The great debate is on. It's spirited, but it's civil. Sure, it's controversial. But in a nation of checks and balances, it should proceed without spittle or shoving, or shooting. We're not standing in a hazy dawn at Weehawken, a stone's throw from the Hudson River. Aaron Burr isn't putting a bullet in Alexander Hamilton's stomach.
Instead, this one's a duel of words, a matter of ideas, brain versus brain.
I have to say that I've found -- and I may be alone -- the participants on both sides to be pretty bright, articulate, admirable. Amen for that. After all, this debate rattling our country is of enormous importance. It's fundamental to our economic future. It tells us who we are. How it's resolved will impact the quality of our lives, our potential for financial independence, the state of our nation.
As powerful as the arguments have been, though, every day I think it just becomes clearer that there's no right answer. Nobody's going to flat-out win. One may throw ice into fire while the other lights fires in ice. One side can take it to court. The other can recount votes. Stand one on CNN; put the other on MSNBC. Give him a placard; give her a bullhorn. Let them quarrel. But neither has a monopoly on truth.
That may be what makes it one of the great debates of our time. As students, we should all want it to go on and on as long as it can.
Of course, the debate I'm referring to is the public argument over whether the strength of a company should matter more or less to investors than the price of that company. Which should count for more -- a company's share price or the durability and expandability of its business?
One side asks: "Well, would you buy General Electric (NYSE: GE), trading today at more than 40 times earnings, at any price?"
The other counters: "Well, didn't you think America Online (NYSE: AOL) was overpriced in 1995, having lost more than $35 million that year? It's up more than 50-fold since then."
The two sides will throw history at each other deep into the night of our existence.
To champion the importance of not paying too much, the advocates of stock valuation cite the aggregate returns of Kidder-Peabody's Nifty Fifty stocks since 1972; the fall of the Japanese market since 1988; the death rattle of biotechnology valuations in the early '90s; Coca-Cola's (NYSE: KO) decline since 1998; the dot-com decimation in 2000; and many more than these. All of them represent companies, industries, indices, or marketplaces whose wings flew too near the sun, whose prices melted.
To champion the importance of investing in the best, the advocates of business quality cite the 50-year returns of Johnson & Johnson (NYSE: JNJ); the 70,000% investment gains at Cisco (Nasdaq: CSCO) since its 1990 IPO; the compounded returns of the U.S. stock market in the 20th century; America Online's 50-fold growth since posting a P/E ratio above 250 in 1996; the unremitting growth of property values in Sea Island, Georgia (versus the unremitting decline of property values atop the Love Canal in Niagara Falls, New York, courtesy of the Hooker Chemical Company); and many more than these. All of these examples represent companies, industries, indices, or marketplaces whose excellence was steadily rewarded, whose prices soared.
Both sets of examples help to frame our debate. Can investors pay too much for greatness? Is there a price that no company can earn? Is it easier to locate inflation in stock values or mediocrity in business practices? Was Planet Hollywood's equity overpriced or was its business misunderstood?
The deeper we dig for answers, the muddier our questions get. So I'd actually like to close today by returning to steadier ground. Why? Because both sides actually agree 95% of the time (though we may enjoy spending 95% of our time on the 5% about which we do not agree).
Here, then, are two points on which I suspect, as investors, we all agree.
1. Being average is still above average
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2. Ninety percent of garbage actually is garbage
Who among us thinks it's a good idea to bargain for the best available price among the hundreds of public companies waving away flies in dumpsters across America? In fact, if history repeats itself -- over the next quarter century -- the vast majority of publicly traded companies in the U.S. today will either 1) underperform the market, 2) be consolidated at a discount to their present price, or 3) file for bankruptcy. Don't we agree that searching for buying opportunities among the slew of unproductive or mediocre corporations is a waste of our short while on earth? I think we should turn our eyes to the best available businesses. The updated list behind this link has been tremendously helpful for me in locating some of the best large companies in the world (thank you, TMF Tribe).
Where else do you think we all agree? Become a Fool (www.welcome.fool.com) and speak your mind.
-- Tom Gardner
P.S. With strong future prospects, a light business model, and a preeminent space in the online media world, Yahoo! (Nasdaq: YHOO) looks poised for long-term success even though it's had a tough year. As such, the Rule Maker has decided to invest this month's $500 in the Web's leading portal. We'll make the trade in the next five business days.
