Historical Results and Commentary
November 11, 2000
Holdings
|
Nov-00 |
|
|
1 |
PFE |
|
2 |
UN |
|
3 |
BBV |
|
4 |
NKE |
|
5 |
LLY |
|
6 |
MMM |
|
7 |
IBM |
|
8 |
CAT |
|
9 |
JNJ |
|
10 |
DELL |
|
11 |
MCD |
|
12 |
FNF |
|
13 |
MSFT |
|
14 |
BRK-A |
|
15 |
AMGN |
|
16 |
WMT |
|
17 |
NOK |
|
18 |
AAPL |
|
19 |
P |
|
20 |
WB |
Performance of Individual Stocks For last 3 months
|
Nov-00 |
|
|
FNF |
31.81% |
|
P |
11.38% |
|
CAT |
-6.43% |
|
NKE |
-8.83% |
|
LLY |
17.52% |
|
MMM |
-1.22% |
|
IBM |
-22.80% |
|
BBV |
-11.45% |
|
JNJ |
-3.16% |
|
DELL |
-38.98% |
|
MCD |
-1.13% |
|
PFE |
3.14% |
|
MSFT |
-6.99% |
|
BRK-A |
0.00% |
|
AMGN |
-7.36% |
|
WMT |
-16.09% |
|
NOK |
-7.83% |
|
AAPL |
-60.03% |
|
UN |
19.04% |
|
WB |
6.83% |
Total Increase (Decrease) since last quarter: -5.13%
Additions: None
Subtractions: None
Commentary: Well, nobody likes to lose money, but I suppose that in these rough markets for tech losing only 5 percent when one holds AAPL, IBM, and DELL is acceptable. I sense that at this time the market is starting to rethink growth as a means of justifying high multiples for many companies, especially high tech ones (or expected high multiples for companies that are currently losing money and therefore have negative P/Es and P/BVs). To some extent I have been very confused as to how to value high tech companies, since their values are often determined by their human capital and expected growth rather than physical capital and growth rates based on substantial historical evidence. For this reason, I have neglected book value multiples when valuing tech companies. Is this foolish? Perhaps, but there is no doubt that the paradigms for evaluating prices of industrial companies will not work in precisely the same way as valuing tech firms. Probably I was foolish to be so lenient on my P/E criteria for tech firms, but growth is going to happen, and I think established firms like Apple, IBM, Dell, and even some smaller ones will trade at twice or thrice their current prices sometime in the next decade (some of these Internet startups are doomed, but I think people are throwing out the babies with the bathwater as they reject tech in general without selecting the good companies from the no-name startups).
So, my commentary this quarter is about growth as a justification for purchasing securities at higher prices:
Growth is simultaneously an investor’s best friend and worst enemy. Real growth is responsible for improving the value of his or her portfolio, but growth estimates are also responsible for injecting into the prices of many stocks a speculative premium.
The irony to be remembered here is that good companies often have bad stocks. In no words is this summed up more eloquently than in Benjamin Graham’s landmark publication, The Intelligent Investor:
“The whole structure of stock-market quotations contains a built-in contradiction. The better a company’s record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value – i.e., the more this “value” will depend on the changing moods and measurements of the stock market. Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be.” (p. 198-199).
A speculative stock commands a premium above the net worth of its assets per share. Speculative risk is essentially the component of the stock’s price that is based on expectations of future performance that exceeds current performance. In other words, this speculative component can only be mastered by those with an information advantage over the market – and you and I do not have this advantage. In no way does this mean an investor cannot purchase solid companies. Rather, it means that if a solid company can be purchased at a low price, an investor is extremely well positioned to benefit from a reversal in the mysterious moods of speculators. If too high a price is paid for a speculative company, an ‘investor’ is essentially surrendering control of his or her portfolio to the unpredictable whims of speculation. This is gambling in its worst form, since there are those with an information advantage in the market who are certain to beat you, and for every winner in a sale there is a corresponding loser.
Looking back at what I have just written, I cannot help but feel that I may be a large hypocrite. I am holding onto some tech stocks that have huge growth premiums built into them. Are they really cheap now that they have had a bad quarter, or is the drop just beginning? I am partially justifying my tech holdings now by saying most of my portfolio is not tech. Nonetheless, those who fall back on the ‘diversification thesis’ for justifying foolish holdings are not very selective in their investment criteria.
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