Chuzz, Yamakita...
Would also love to get comments to the following:
Although I agree with the premise that many stocks, especially unproven (pure) internets, are currently overvalued in today's market, I also think we do have a (somewhat) new paradigm concerning investment valuation (re: market risk premium), and other factors..which makes comparisons of PE's, etc. to earlier, historical times (somewhat, but not fully irrelevant)
(1) Fall of communism/victory of democracy/capitalism- Although it is impossible to evaluate to what extent market(s) had already priced this in, in comparing many stocks (at least the ones I like <G>) to the Nifty 50 of the 1960's (or other periods)...there are some huge differences...In the 1960's, it was not entirely clear that a company like Xerox would be able to sell its products (effeciently, effectively) in a country like China (or India or Russia) anytime in our lifetime....therefore, with the "victory" (I use that term very lightly) of West, this has opened up entire new market(s) to many, many products/services that would have (hereinto) been limited in their growth pattern...if market(s) would have been limited to the U.S. and a then, mostly-socialist Europe.......Another factor is (that) the risk of global destruction, massive world war has been reduced significantly (not smaller conflicts since the fall of the East vs. West confict...
How disruptive would it be (to companies) selling products (if we were involved in such a war)? How would there cash flow, profit stream been affected....Clearly, this risk has been reduced (although not eliminated). Surely the market(s) had priced in that risk in the 1950's, 1960's, etc? How much is (the reduction of that risk) worth?
China, Russia, India, Indonesia, Pakistan...these are going to be huge markets for the next several decades...
Of course, the trick is to find companies that have proven (Dell) that they can effectively and effecietly expand to these huge overseas markets.....decent indication (although not perfect) that they will also do well in the future)...Look at many retailers....all things being equal, they will have a much more difficult time expanding to many foreign lands (and, as a result, their stock prices should be discounted, and probably are, appropriately)
(2) Victory of "U.S."-style Capitalism- Free(r) Trade, ROI, ROE, U.S-type accounting standards....Although there is a long ways still to go, U.S- style capitalism (for better or for worse, socially, culturally) is winning, has (essentially) won the war, and many more companies (countries) are being run on the principal(s).........One fact alone: Look how many countries now run budget surpluses(s) (with intention, as a policy goal) or, at least, try to..........This has led to efficiencies in utilization of all sorts of resources (including capital), lower tax burden for existing companies, etc........It is easier for companies (even if we consider a country like Germany) like Dell to operate under "U.S." capitalism rules there, because now you have a number of workers, management, and government that are "geared" towards the rules, which allows the company the produce more profit...I admit, this is a bit nebulous to account for, but nonetheless, significant...By all means (especially with U.S GAAP style accounting), there is still a lot of improvement need, but, at the very least, the "world" trend is much more clear than in the 70's, 60's, 50's..
"Necessity" of technology- Technology, for many companies, is no longer a separate sector of the company, it is now recognized as part of (all) companies competitive advantage....or survival...It is no longer a question of should we?....rather, how quickly can we implement.....For those companies that produce technology products for which there is currently no alternative (a better example than Dell would be a company like EMC or Cisco, IMO)...I would argue that they have a much less cyclical business than a company like Coke...How much is it worth (premium) to own a company that makes essential products that companies MUST buy for the next many years vs. preferances (Coke)?/
(4) The internet- The internet HAS changed everything. It will be growing at an extroadinary rate for many years to come....regardless if GDP grows at 1%, 3%, or 5% in Indonesia or the U.S...the internet IS going to be built...companies, countries ARE going to have to play by ITS rules....and........the "buildout" of the internet (especially internationally)..is going to go on for some years to come...Many U.S. companies are the clear leader here...with no alternative(s) in sight...When was the last time that a sector (and individual companies) had such a clear and overwhelming growth path ahead (relatively, but certainly not entirely) without risk? What is that worth?
As comparison, What was (is) more certain?: That Cisco's routers are going to be used (on a massive scale) around the world in the next 10 yrs. OR that, in the 1960's, Coca-Cola would be able to convince more people around the world to buy their product(s) in the 1970's, 1980's.........I can't go back in time, but I think that Cisco is a sure(r) thing....
(5) Deregulation of U.S. financial markets (I'm thinking here of broker commission, etc), availability of information- Has decreased some risk(s), cost hurdles for the small investor-, although by no means eliminated..
(6) Necessity of individuals to save for their own retirement...not a valuation factor, but a liquidity issue....I guess one could argue (valuation), that the risk premium for equities should be further reduced, because, since the burden of retirement saving falls on the individual (now in U.S, soon in the rest of the world)...stocks are less risky, because individuals will HAVE to own a certain % going forward to allow themselves a shot at a decent retirement..there are few other (investment) vehicles that can match stock(s) consistent performance over time...So, there is going to be (already is)..some "permanent" demand....
So, my investment strategy has been to capitalize on these, to me, apparent factors....to find those companies that (1) Are building out the internet (as Chuzz mentioned) (2) Have proven they can expand, grow effectively, efficiently internationally (3) Are "jiggy" with cutting-edge U.S. capitalism (management techniques)..usually meaning they are U.S. companies...
To me, it is entirely logical that tech stocks have been the big growers of the last few years, that our market(s) have narrowed (other stocks....companies, in other industries have not grown near as much as the builders of the internet have/will), and that tech stocks, by extention, make up a larger and larger % of total net capitalization of stocks (in general)...this can not, will not go on forever, but I still think we are in a "sweet spot"...due to the underuse of technology in many parts of the world (they WILL catch up), internet in the rest of world...there is still a lot of growth left (for those companies that can seize the day)......the key, I think, we'll be to find (and keep) those companies (stocks) that fulfill the criteria I have listed above....and, additionally, have a proven track record of profitability, and consistent profit growth.....WHILE also, staying reasonably priced....although for the real premium companies of the group (Cisco, EMC, etc)...I think there valuations (built-in premiums) can stay excessive for quite a while...
That is, until they miss a quarter, or their technology become obsolete <G> |
