The company is going to earn more than $50/share this year and has more than $100/share in the bank, so the answer is I hope I have the balls to buy a boatload more of the stock at $400.
To each his own... Buffett's strategy and viewpoint makes sense to me in light of massive capital allocation issues. When you are trying to allocate tens of billions, you have to take the extreme long-term view. The Buffett view also makes sense in respect to "Washington Post" type opportunities, where even a blind man can see the screaming valuation mismatch. If your capital base is not putting a strain on trading capacity, however, there are almost certainly better opportunity sets available (assuming trading methodologies are good) than multi-year buy and hold based on extended fundamental conviction -- apart from a Washington Post type opportunity -- in the face of meaningful macro risks. But then again, to each his own.
Wal-Mart's a great example right now. This silly Mexican thing is going to hurt them and they're going to be a target of the morons in D.C. through the election. However ... the company is still going to earn its billions this year, and the next, and the year after that. It's still going to buy back 5-7% of its market cap each year for the next decade. It's still going to pay and increase dividends. WMT at $65 in 2012, $70 in 2013, and so on is better for my ego, my wife's looks, and my dick size, but not for my bank account, which will be far higher if WMT goes to $48 and sits there for the next 10 years.
Except one could have made the exact same argument with WMT in the $50 - $55 range in 2000... and 2001... and 2002, 3, 4, 5, 6 etc and so on... p.s. Not the same in terms of "Mexican thing" but various temporary reasons for price compression, inevitable march upward etc.
Except I'm making it now (actually last summer when it was 50). Don't lump me in with the blokes who bought this thing at 50X then 40X then 30X then 20X earnings. A $50 share price when the company earns $2 is far different than $50 when the company earns closer to $5.
Fair enough. And again not so much directly disagreeing with you, as presenting an alternative perspective... as a general rule I am very wary of "unknown unknowns," which leads me to eschew "good" or even "very good" value opportunities apart from the bleedin' obvious macro dislocation, hard core Ben Graham type stuff. You could be completely right about WMT -- but they could also have another ten years of sloppy sideways range due to some new unknown compressor -- like the rise of 3D printing technology fueling a low-cost manufacturing revolution that dulls their logistical edge, for example. Not saying that will happen... just that my "unknown unknowns" hurdle is pretty high for long-term investments, and will remain so as long as my main opportunity set lies with risk-defined trades.
10 years of a sloppy range at a 10X or lower multiple means the company dollars just buy back even more shares and an investor's reinvested dividends allow that person a greater stake at a lower price. In 10 years, you'll have a $200B company with barely any float left! As for the 3d thing, do realize this isn't a Treasury bond. When you buy the stock, you're investing in what will hopefully continue to be an adaptive management. Could management completely screw up and destroy the company? Sure, there's a small chance. Other than that, the rest is just 8th grade math. The returns almost have to be outstanding over the next 15 years. Whether they're steady, or whether the stock does nothing for 12 of those years and then goes up 8 fold in 3, I don't know.
For this case specifically -- the WMT 15 year investment case -- what would be your definition of outstanding, in CAGR percentage terms?
Heck, I'm barely smart enough to know what CAGR is, but the risk-free rate is around 2%, so anything north of that works for me. Seeing as WMT yields close to 3% and raises the divvie most years, it'll be high single digits at the worst.
CAGR = compound annual growth rate. At the end of the day, risk-adjusted CAGR is the only thing that matters, which goes back to my point, re, different strokes for different folks. If an independent trader has access to an excellent strategy that can deliver 25% CAGR over 10 years, with low risk, and his capital base is small enough (or the strategy capacity large enough) to fully operate without capital constraints, then this trader would have zero need to look at long-term investment strategies of the WMT / AAPL type. Anything with a less desirable CAGR profile than his bread and butter approach -- again, assuming it is genuinely stable and low risk in aggregate -- has negative opportunity cost (or rather, opportunity cost as a significant negative). A family office manager trying to allocate $500 million, on the other hand, is a whole 'nother kettle of fish. Such an individual would certainly be looking for WMT style opportunities, because of obvious and unavoidable strategy constraints working with such a large capital base. The bigger you are, the happier you are with a lower CAGR, as long as risk is stable, due to the increased challenge of your mandate and your increasingly restricted opportunity set. I look forward to having Biggie style problems one day -- mo money, mo allocation problems -- but not there just yet. Hence l-t investment opportunities with single-digit or even low double-digit CAGR profiles don't really register on my radar screen, unless we are talking screaming mimi compelling. You may be sitting on a much bigger pile than I, however, as such making your WMT enthusiasm more appropriate. Vive la difference...