Value and Valuation
by
Jerry Thomas (TMF Cheeze)
January 28, 2000
Greetings, Fools.
What is a stock worth?
You know what? I don't know. Obviously, it's worth whatever the stock ticker says it's worth at any given moment. But that information, without any context, is useless. By itself, it tells you nothing about whether you should buy a company or sell it, short it, or load up. Here I've been working for the world's greatest financial website for almost three years, and I still haven't solved this most basic issue confronting all investors.
| The Markets -- January 28, 2000 |
| |
1/21 Close |
1/28 Close |
Change |
%Change |
| NOW 50 |
1,966.29 |
1,854.09 |
-112.20 |
-5.71 |
| DJIA |
11,251.71 |
10,738.87 |
-512.84 |
-4.56 |
| S&P 500 |
1,441.02 |
1,360.16 |
-80.86 |
-5.61 |
| Nasdaq |
4,235.40 |
3,887.07 |
-348.33 |
-8.22 |
Not that I feel all that bad about my shortcomings: there aren't any easy answers to these questions. If valuations were obvious, there wouldn't be any need for a stock market. You'd look up the company price in a catalog and send for it the way you would a ham radio kit, or a Schwinn bicycle from Sears. Theories of valuation rise and fall, they come in and out of vogue like fashions, and if you think you've seen the last word on it, wait a few minutes for the next magazine article to come out.
Even Alan Abelson, the hapless Barron's columnist whose word can send markets reeling, has been so consistently wrong in his forecasts that some savvy investors (read: Fools) use him as a contrary indicator. Bill Barker (TMF Max) looks at Abelson in Thursday's Fool on the Hill commentary, which will give you some idea of just how dicey the word of a perceived expert can be.
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I've been spending a lot of time lurking on our Berkshire Hathaway message board lately because it's a place where this question of equity valuation is studied incessantly. I want to learn more, and this symposium of thinking investors is a great place to do it. I count it as one of the finest discussions in Fooldom because it draws people who are not satisfied with superficial answers. If they are a bit too worshipful of Berkshire's Warren Buffett, they can be excused, first by way of deference to Buffett's epochal returns, but more importantly, because they have done their homework. I post rarely, but read closely, expecting one day to have a clearer understanding of what valuation is all about.
In Wednesday's Rule Maker, Fool David Wolpe (TMF Dbunk) makes the point that, in assessing the value of Internet companies, earnings are only a small part of the picture. In a land rush, you build first and ask questions later, which accounts for at least part of the reason why P/E ratios among 'Net stocks are so outta sight, vexing many traditional measures of value.
In Wednesday's Fool on the Hill commentary, Bill Mann (TMF Otter) looks at the matter of high valuations from a wider perspective, asking if Value Investors can even be considered "Foolish." The answer, by the way, is yes, of course, and most emphatically -- but please be particular about your use of that word, "value." Bill's commentary sparked a bit of a debate on the aforementioned Berkshire board, one segment of it being highlighted in Friday's Post of the Day. Value is an elusive business, and among some investors it is not merely of self-discipline but has become a moral imperative. Given the rewards that have come to Berkshire shareholders over the past 30 years (if not the past 2), it is difficult to argue with that sentiment.
There have been two recent Fribbles that are both compelling reads on their own, but taken together, their poignance is multiplied. Contributor Jacques Bourque, who lives in Indonesia, tells of the hundreds of people who make their living sifting through the trash at a Jakarta land fill site. "There are actually dozens of families who are living right on the trash," Jacques reports. "No, not on the side but right on top of it, with makeshift shelters." While you may find that a depressing reality to contemplate, the story is actually an uplifting one, which is why Jacques titled the piece A Reason to Smile.
Joseph Mailander, known popularly on our message boards as "laopera," follows with A Real-Life MBA, the story of a Cambodian friend who arrived in America 20 years ago, penniless and speaking no English, who has created a measure of success in his life that would put most Americans to shame. In these two short essays, I find two powerful lessons: the power of opportunity, and the power of determination. There is valuation, and there is value, and the abstraction of one informs the appreciation of the other.
If present valuations in the stock markets have you feeling wary, spend some time with Ann Coleman (TMF AnnC) and Monday's Foolish Four report, which will help prepare you for the inevitable day when this happy bull market goes away and the bear finally returns. Thursday's Rule Breaker brings you the Truth about Market Froth from Barbara Eisner Bayer (TMF Venus). And Internet watchers will not want to miss David Gardner's interview with Tim Koogle,CEO of Yahoo! (Nasdaq: YHOO).
Until next week,
Fool on!
Cheeze
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