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

To: James Clarke who wrote (452)	10/18/1998 11:51:00 PM
From: Michael Burry	Respond to of 4691

Buffett doesn't care about PE cuz he doesn't feel accounting earnings are accurate. I don't think I need to remind you anything about Buffett, and vice versa. But many, many people confuse the fact that he owns them now with the idea that he would buy them now. Fact is, Gillette is a known Buffett company, and it gets a higher tolerable valuation because of that fact. And putant Buffett-like companies get a higher valuation as well. I feel his success popularized the notion that high ROE and brand names are enough to justify PE's of 25 and higher across the board, without his regard for many company-specific factors. Mike

To: James Clarke who wrote (452)	10/19/1998 1:08:00 PM
From: Robert Douglas	Read Replies (1) \| Respond to of 4691

Imagine my surprise. I return from a pleasant weekend and discover that an excellent discussion had taken place on Return on Equity. While I would be the first to encourage the use of this methodology in investment analysis, I am also quick to acknowledge its limitations. As has already been pointed out, the numbers on equity have become so bad during the last 20 years as to make the number almost meaningless without research into its origins. It is however this very research that produces the understanding into whether or not it is a good investment. Sooner or later a judgement must be made as to whether the returns being produced by the company in question are A. Sustainable B. Unsustainable or C. Expandable. Generally this requires an analysis as to the competitive situation that our company finds itself in. I am always amazed by the number of research reports that I read that never even address the issues of competition. Of course they always manage to include exhaustive research into what next quarters earnings might be. It should come as no surprise that the best investments usually come from the “C” category in the last paragraph. If a company can actually expand their rates of return, the result is usually a rapid rate of earnings growth accompanied by a richer P/E which leads to the types of returns that make investors rich. This leads me to the point I wish to make about investing by looking at high ROE companies. I often see investors scan through lists of companies ranked by their ROEs. What they often end up doing is picking a company from category “B” that has achieved unsustainable levels and is about to trend back toward the mean. Even if a company has a ten-year history of achieving an above average ROE, it is foolish to invest there until one has made a judgement as to whether the factors that allowed that ROE will be present in the future. In other words the numbers are just a starting point into analyzing the company. Thanks for the discussion. I'll be looking into the companies mentioned in all the previous posts. -Robert