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

To: James Clarke who wrote (5355)	11/29/1998 10:17:00 AM
From: Freedom Fighter	Read Replies (1) \| Respond to of 78661

Dear Jim Clark, >>Your monthly post sticks out like a sore thumb, because as far as I know, you don't contribute much to the day to day thought on this thread. Also, I see you post the same thing on other threads. That is just not how we do things here.<< I understand your point of view. Mine is this. I have a limited amount of time to express my thoughts to the various SI threads, Motley Fool threads and newsgroups I read. I also answer e-mails that come from my occasional posts. Rather that write the same thing or variations thereof everywhere I occasionally browse, I post my thoughts in a monthly market view at my personal web page. Then, anyone who wants to know what I think, read any articles I found interesting (links), link to other web pages on investing that I found etc... can do it from one spot easily. This saves me precious time. Other than that I would spend 5 hours a night doing this stuff and that makes no sense. On occasion I will read something that I agree/disagree with strongly and I will respond to it. If someone addresses me, I respond to it. I've never viewed any of these SI threads as a sort of club so long as you don't post any off topic, or offensive things, or direct ads for pay services. I didn't consider a monthly update notification of my thoughts, or a link to something I wrote on another thread as out of line. Why write the same thing 10 times if I can provide a link to it and write it once? If you find my monthly update notifications and links to other threads than contain exactly what I want to say here out of line I will stop posting them. It isn't an ad though. I don't charge. As far as individual investments goes, I prefer not to do that. If I tell you I like xxx company I will then feel an obligation to tell you when I sell it. Since I am all over the place writing this stuff, you can see how this could an be a problem. Besides, my present portfolio contains a grand total of 6 stocks. Sbarros, Applebees, Mercury General, Berkshire Hathaway (bought in 1988), Leucadia National (token position that I wish to expand greatly some day. I have had conversations with the company head), and Ensco. All except BRKA were purchased in the recent decline or a prior one. I have cleaned out all my other long positions over the last year or two (Kimberly Clark the latest) and I have no other ideas that meet MY criteria for a bargain! I have written about all these positions in public at one time or another. Wayne

To: James Clarke who wrote (5355)	11/29/1998 12:25:00 PM
From: Freedom Fighter	Respond to of 78661

Here is a small Summation of my Method and the way I think. I hope it addresses some of the criticisms that have been made of me in this thread. My method for determining the intrinsic value of a business is not limited by either one model or view of how the economy works. To me, intrinsic value is a range of possibilities. In general, I am trying to purchase as much future earnings power as possible for as little as possible. However, a thorough look at market history suggests that not only does corporate governance change, so does Wall St. and the public. Here is one example: The historical record indicates that there is a close relationship between interest rates and stock prices from the 60s forward. There is an even CLOSER relationship between inflation and stock prices since then. However, there is very little relationship between any of these factors prior to the 60s. If you look at academic studies on risk premiums, there is substantial evidence that risk premiums vary from decade to decade and under different economic conditions. How does one come to terms with a game where the rules of valuation are constantly changing? Logically, lower interest rates should mean higher stock prices and visa versa. In modern times, investors compare the amount of earnings their company will generate vs. the income an investment in an alternative security like bonds would generate. They then plug those inputs into Dividend Discount, Free Cash Flow, CAPM, and various other present value and earnings yields models of their own design. Some use a risk premium specific to the industry, others use a margin of safety etc… Some use relative valuation. But contrary to popular belief, I believe it's possible that interest rate/inflation models fail to consider that as nominal interest rates fall or rise, so could future returns on capital and equity for business over the LONG HAUL. In essence, what I am saying is that it is possible that all the factors and returns in an economy MAY get priced in over time (10 years or so). If so, then "intrinsic value" is based on some REAL return on capital (the difference between the cost and return on capital) that can be expected from a business over the LONG HAUL. If so, stock prices would tend to move to a mean PE RANGE over time at any interest rate or any level of inflation. There have been numerous reversions to the mean at many different levels of interest rates in the past. If this is so, an investor should try to determine the level of (REAL) profitability their company will be able to sustain. To do so, it is necessary to examine factors such as size, management, number of competitors, business advantages/disadvantages, industry, reputation/ goodwill, etc… One could then determine the appropriate PE by discounting adjusted inputs using any of the standard models mentioned above or a model of your own choosing. Given these two very different views on valuation and economics, an investor could come to very different conclusions about whether a given stock is cheap or expensive at present. Wall St. and most investors are assuming that higher than average PEs are justified by low inflation and interest rates. Furthermore, they are assuming that the historically high return on capital we have at present also justifies higher than average PEs. In combination you get a "New Era". I am saying MAYBE, MAYBE NOT! My recent purchase of Kimberly Clark explains my thought process in action. In short, KMB has earnings power of about $2.50 per share at present. (give or take) It is an above average return on capital business with several excellent brand names so it generates above average Free Cash Flow levels. I think that above average returns are sustainable for a consumer giant that has its brands. I would also say it has at least average growth prospects going forward. Companies like this generally sell at a premium to the market over the long haul. Temporary difficulties knocked the stock price down to the mid 30s. It was trading at about 14-15 times normalized earnings power when I bought it. No matter whether you discount a range of FCF levels at 9% or 10%, expect a reversion to the mean, use a range of assumptions about its future growth, use earnings yields vs. bonds, or any other common method, KMB looked good from a valuation perspective. There was a significant margin of safety no matter what as far as I was concerned. However, the vast majority of companies at present are discounting low interest rates, low inflation, and high returns on capital as if they are sustainable in combination. For many of them, I do not believe it is possible. In aggregate I really doubt it. If they are, the rewards over cash and bonds are minimal. If they are not, future returns from those securities are likely to be close to zero or negative over the next decade. If there is a reversion to the mean in all ways watch out! Not a very good bet in my mind. And given my ideas about what value is (a range of possibilities), they are overpriced. I use all the following models. A modified version of CAPM Earnings Yield vs. Bond Yield A Plowback Return on Equity Model of my own Design Dividend + Share Repurchase Discount Model Reversion to the Mean Model All the models presented in "Buffettology" A Catchup Model - How many years for the sum of the earnings of the company to catchup to a bond with reinvested interest. Real Return on Capital Models Miscellaneous other stuff. Wayne Crimi Value Investor Workshop members.aol.com