Forum Archive Index - February 2003

["Morgy" <morgy40@xtra.co.nz>]

Harry

I find it amazing that you were able to deduce all this from the same post I
read. I quote Travis again

"Technical analysts have developed over many years a
sophisticated Delphic phrasing system that enables
them to sound like they are deeply insightful on a
stock's progress when in fact almost everything they
say is an each way bet"

Not only techies eh !

I'm sure if what you wrote was what he meant, he would have wrote that. In
fact what you have written is clearly not the same, have another read Harry,
Nice spin doctoring though Harry.

Regards

Morgy


----- Original Message ----- 
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Monday, February 10, 2003 1:11 PM
Subject: [sharechat] Predictions (was TLS Chart Update)


> Hi Morgy,
>
> >
> >
> >Travis Morien wrote:
> >>"As a value investor I seek to predict the future
> >>return from owning a business, using mathematics
> >>identical to that used to value a bond."
> >
> >
> >Here is what Benjamin Graham has to say about your method,
> >
> >The problem with forecasted earnings is that they are highly
> >unreliable and subject to constant change. The father of securities
> >analysis, Benjamin Graham, did not believe in predicting earnings
> >for stocks.
> >
> >Graham wrote,
> >"In forty-four years of Wall Street experience and study I have
> >never seen dependable calculations made about common-stock values,
> >or related investment policies that went beyond simple arithmetic or
> >the most elementary algebra. Whenever calculus is brought in, or
> >higher algebra, you could take it as a warning signal that the
> >operator was trying to substitute theory for experience, and usually
> >also to give to speculation the deceptive guise of investment."
> >
> >I came across the above passage while reading the associated article
> >(the article not being relevant to your thread in any way) and
> >having read your email from earlier today and being highly amused at
> >your ability to "predict"  future value based on "assumptions" of
> >future profits it sort of jumped out at me. There are a lot of
> >unemployed analysts around at the moment who also assumed future
> >profits based on there predicative assumptions.
> >
> >
>
> At last, another person on this forum that can think for themselves!
>
> Excellent response Morgy.  You just nailed Travis.  Or did you?  I
> hope Travis will excuse me for butting in at this point, but I think
> Morgy, you haven't quite got the point that Travis was trying to make
> (probably due to Travis not presenting his argument clearly enough
> for you).
>
> First up, I have no argument with any of your quotes.  Trying to
> predict earnings one year out is a minefield, two years out is
> incredibly difficult and ten years out is practically insane.
>
> However, there is one special class of company where, as strange as
> it may seem, insanity can prevail.   This is the so called 'consumer
> monopoly' as described in 'the Buffettology Workbook', and all those
> other Buffettology books.   A consumer monopoly is a company that is
> a well established leader in its chosen market, with a history of
> profit growth.  It will generally also show a healthy return on
> shareholders funds and be almost immune from competition being able
> to devastate its profit margins.   There aren't many companies that
> can satisfy these very strict criteria.   A failure at any of the
> qualifying hurdles means any ten year earnings prediction is
> nonsense.  But find the select few companies that clear those
> hurdles, and it can work.  This is what Buffett does, but how to find
> these companies?   It takes hard work, but this is the mission of the
> 'Focus Investment Group' (one of the 'sharechat message boards').
> Welcome aboard, if you would like to help us.
>
> There is one more point about predicting future earnings that needs
> to be made clear.  When Travis says he is predicting future earnings
> he does *not* mean he is trying to pin down earnings figures five,
> six or seven years hence.  What Travis is plotting here are *future
> earnings trends*.  An actual result for a particular year *may* be
> right on the trend line.  But the result may also be significantly
> above or significantly below it.   This sort of thing does not
> invalidate his analysis.  Why not?
>
> There exists in business a phenomenon known as 'regression to the
> mean'.  Put simply this means businesses have good and bad years and
> although some of these good/bad fluctuations are quite unpredictable,
> they tend to average out in the end.
>
> The secret to running a successful business lies in hiring the right
> people, getting the management structure right and understanding your
> market.   Get these basics right and the single year earnings
> forecasting blips pale into insignificance.   Bad years are balanced
> out by good years and looking back over several years of trading
> history the upward trend in earnings will still be apparent.
>
> Reduced to this level you can see that what Travis is saying is that:
> if you have
>
> i/the right people
> ii/doing the right things
> iii/ in the right market,
>
> and
>
> iv/ this combination has been proven to work in the past,
>
> THEN
>
> it is reasonable to conclude that the business will continue to grow
> in the future.
>
> To anyone who has run a business this is just common sense.  Travis
> is *not* predicting that such a business will grow a predictable
> amount every year without fail.  Travis is predicting the longer the
> ingredients of a successful business are there, the better the chances
> are it will be recognized by the market - eventually.  And as a long
> term investor Travis is patient, able to bide his time waiting for
> that 'eventually' to really happen.
>
> SNOOPY
>
>
>
> PS  You should also know that the mathematics needed to carry out
> this analysis *can* be carried out on a simple four function
> calculator.   OK, I'll admit that a business or scientific calculator
> might have you pushing less buttons.  But nothing anywhere as complex
> as calculus or heavy algebra is needed to solve these 'valuing as a
> bond' problems.
>
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "Q: If you call a dog tail a leg, how many legs does a dog have?"
> "A: Four.  Calling a tail a leg doesn't make it a leg."
>
>
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