Wednesday, March 4, 2009

This Debate Will Last Forever

This gentleman - Charlie Minter - is a friend of mine. I might actually play poker with him tonight if I get back from New York in time.

In that Bloomberg interview, he unintentionally illustrates why it is so hard for two investors to even discuss earnings and valuation, let alone agree on them. There are two lynchpin issues:

  1. Operating earnings vs. reported earnings
  2. Which earnings - trailing, current or future?

1. While I agree that many one-time charges actually end up recurring in some shape or form, this construct reminds me of the quote, "Consistency requires you to be as ignorant today as you were a year ago." If I want to own a stock, I am setting myself up as optimistic about its prospects while at the same time hopefully cognizant of the risks.

2. All other things being equal, I care about a company's returns available to shareholders after I buy the stock. I don't care what happened to a company before I bought the stock, except as pertains to its predictive value over my investment. If 2009 is going to be the worst year for U.S. economy since that 1970s, or 1930s, surely 2009 earnings have little predictive value for much other than a company's proclivity of burn or conserve cash in bad times.

I haven't done this topic justice. I need to revisit it some time soon. I also need to get into the shower.

1 comment:

Anonymous said...

I like his tie.