Thank you brittlerock, your post was quite helpful. I can see more clearly now!
Peace,
Dana
Duma,
I agree 100% that valuations do matter in the end.
The return for an investor over the full stock market cycle depends on two things:
a. Growth rate of the business
b. The valuation at the time of investment
Ultimately, the stock (market cap of the business) is always determined what that business generates in terms of cash flows and valuation is also determined somewhat by the risk free rate of return. I.e. low rates push up valuations and vice versa.
History has shown that ultimately if an investor buys into stocks at sky high valuations, they may go up for a while but in the end, they disappoint (either by declining or going sideways for years) as earnings/cash flows catch up.
I am not here to pick fights with anybody on this Board, but “this time is different” have been known to be the four most dangerous words investing.
Good luck to all.
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History has shown that ultimately if an investor buys into stocks at sky high valuations, they may go up for a while but in the end, they disappoint (either by declining or going sideways for years) as earnings/cash flows catch up.
Stocks like Walmart and Starbucks have always traded at very high valuations while their stock prices were rocketing up. Because the companies were growing like crazy. Then they stopped growing so fast, and that was the time to sell. Even if you sold early, fine. You had already enjoyed many amazing months or even years of market crushing returns!
There will eventually be a time to sell with every company. Saul does it all the time. Sometimes he sells too early, as he himself says, but so what? If there’s another faster grower, even better.
Bear
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Bear,
I agree 100% with you and Saul that the long-term growth and ‘moat’ of a business are the most important factors for investors. Long-term compounders reward their shareholders and fortunes are made by patient investors.
Having said that; I firmly believe that no business; no matter how wonderful is worth an infinite price. Over the long-term, the market values all businesses based on their cash flows/earnings power and investors have pay too much for that growth are punished.
For my part, if a high growth company has earnings, I try and pay no more than 1.5-1.6 times PEG ratio (Price Earnings/Projected 3-5 year growth rate) and a businesses does not currently have earnings, I try and figure out what its sales and margins will be in 8-10 years. From these figures, I try and figure out what the businesses will be worth in about 8-10 years. If the current valuation offers me a decent CAGR over the next 8-10 years (15% +); I invest. Otherwise, I pass.
Of course, my method above is not fool proof as my sales projections are sometimes off the mark; but in order to mitigate this issue, I only focus on those businesses which have sticky customers; recurring revenue and a dominant (monopolistic position); past operating results are also a good indicator as they reveal the quality of the operations.
Anyhow, there are many ways to skin a cat; and each investor should do what works for him/her.
Best,
GM
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The world is always changing sometimes faster than at other times.
Tech by definition is typically about increased efficiencies and capabilities leading to growth but often times it gets hyped up. Eventually the technologies in question get some momentum and become widespread. Certainly you want to invest in that during that time. That process is non obvious eventhough one will always want to think about the bright future of the technology or sector s/he is investing in but sometimes it is just hype or the momentum peters out or there is a lost of interest.
Software and how one uses it or develops it have undergone major developments and enterprises have begun to use some of that and they have seen positive business results and advantages. But that entire growth is only the latest thing.
The key question I think is to understand when is a sector or a particular technology trend starts and what is its potential and its longevity. We are in a period where we caught a wave and it seems that we can continue to ride it until… who knows?
The waves will slow eventually and another wave will come. Catching the next wave is what is hard in this endless search for growth…and of course the volatility.
I don’t think there is much to rejoice after the wave is clearly formed. It is just a matter of riding it. What’s next is most difficult to determine…
tj
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I don’t think there is much to rejoice after the wave is clearly formed. It is just a matter of riding it. What’s next is most difficult to determine…
tj
If only there were a board for that to find that next paradigm
Granted, there are the political diatribes to sort through, but the investing content over on the NPI board is high enough quality that I personally am willing to wade through the rest of the board. I even put out that combined NPI/Saul’s board BBN list recently (which may be due for a bit of an update after getting knocked down from its initially unbelievably fortunate start).
-volfan84
long Saul’s board and the NPI board, with non-uniform/Motley opinions sharpening the overall analyses of both boards
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I also appreciate your posts duma, and also curious about the “retirmentdough approach”
Thanks everyone, learning a lot!
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