The decision to sell a stock is, in many ways, trickier than the decision to buy. My own observation is that investors in common stocks should never be conditioned to sell outperformers. There is a time to fold ‘em. But its not simply because their price has outperformed the market or some benchmark.
In effect they acknowledge that going down the Capital Asset Pricing Model rabbit hole with Alice did not get them to Wonderland. Their solution is to go further down the same rabbit hole.
The best cash flow measure is Warren Buffett’s Owner Earnings. If that is increasing faster than GDP, the fair value of companies will increase faster than GDP
The question then becomes whether the market is simply slow to recognize the value in the company or whether the analyst was too optimistic in their estimate of fair value.
The S&P 500 price earnings ratio shot up to over 100 times earnings, a reflection of massive write offs and depressed earnings. In fact, there were outstanding values in the stock market at that time! It was a good time to be a buyer.
It got to a point a few weeks ago when AMAT’s price was some 60% above fair value. It struck me that the price reflected serious ‘irrational exuberance’.
Declining free cash flow may be a sign the company is investing for the future! Or it may be a very bad sign. Increasing free cash flow may be a good sign or a bad sign. It’s all in the interpretation of the financials.
What could be more advantageous in an intellectual contest – whether it be bridge, chess, or stock selection – than to have opponents who have been taught that thinking is a waste of energy?
Robust decision-making embraces many plausible futures, then helps analysts and decision makers identify near-term actions that are robust across a very wide range of futures
Can we improve on the accuracy of these estimates by obtaining estimates from, say, 22 leading investment banks and averaging them?
You must be logged in to post a comment.