Monday, June 29, 2009

Methodology - thoughts and observations

Readers will note a rather tough approach to these valuations. They might ask themselves if these valuations are unreasonable and harsh. They might aks themselves if waiting for the prices to reach the values calculated by Gudovac1941 will cause investors to Miss-A-Major-Opportunity

Finally, they might ask themselves what other alternatives exist ?


In reply to these questions, this writer can only state that:


First: one must think in terms of market cycles lasting a few years. During time of excessive pricing, one must simply accumulate capital and wait. Imagine a hunter stalking prey. Good hunters don't crash through the underbrush. Good hunters are able to sit quitely for long periods waiting for the perfect opportunity.


Second: one must also examine alternatives to the straightforward long equity investment. Modern markets provide multiple avenues for investing against an enterprise.


Third: Gudovac1941 has bought many companies at the valuations calculated in these pages. There are many ways one can invest one's capital. The capital markets are just one vehicle of many.


Fourth: Be discerning when gathering information. The vast majority of information on investments is generated by the sell side. The sell side of investment is siren call that one should ignore.


The root of anyone's valuation should be at what cost would I want to own this enterprise ?


Gudovac1941 does not spend much effort in examing macro-economic trends. Great management teams are able to navigare through a variety of macro-economic environments profitably. Certainly, macro economic trends, effect long term valuation significantly. However, these trends are not too difficult to discern. There are numerous sources of macro-economic trend information. Again - be careful to determine is the source is from the sell-side. If the source is on the sell side, then ignore.

Gudovac1941 spends much effort slogging through the details of these enterprises' reports, conference calls, and numbers. 

However, the greatest single factor which drives valuations (in his mind) is whether management serves the stockholder's interests ?


One can develop the most highly nuanced CAPM with a refined multi-varient WACC - but miss the most salient question: to whom do the economic rents acrue - owners or managers ? 

Gudovac having hired (and fired) his share of operating managers over the last few decades has seen his share of self-serving looting by operating managers.

Gudovac is positive that the silly market levels of the past 15 years are behind us. He hopes for further steep declines in the equity prices over the near future. 



In sum - Don't get Massacred.

Gudovac1941@gmail.com

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