In the Interest of Being Well Rounded

Sorry in advance for the meander, but I promise there is a valid point:

I don’t spend a huge amount of time on these boards; mostly in the winter when I have a bit more time. I’m poking around and reading New Paradigm, as well as Saul, as well as Retirement, as well as METaR (though not as much on that one lately). I see a lot of common themes that get me to thinking.

One quote that has always stuck with me is from Sun Microsystems CEO Scott McNealy:
‘But two years ago we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?’ (Scott McNealy, BusinessWeek, April 2002)

This comes from a John Mauldin newsletter in 2004;…
where Mauldin and crew are warning that the bubble is back.

So we have a recurring theme.

  1. this is a very few years after the dotcom bust (hence the McNealy quote)
  2. Mauldin and crew are shaking their heads at the obscene valuations of Amazon and Google.
  3. Mauldin is warning us that the market is in a bubble. (If he’s right, he’s four-five years early. So I’m gonna just say “he was wrong,” at least for practical investing purposes).
  4. McNealy, bless his heart, failed to figure in growth for his company? I have no idea how fast Sun was growing, but if it was growing like ZS, his company would be reasonably priced in 18-36 months (ignoring other valuation metrics).
  5. “Saul” stocks trade at P/S 5-10 times higher than McNealy was on about (36X for ZS; 77X for SNOW), so yeah, growth is good, but is it enough…is it worth the risk?

So what to make of all of this?
I have a healthy skepticism for permabears. The market is definitely biased, over time, to favor permabulls.

Looking at Google and Amazon now, it’s clear that those two companies grew into their insane valuations (and I don’t know what those valuations were at that time; just para-quoting Mauldin). But let’s just look at Google: when Mauldin wrote this letter, GOOG was about $125. It had doubled in 2 months. Insane! Then over the next five years, it was a rollercoaster ride. Who among us would have bought and held through all of that, with zero clarity that GOOG would become what it has become (and it took 16-17 years)?

So let’s talk “Saul” stocks for a second:
I think there is a huge piece of the puzzle that most of the readers are missing; P/S is the metric, but the fundamental issue is shares outstanding. PLTR and NET are two perfect examples. If they are to survive, they will likely reverse-split. It’s not supposed to matter about stock splits; but those that split and give you more shares do better, those who reverse split do poorly, and are often on their way out. I suspect PLTR will survive a reverse split, but NET you can color me skeptical. CEO Prince has all of the attitude and swagger of the dotcom bubble.

And speaking of CEO swagger, again, color me skeptical. My earliest experience was with Charlie Bludhorn, followed by Chainsaw Al, Aubrey McLendon, Eddie Lampert, etc. Bluster is just wind, and frankly, it usually stinks.

So that’s all I have at the moment. Just thought food; perhaps getting it off of my plate and on to yours. I’d like to know what you all think.



I’d like to know what you all think.

Numbers without the right insight are just numbers. Americans have been indoctrinated to trust numbers as if they were magical. ‘Follow the science’ means believe in the science guy. Science does not mean ‘this is the definite answer.’ Science means is ‘This is what we believe to be true at this time.’ The Pythagorean theorem has held for millennia. The heliocentric and geocentric models have not.

To dump all growth stocks or high multiple stocks in the same basket is just plain foolish. Talk about a market bubble makes sense but demonizing all high multiple stocks does not. Each stock has a story of its own.

Denny Schlesinger


I’d like to know what you all think.

I’m in Buffett’s camp => Distinguishing between growth investing and value investing is fuzzy logic.
All investing is value investing. Growth is an attribute of value – sometimes good, sometimes bad,
sometimes indifferent.

Also Mauboussin’s camp => Accounting rules were set up long ago when most companies invested in
tangible assets which landed on the balance sheet. Today most firms invest in intangibles which are
hidden on the income statement. Our first challenge is to come up with an approach that uncovers
these intangible investments and their effect on cash flows. Our second challenge is to rethink how
we value a business. Rules of thumb such as price multiples aren’t valuation, and worse they bury all
assumptions about what drives business value. We do need to start with price, because that’s the one
thing we know for sure. The challenging part is to detail the assumptions and expectations built
into the price, and see if we agree with them. In the spirit of what Scott McNealy was trying to do.



Nice post, Randy.
I looked at Mauldin’ws 2014 post and these words struck me in the solar plexus:

“It typically takes years for valuations to fall in bear markets to levels from where a new bull market can begin. Why does it take so long? Why don’t we see an almost immediate return to low valuations once the process has begun? Investors overreact to good news and underreact to bad news on stocks they like, and do just the opposite to stocks that are out of favor. Past perception seems to dictate future performance. And it takes time to change those perceptions.”

Couldn’t be more true.

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