Good morning Joan,
As I write this I am listening to Schumann's piano concerto. It is always a delight, especially on a beautiful Western morning. I look out of my window and I can see the Olympic Mountains etched against a deep blue sky. I often wonder why people feel the need for church when they can simply step outside and drink in the magnificence of this world.
The stock market is just an intellectual game to me, like reading a whodunit with clues scattered about plus the occasional random event. I was distressed to read the following: My points were more radical. Actually, they weren't points, but "feelings" -- hurt feelings, mostly -- hence they qualify for posting on this thread.
If I have in any way hurt your feelings I apologize. It was never my intent to do so, and I will do everything I can to atone.
So in this expansive morning spirit I offer the following thoughts:
I agree with most of your points. Let's examine a few in more detail:
1) Only the pros (who amount to -- what? 5% of the SI crowd?) really understand what they are doing. The rest of us may talk the talk, but can't really walk the walk unassisted.
Probably right, but the aren't all that hard. What I have noticed is that engineers in particular like to pretend that they understand the nuances of business. The truth is that many can barely spell the word. But they are very useful in navigating the minefield of high-tech stocks because of their knowledge of the products. But don't accept their facile pronouncements on business issues, and in particular, economics. The same can be said of programmers and physicians.
But you must be wary, also, of analysts. They are in a peculiar position because they are expected, by the very nature of their jobs, to forecast the unforecastable. But analysts are excellent sources of information on the general business outlook. Plus, they provide us with company guidance (often conservative) about expected revenues. So strip away analysts opinions of pricing and value (dicey at best), and put together two nuggets of information: the technical outlook(by that I mean scientific/engineering -- not TA) and the business outlook.
Now you must become a bit of a detective, looking for problem areas within a company. Since I like growth companies I watch cash flow like a hawk. In particular, I am very wary of a few things. If accounting earnings seem to rise much faster than operating cash flow this is a red flag. If the income taxes actually paid are much less than the provision for income taxes this too is potentially a red flag. There are some others, but this will give you a taste for the kinds of things anybody can look for using 10-Ks and 10-Qs. If we get deeper into this issue I suggest we switch to a different thread.
2) "Good" stocks (good in terms of balance sheets, valuation ratios, etc., etc.) can turn "bad" very fast (e.g., CPQ, once the very model of a free cash flow champion).
Joan, all of us get caught up in these issues. I have been the recipient of a triple whammy this year -- BMCS, PSFT and most recently NETA. I have myself to blame for one of them (PSFT), because I didn't watch the proper warning sign (decreasing % of revenues derived from licensing), but I have learned my lesson. I will not repeat that mistake (there are way too many new mistakes awaiting me).
I guess what I'm saying here is that cash flow analysis does not predict the future, but it can give you one helluva good picture of how the company has operated in the past. Now look to analysts and engineers to give you a glimpse of the future from a subjective business perspective.
BUT, CPQ we saw coming. In fact, I have been warning people of its problems for the last year and a half. The problems were discernable not through financial analysis, but through thought -- thought about the business plan, and the transition plan to a direct model. In this light problems with inventory control and channel management were not too difficult to see coming. The problem many of us have is we develop an emotional attachment to our decisions, and then go through a period of denial when evidence begins to mount that we were incorrect. I did that with PSFT and it cost me. It is easy to fall into the trap of being a cheerleader. But maintaining a disinterested stance is exceedingly difficult for most of us.
3) I see no evidence whatsoever that the market at present gives a hoot or a holler about all those things we are traditionally supposed to pay attention to (free cash flow, "reasonable" valuations, predictability, low debt, steady growth, increasing ROE, etc., etc.)
Yes, in many cases you are correct. But there is another issue, and that is can we, as investors with calculators, sit down and determine what is the proper value for a stock. Yes, if we were dealing in an environment of certainty. But uncertainty prevails. Not only do we not know how a company will perform in the future, we don't even know how to evaluate that performance. We are constantly bombarded with platitudes like "paradigm shift", and fairy tales like PSR, but the fact is that for radically new businesses like e-tailing we haven't the vaguest idea of what the valuation models themselves shoul look like. And since economics is supposed to model human decision making (not the other way around) we are left with an intellectual vacuum. Many of these issues have been discussed in much greater detail on the internet discussion thread. I would invite your participation on that forum.
I think I hit much of your point 4. in my introductory remarks, so let me simply add that had I not been totally lacking in talent I would have been an opera singer. But there is no call for opera singers who cannot carry a tune. Now I function as an appreciative audience.
I do not think of money all the time. In fact, the analysis I do takes on an abstract, almost other-worldly quality. It is as if I am matching wits with an unknown opponent who revels in breaking rules and kicking me in the slats when I am not looking. But it isn't about money.
TTFN,
CTC |
