On stock overvalued...

The folks will be willing to buy at today’s price/ valuation after 2,3, 4 years. The simple reality is, the strong fundamental companies, with secular growth tailwind are not going to sell for 10 PE. You pay the price for quality. Otherwise, you have to find another edge.

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The simple reality is, the strong fundamental companies, with secular growth tailwind are not going to sell for 10 PE. You pay the price for quality.

History has proved you wrong. Wasn’t Apple selling at about 10 PE when Warren made his initial massive investments? MSFT sold for about PE 10 in 2009, IINM.

These may be rare opportunities, but they do happen.

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MSFT was cheaper for a reason, at that time they were in secular decline. Satya’s vision to pivot the company towards cloud, completely changed the game.

Wasn’t Apple selling at about 10 PE when Warren made his initial massive investments?

No, more like 13 in 2016-Q4 when the big purchases started I believe.
But the general concept is valid–it wasn’t expensive in any sense of the word.

The P/E hasn’t been below 10 since 2013.
P/E was 9.49 when I touted it in March 2013.
As is so often the case, I made some quick bucks then left the position.
Let’s just say I’m not very good at picking appropriate position sizes.

Jim

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These may be rare opportunities, but they do happen.

over a decade, finding one example doesn’t qualify as ‘rare’, it is nearly impossible. If you are going to be waiting decade for that one opportunity, and assuming you are going to have the ability to clearly analyze the risk/ reward and make an investment on size, you will be called Warren Buffett.

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These may be rare opportunities, but they do happen.

Another view:
Such opportunities are actually pretty common.
But when something is cheap, almost by definition there is a very strong consensus that it is cheap for a reason.
So the good deals are often staring you right in the face, but surrounded by a dozen false voices yelling “danger” that scare you away.

Though it isn’t a great way to find investments, I notice that right now 308 of the Value Line stocks are trading at a current P/E under 10.
The long run average is 142 of their stocks, so that’s over twice the usual number of “seemingly cheap” picks.
Using forward estimates: 24.8% of stocks with an earnings estimate for next year are at a forward P/E under 10; the long run average is 13.6% of them, so we see 82% more than usual.
Maybe most of those seemingly cheap stocks are terrible picks because earnings are about to fall off a cliff two years out, or the forward estimate is plain garbage.
But I figure it’s pretty likely that, on any given day, some of them are just plain too cheap.

The current cheapies aren’t all obscure microcaps.
A the moment the “forward PE<10” list includes: JPMorgan, BABA, BofA, Toyota, Shell, Comcast, Verizon, Wells Fargo, Intel, TD…

Jim

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A the moment the “forward PE<10” list includes: JPMorgan, BABA, BofA, Toyota, Shell, Comcast, Verizon, Wells Fargo, Intel, TD…

First of takeout banks. PE is not the measurement for banks. Separately I do like banks here, because of the raising rates tail-wind. I have posted multiple times on that.

Now, BABA has significant unknown, risk. This is not a business cycle, competition but unusual political risk. I have position in BABA and write covered call. The recent BABA price movement, clearly shows the political risk. One can take some minor position, cannot bet farm on it.

A clean story, that is just mis-priced is like proverbial $100 bill lying on the floor. At the moment there were risks associated with it, on hindsight one can explain, but at that moment it is a significant risk.

It is when you are pressed against clock and you are playing against GM Mikhail Tal, and he sacrifices on a complex position. Will you accept the sacrifice or not? Perhaps easy for GM’s not for mere mortals.

Just saying BAC was a much better story at < $15, and someone dissing it from $5 to $15 cannot suddenly wake up and claim it is a wonderful investment today at $33. The selective readings, and swinging one’s popularity in a small group doesn’t translate into sustainable investment advantage.

Using a forward PE of 15 allows for extra wiggle room to pick up the higher quality businesses at times of distress and at low valuations I’ve found.

A the moment the “forward PE<10” list includes: JPMorgan, BABA, BofA, Toyota, Shell, Comcast, Verizon, Wells Fargo, Intel, TD…

I’ve been thinking about buying Toyota stock. Conventional wisdom has them as terribly behind in the race to electrification, and that’s not 100% wrong, but it’s far from 100% correct. I think they are managing the transition okay, so far, for the most part. Though it was a sizable mistake not to get aggressive with EVs for their Lexus line years ago: they let Tesla eat their lunch in that market.

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Seems an important differentiator is whether one is insisting on buying “wonderful businesses at fair prices” versus fair businesses at wonderful prices. Obviously, there is something in the middle.

And I don’t think there is any “right” answer to this. Buffett, for one, has done great with both methods. While the size of Berkshire necessitates the former, I would not be surprised if Buffett working with a small amount of capital chose the later.

I think part of it has to do with the amount of time one has to devote to turning over the proverbial Lynch rocks. Part of it also has to do with the amount of concentration one takes with their portfolio. For my own situation, I like to own only a handful of businesses. I agree with Munger’s bias in this. And for me, if I’m putting 10-20% into a stock, I’m extremely picky with the quality of the business. I want a business in which I really would not lose much sleep if I had to put 100% of my net worth into it (IIRC, Buffett has said that the best investments he has seen fit exactly into that mold). In today’s low-interest rate and high-stock price environment (not just today, actually, but most of this millenium), I just can’t find those types of businesses at really-attractive valuations…except Berkshire. So for the most part, I find that it’s either compromise on the quality of the business, or compromise on the valuation. I chose the latter, though I understand why some chose the former. If you find something that does not require either compromise (except, as stated, Berkshire currently), I’d love to hear about it.

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Seems an important differentiator is whether one is insisting on buying “wonderful businesses at fair prices” versus fair businesses at wonderful prices

When I purchased MA & V, they were wonderful businesses that are expensive. After holding them for so many years, I stopped even looking at the results, MA, is pretty flat from mid 2020, yet a CAGR of 29%, Visa not as good as MA but still slightly over 20%; This doesn’t include dividends.

Sometimes a good/ fair price is not immediately, readily evident. Time reveals it.

Sometimes a good/ fair price is not immediately, readily evident. Time reveals it.

Like Buffett says, time is the friend of the wonderful business…

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I figure it’s pretty likely that, on any given day, some of them are just plain too cheap.
The current cheapies aren’t all obscure microcaps.
A the moment the “forward PE<10” list includes: JPMorgan, BABA, BofA, Toyota, Shell, Comcast, Verizon, Wells Fargo, Intel, TD…

FWIW, I note that BABA at around $88-89 is now trading at around 9.5 times peak-to-date EPS.
I don’t think it passes Rule #1.
There are certainly many obvious danger signs, but overvaluation definitely isn’t one of them.

Jim

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