Stephen Yacktman: Many people set a price target by saying, “Okay, I think it is worth $X.” Well, we don’t think that way. We look at
- what the forward rate of return is,
- stack it up against other investments and
- determine which one is the highest and
- which one is the lowest and
- what risk we are taking to get that rate of return.
- leverage,
- cyclicality of earnings, and
- the quality of the business.
An investment that is going to make it into the portfolio with the lowest rate of return would be a company like Coca-Cola that
- has high predictability and good management.
- We can just go into autopilot.
- It becomes our AAA bond.
A sale is triggered by two things.
* If the rate of return is not sufficient or
* if there is a better opportunity elsewhere with a larger margin of safety to get a similar or higher rate of return, we’ll sell it.
The overall market dropped and consumer product names held up and the media companies got killed.
* News Corp. went from the $20s to $5.
* That drop opened up a huge rate of return gap and encouraged us to sell some of our Pepsi and buy News Corp.
* We viewed that decision as going from a low teens rate of return to something that was going to make a 20% return.
There’s no price target ever set, it’s just a function of the environment.
* What ends up happening, unfortunately, in an environment where everything goes up, is fewer of these returns are satisfactory and we end up more heavily in cash.
* It’s not that we’re trying to time the market; it’s just there’s nothing to buy.
No comments:
Post a Comment