franchises unassailable, but what type of return can you expect when paying $1 for $1 worth of value? Answer: Non-Buffet returns. -Robert

To: James Clarke who wrote (303)	9/22/1998 1:14:00 PM
From: jhg_in_kc	Read Replies (2) \| Respond to of 4691

Sir, there is a cat named Chuzzlewit, a very smart and alert cat and a keen observer of human behavior. He advises naive investors like me over on the Dell thread. Here is his response to your bearish post to me about Dell and a Dow 5000 market: Talk : Computers : DELL To: jhg_in_kc (66621 ) From: Chuzzlewit jhg, I think you must like to read horror stories and scare yourself. This is an example of fear beyond reason. Here's why: 1. Dell trades at about 75 times earnings. wrong. It trades at about 75 times last years earnings. The multiple is considerably less for this years' earnings, and given the fact that Dell manages expectations very well it is probable that Dell will continue to surprise to the upside. 2. 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. The devil is in the details, or in this case the assumptions. Here are the implicit assumptions: a. Earnings doubling in three years implies an annual growth rate of only 25%!!! b. Stock winds up trading at a high multiple of 30 times those earnings implies that there is an increase in long term interest rates and that there is a permanent slow down in Dell's growth rate. [I] 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. 3. As we have continued to point out, the barriers to entry are formidable. The only people positing this position are the ones who have not studied the problem in detail. *** Your tormentor goes on to invent a nightmare designed to frighten children and naive investors: ... 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. I suspect that he is not talking of the ROE, but the return to the investor. But note the subtle assumptions implicit in these statements: the historic average is 11% and a P/E of over 20x. You see, what he is doing is assuming away economic realities. The reason P/Es have expanded over their historic averages is because long-term interest rates are low. 30 year bonds are yielding a little over 5%! Invert that number and you get a P/E (yes, the inverse of yield is P/E!!!) of 20x. Now, since investors put money into equity markets in hopes of increases in future earnings and cash flows, it makes sense that the current earnings yields for equities would be lower than comparable yields for fixed income securities. Put another way, if the 30 year bond has a P/E of 20, then the stock market needs to have a P/E well in excess of 20. There is much more in the way of silliness in these fears, but I am beginning to suffer from cramps in my tiny cat paws, so I will leave it here. TTFN, CTC

To: James Clarke who wrote (303)	9/22/1998 1:44:00 PM
From: Investor2	Read Replies (1) \| Respond to of 4691

Re: "I will buy big name stocks to hold forever when: ... "buy the dips" is ridiculed." I believe you are saying that you will never buy big name stocks and hold forever. Is that correct? Best wishes, I2

To: James Clarke who wrote (303)	10/9/1998 1:31:00 PM
From: jhg_in_kc	Read Replies (1) \| Respond to of 4691

James on Sept 22 you wrote: 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. As of today Abby Joseph Cohen has been forced to revise her predictions, there were outflows of funds from mutual funds for the first time in many years, and Newsweek has a cover story on The Crash of 1999. Internet stocks while not in single digits are off 40 to 50%. Are you ready to call a bottom now? PS You dont have the last laugh on Dell. The market marked the stock down from 69 to 40 7/8. I am happy to say I bought several hundred shares at 42 yesterday. Today 52 and climbing. Dell's fundamentals as you know by now are great and its valuation was cut by 41% in 30 days. It is now less than 50 times past earnings, and given its growth rate, much less a multiple of anticipated earnings. Dell will announce these by the way on Nov. 17. I urge you to go to dell.com and check the results then. I ask you again: With Dell marked down 40%, is it not a good buy? jhg