81
$5.09
$6.70
$24 million
$18 million
• $31 million sales, $6.5 million burn.• 40% YoY sales growth in the most recent quarter.• Losses decreased 31% compared with prior year quarter.• Sales to military increased 80% YoY in prior quarter.• Heartland Value Fund is a large mutual fund shareholder.• CFO bought shares a year ago.
Source: Reproduced with permission of Yahoo! Inc. © 2004 by Yahoo! Inc. YAHOO!and the YAHOO! logo are trademarks of Yahoo! Inc.
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EXHIBIT 2.11
STRD
Strategic Distribution, Inc. provides proprietary maintenance, repair andoperating supply procurement, and handling and data management solutionsto industrial sites, primarily through its In-Plant Store (R) program.Price
Cash/Share
Book/Share
Cash
Market Cap
$1.33
$1.65
$1.73
$23 million
$18 million
• Profitable in the most recent quarter ($0.6 million vs. $−3.4 million lastyear).• Eliminated unprofitable contract with Kraft that accounted for almost halfof their revenues.• Royce Micro Cap fund a significant mutual fund shareholder.• $284 million in sales last year.
Source: Reproduced with permission of Yahoo! Inc. © 2004 by Yahoo! Inc. YAHOO!and the YAHOO! logo are trademarks of Yahoo! Inc.
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Graham-Dodd and a Dose of Fisher
EXHIBIT 2.12
PRTS
Partsbase, Inc.Price
Cash/Share
Book/Share
Cash
Market Cap
$1.33
$1.65
$1.73
$23 million
$18 million
• Annualized burn rate of $3.7 million.• Offer on the table for $1.41 from a company formed by Robert Hammond,PRTS’s CEO. A definitive merger agreement was signed in August 2002.A higher offer, for $1.55–1.65, was presented by AVL, but the board hasrejected it.• If the merger closes by January 1, the annualized return for sharebuyers atcurrent prices is 72%.
EXHIBIT 2.13
IATV
ACTV, Inc.Price
Cash/Share
Book/Share
Cash
Market Cap
$0.73
$1.15
$0.75
$64 million
$40 million
• Has signed definitive merger agreement with OPTV, which is majorityowned by Liberty Media.• OPTV also trades under cash levels ($135 million cash, $98 millionmarket cap).• The deal, to be done in OPTV shares, currently has a value of $1.07 if thedeal closes today with OPTV at $1.46, implying a spread of 34 cents tosharebuyers today.
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TRADE LIKE WARREN BUFFETT
Within six months of writing that article, the basket of stocks I recommended was up over 100 percent as the market not only jolted upwards inthe aftermath of the Iraq War but also began to realize the value of the cashportfolios of these companies. I mention this article as prime evidence thatthese situations still occur when the notorious “Mr. Market” takes anaggressive view toward selling.This brings us back to the topic of diversification. All of the aboveexamples were interesting in that they were trading below their book valueand had reasonably safe criteria in terms of the rate by which they were dissipating these assets. However, I still was not willing to put all of my chipsin one stock.Graham notes that when a company is trading below its market value,one of two things should happen (note the word “should”):1. The market will once again value the company on the basis of its liqui-
dating value or higher.2. The company’s management, if they can’t turn the business around,
will liquidate the business and return the proceeds to investors.All of this is based on the notion of mean reversion. If a company weretrading well above book value, then it would imply that the market was giving high value to the company’s earnings. If the earnings were of such highquality then eventually competition would set it, driving down the quality ofthose earnings, and the market would respond accordingly. Similarly, if acompany were trading below book, then the market would not place anyvalue on the company’s business, eventually causing potential competitorsto look for other opportunities and industries, which in turn would drive upthe quality of the company’s business (since all competitors are elsewhere).However, there is always the danger that management doesn’t careabout the shareholders but instead enjoys sitting on the assets of the company and using it for their personal benefit. Diversification is the tool thatwe can use to reduce the risk of corrupt, or at best, uncaring, management.To quote Graham and Dodd again, this time from the chapter “Theoryof Common Stock investment” in Security Analysis: “Finally, [the investor]will rely . . . upon diversification to average out the effects of unforeseeablefuture developments . . .”
