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March 10, 2000

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Subject:  Re: A bull amongst all these bears
Author:  palsan

Ted said:

Do I plan to change the way I've been investing? Nope.

Nor should you. The most successful investors develop a personal strategy and stick to it - through bull AND bear markets.

Is my life going to change if the DOW drops another 1,000 points? Nope.

I wouldn't be to quick with that assumption. Long-term, no your life will probably will not change financially, in the sense that the stock market goes up in the long run. Short-term is another story. If a market crashes but the economy keeps humming along, that's great, it just means that we are all able to buy our favourite stocks at a better price. If a market crash is accompanied with a recession, then losing one's job (or your neighbours losing theirs) WILL affect everyone! Furthermore, during a recession when profitable companies start to cut back on expenses what do you think will happen to the tech companies? Can the tech companies continue to put up 50% growth rates by selling goods and services to themselves in the absence of buying from the "old economy" companies?

Will I be buying? Yep.

So will I! Markets go up and markets go down but over time the trend is UP. Therefore, being out of the market - even when the bear is on the prowl - is a mistake. It's also a mistake to sell in anticipation of a crash/correction because no one can predict when that will happen. However, I will NOT be buying at any price. I'm not a follower of the "buy good companies at any price" mentality. Buy good companies, yes. But beyond certain levels even the price of good companies can be (temporarily) too high. (That does not mean that if I'm holding a stock that is "too high to buy right now" I will sell it. No way! If it was worth buying, its worth holding until fundamental changes happen to the company.)

Take for example one of your favourites - JDSU. By my calculations the pro-forma 12-month trailing EPS is $0.51. Now let's assume the economy/stock market keeps on rolling along. Furthermore, let's assume the company can grow EPS at a rate of 40% for the next 5 years and at 20% for the 5 years after that. (I might get arguments that those figures are too low but IMHO anything above those numbers is wishful thinking.) No matter how good a company is, a P/E ratio above 50 cannot be sustained for long periods of time. Therefore, let's assume that in 10 years the stock is trading at a P/E of between 30 and 50. Given those assumptions, EPS in 2011 will be $8.19. That leads to a price range of ~$245 (8.19*30) to ~$410 (8.19*50). Anyone buying at the current price of ~$260 is implying one of three things: (1) he can sell the stock to a "greater fool" at a higher price in the near future; (2) he is projecting that the company will grow at rates higher than I suggest AND the current P/E of 500 can be sustained; (3) he is willing to make between 0% and 58% TOTAL RETURN over the next 10 years. This type of analysis applies to many other companies (including NT, another of your - and my - favorites)

Great companies? yes! At any price? Bull or Bear, no way I say!

Will I buy technology? You bet.

No argument from me. One should always buy what one understands. That does not mean that technology is the end all and be all of the economy. Remember that technology does not arise out of nothing. Technology requires the "old" economy for its own existence (and vice versa). Who will technology sell their products to if not the companies in the "old" economy that are making money?

Money can be made in the stock market in just about any sector over the long-term. Right now the big gains are in the tech sector. Tomorrow that could change to the "rocks and trees", or transportation, or banking, or ...

Do I perceive any risk in doing so? Not at all, why should I? If I know what I buy and buy what I know, what's the risk?

The risk is that the crowd turns against you. No form of investing is free of risk. Right now the crowd agrees with you that technology is the place to be. But at some point in time, the crowd will change their focus and the companies that you think are great will then become the "value" plays. Right now we are seeing technology companies trading at P/Es above 100 and "old economy" companies trading at >20. The owners of the tech shares are happy while the owners of the value plays are crying that no one understands how good their company is. There is no guarantee that will continue. The risk you are brushing off is that at some point the tech companies will be the ones no one appreciates and their owners will be wondering why no one sees how good/profitable they are.

But of course, such a correction will only be short-lived and will provide the astute investor a buying opportunity.

Absolutely! But again, just because a stock price of a great company drops, it does not necessarily mean a good buying opportunity. For example, JDSU would need to drop by more than 50% to make it worth considering). Similarly, while I currently hold NT, I will not be buying more at current prices, nor will I be selling.

Just my thoughts, of course. Serious money has been made in the past, and will continue to be made in the future, by following the "greater fool" theory. I'm just not willing to play the game. But then, that's just me. I would rather achieve 12% gains compounded over the next 30 years than alternating between 200% gains one year and 80% losses another year.


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