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

To: Wright Sullivan who wrote (899)	1/3/1999 12:03:00 AM
From: Chuzzlewit	Read Replies (2) \| Respond to of 4691

Wright, I think you and jhg are arguing at cross purposes. I believe that jhg is trying to anticipate companies that will eventually emerge as Buffett type stocks, rather than identify existing ones. Warren Buffett has one of the most enviable records around, and there is much to learn and profit from his thoughts. The concept of the "brand" as a barrier to entry is indeed important. But the problem with Buffett is that his methodology is not equipped to spot an emerging brand. His insistence in track record is evidence of that. The implication is that you invest in a company only after it has erected those barriers. So I think that jhg is on a quest. He really is representative of those of us who bridge the gap between the venture capitalist and the larger investing community. There was a book written a few months ago entitled "Gorrilla Investing", and the basic premise is that in tech stocks it is difficult, if not impossible to identify the emerging franchise (or "gorilla" as the author is wont to say). So instead, the author recommends purchasing a basket of potential "gorillas", and winowing down the field as results emerge. He contends that Wall Street does not know how to value these companies even after they have emerged (shades of Buffett here, I think) and that abnormally high return of invested capital persists for a considerable amount of time due to the "gorilla" nature of the company. Some examples of "gorillas" are CSCO and MSFT. Some examples of emerging "gorillas" are AOL and NETA. I think the point is that in order to catch these companies before they become household names you must forego such niceties as established track records and safety margins. But then, there is no such thing as a free lunch. If you want abnormally high rates of return you must be willing to assume commensurately high levels of risk. And of course you need to have a well-diversified portfolio to eliminate much of the diversifiable risk. You raise the issue of price, and that is indeed a problem. There is no decent method of valuing equity, because we are dealing not so much with uncertainty as opacity for future earnings. Only a lunatic would hazard a guess as what earnings will look like 10 or 20 years out. I frequently take the easy way out by simply comparing projected growth rates to the earnings yield, and then cross checking with industry norms. Happy New Year, TTFN, CTC