Post of the Day
November 30, 1999

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Grape's Fisher Kings

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Subject:  Re: Fishers "15 Points"
Author:  TMFGrape

I just thought that I'd add a little more to this thread. So far, I've only mentioned what others might say or think and have kept most of my own thoughts out of the picture.

To me one of the hardest things for an investor to do is value a stock. I don't claim to be able to do it with any degree of certainty. At best, I'll do an intrinsic value calculation using a range of growth rates to determine a price range for the stock. I firmly believe in the QuaVa approach to investing as set forth in the Rule Maker steps to investing.

"...other than occasionally reading something mentioning a stock's P/E, I have no idea what the P/E of the stocks that I own is."

Just last night I was discussing investing at a party my wife and I went to. I stated with all honesty that other than occasionally reading something mentioning a stock's P/E, I have no idea what the P/E of the stocks that I own is. I will say, however, that I normally have an idea of the stock's trading range over the last 52 weeks. I just don't believe that P/E is all that important. IMHO more of the value of a company can be determined by examining its financial statements (at a level of detail that also goes beyond what's covered in the Rule Maker criteria) and its cash flows as well as putting in the effort to better understand its business.

Instead of knowing about the P/E's of my stocks I do have an idea of what kind of margins my companies earn, what kind of cash they generate, what their balance sheet look like, etc. To my mind this is what's important. I also have resolved to never own companies whose management I don't trust. I believe that is the most important of all of Fisher's 15 points. In the recent Forbes article he mentioned that the one thing he'd change from Common Stocks was that he'd increase his emphasis in this area. I agree wholeheartedly.

If you look at Rule Maker articles that I've written on where our next $500 should be invested, you'll see that I mention valuation rarely if ever when I make my selections/nominations.

What has attracted me to the Fisher approach to investing is how much intuitive sense it makes to me. If I go through Fisher's points, I'm left feeling that if I can come up with reasonable responses to most if not all of them, I've got a good start towards understanding the company in a way that coincides with the kind of things that I'm looking at when studying a company.

"That being said, do I believe that companies can be overpriced and get ahead of themselves."

That being said, do I believe that companies can be overpriced and get ahead of themselves. Absolutely. It happens, I can't deny that. However, I feel more comfortable investing in a company that I believe in at too high a price than putting my money in a dog just because it's cheap. While my returns will be a little lower if I put money in a quality, overpriced stock, I feel that in the long run I'll do better with that kind of purchase than investing in a dog of a company just because it's cheap. The reason for this belief is that quality companies will continue to grow. Fisher said in the Forbes interview that he has told clients when prices seem high that the going may be rough for awhile, but it will rebound and rise to new heights.

The problem with selling because something seems too high is it's so hard to pick the right exit and reentry points. What if you sell now because you think it's too high only to see it go higher and never get back to that level again.

The other thing that I believe happens is that the longer you own a company, the better you get to know it. This is quite helpful in determining when is the best time to add new money.

I'll also say that in establishing a new position, I'm most likely going to pay even less attention to price than once I already own the stock. One of the reasons for this is that taking an ownership interest in the company leads to an increased interest in it and a better understanding of the company over time.

I guess that's enough rambling from me for now. I'm sure there are some that agree and others that disagree. That's great. It's what makes for the most interesting conversations.

Phil

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