Doree has a few questions. Read on:
Hello Phil,
I have run numbers on a lot of companies (using Excel and Investools, I can do this in about 5 minutes). Like many others, I am having a tough time finding stocks that both meet the 4M's and that are selling at or below their MOS. In fact, most of what I find that is investment worthy is trading well above the Sticker Price. I supect this is because the market is generally strong and prices are relatively high.
My question is, why not lower the accpetable ROR from 15% to say 12%? Wouldn't it be better to get this return and buy stocks at a somewhat higher price than keep funds in cash equivalents (short term T-Bills and Money Market Funds) earning a much lower ROR? Then, when market conditions change and better deals are available, take advantage of them. I would really appreciate your insight on this.
Another question I have relates to one of your Blog posts wherein you state only own 1 stock (the best) in the same industry. I am guessing you mean only one where the companies compete head-to-head as companies can be in the same industry but not competitors - e.g. Oracle and Adobe - in the same industry but not direct competitors. I would also appreciate clarification on this.
Thank you so much for your book and your web-site, especially the Blogs which are a real font of information! I am just loving doing the analysis so currently this is play!
Thanks for everything.
Warm regards,
Doree
Here's what I told her:
Regarding same industry stocks -- you've got it right. Oracle in the database industry does not directly compete with Adobe in the multimedia industry. You can have both if you love them!
Regarding lowering your sites for ROR: Don't even think about it!
When you invest you are putting your money to work by owning a business. However, that is not your only choice for where your money could be working. You could buy a T-Bill. You can invest in real estate. You can buy gold. You can buy mortgages. You can start your own business.
Each of these has differing amounts of risk, taxation, inflation and personal involvement that must be accounted for in the return on the investment.
In my opinion, 15% is the minimum acceptable return for the effort of finding and owning a wonderful business. Don't change it to make the prices better -- that increases your risk that you will pay too much and get burned.
The fact is that this market is overpriced. Historically, the S&P 500 trades at an average of 16 times trailing earnings. Since the S&P 5000 historically grows its prices at 8%, a 16 trailing PE seems about right.
This market is currently priced at almost 32 times earnings -- nearly double its historical average. To justify that, the average S&P 500 business will have to demonstrate long term growth expectations of 16% a year. Therefore, a huge 32 PE portends one of three things:
- much faster EPS growth that will soak up the bubble and reduce the PE
- a sideways market while EPSs catch up to the excessively optimistic PE
- a meltdown of a big chunk of the market price to bring the PEs into line with long term expectations.
For a long term investor to make money in a diversified account (say in a 401K) they have to pray for #1 because both #2 and #3 are going to mean trouble for their long term financial situation.
The problem with praying for #1 is that the country already has record debt, record negative trade balances, long term energy issues, long term inflation issues and a war that looks like it will continue for a long time. Any of these on their own can be the catalyst for a stock market meltdown. Just for fun, factor in the impact of baby boomers withdrawing money from the market to live on in retirement.
Bottom line, for #1 to work out we need to see the Dow at 23,000 sometime in the next nine years... which is where it needs to be to average 8% per year... and if it's already at a PE of 32, it's going to have to get there from real growth.
Real growth of 8% a year across the entire S&P 500 for the next 9 years? Could happen. These are the best companies in America. But the other two possibilites loom and with so many financial issues knocking on the door, it seems like a prudent thing to learn to pick the businesses that are undervalued and buy them then, not just any time. And it's likely that that strategy will produce great returns in any of these scenarios.
Now go play.
Phil