Graham-Dodd and a Dose of Fisher
35
And then they state: “Purchase of a single common stock not aninvestment” (italics their emphasis). They add:Group Purchases May constitute an Investment Operation—Grouppurchases of selected common stocks at attractive prices will veryprobably fall under our original definition of investment in Chap IV(“An investment operation is one which, upon thorough analysis,promises safety of principle and a satisfactory return”).It is interesting in the paragraph above that one diversifies and thenthere is a valid investment operation. In other words, they separate the ideaof diversification from the idea of safety. Buffett is able to combine theideas from Security Analysis with Fisher’s ideas of a focused portfolio byreintegrating diversification into the concept of margin of safety. In otherwords, diversification is one possible means of acquiring that safety. Butif you have other means of getting the desired degree of safety, then itreduces the need for diversification.A great example from the Buffett historical portfolio is that of SanbornMap. In the 1960 letter to his limited partners, Buffett mentioned that therewas one situation that constituted 35 percent of the portfolio of the partnership. This would not have been considered by Graham to be an investmentin the spirit of their approach since it was not diversified, despite havingmany of the other characteristics that Graham typically recommended. Aswas typical with Buffett, he did not reveal what the stock was in 1960 thattook up so much of the partnership’s assets. However, in the 1961 letter hedid unveil this mysterious stock and put up his reasons for the investment.Sanborn Map was the MapQuest of the early twentieth century. Thecompany started in 1866 when Aetna Insurance employed D.A. Sanborn tomap a town in Tennessee. In the first year of business, 50 towns weremapped out. By 1873, 600 towns were mapped out. By 1920 they had over1,000 employees and had production facilities in Chicago, San Francisco,and New York. The maps were incredibly detailed—showing undergroundpipes, fire hydrants, and so on, so that they were of great use to fire insurance companies. Starting around the 1950s the map business began to falter. Rising competition and little need for the insurance companies toconstantly update their maps forced Sanborn to downsize.
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TRADE LIKE WARREN BUFFETT
Starting around the 1930s, however, Sanborn began putting their profits into an investment portfolio that, over time, grew substantially. By 1958,when Buffett started accumulating the stock, the investment portfolio wasworth more than the market price of the company. As Buffett put it in his1961 letter:Let me give you some idea of the extreme divergence of these twofactors. In 1938 when the Dow-Jones Industrial Average was inthe 100–120 range, Sanborn sold at $110 per share. In 1958 with theAverage in the 550 area, Sanborn sold at $45 per share. Yet duringthat same period the value of the Sanborn investment portfolioincreased from about $20 per share to $65 per share. This means, ineffect, that the buyer of Sanborn stock in 1938 was placing a positive valuation of $90 per share on the map business ($110 lessthe $20 value of the investments unrelated to the map business)in a year of depressed business and stock market conditions. In thetremendously more vigorous climate of 1958 the same map business was evaluated at a minus $20 with the buyer of the stockunwilling to pay more than 70 cents on the dollar for the investmentportfolio with the map business thrown in for nothing.In other words, Buffett felt he had a substantial margin of safety basedon the fact that the investment portfolio was worth far more than the company was being sold for on the stock market. Additionally, the companywas still profitable, although the profits were deteriorating. Moreover, thevalue of the maps was not going away anytime soon, even if the companyhad to downsize. The maps were so detailed and useful that there wouldalways be some sort of market for them. In fact, the company still existstoday and still serves the insurance community.Additionally, the income from the investment portfolio was such thatthere were absolutely no worries regarding the financial viability of the company. What concerned Buffett, though, was that while dividends were beingcut during the period of downsizing, Buffett “could never find any record ofsuggestions pertaining to cutting salaries or directors’ and committee fees.”Since directors did not own enough of the stock, they were therefore lessconcerned about the price of the stock than Buffett, who ended up eitherowning or allying himself with about 40 percent of the company’s stock.
Graham-Dodd and a Dose of Fisher
37
It is this control that gave him an extra level of safety. He knew thatonce he was in control he could arrange an appropriate liquidation of stock.Once he obtained enough shares to influence a shareholder vote, heworked out with the board a plan to separate the investment portfolio fromthe map business. All shareholders who wanted to were taken out at fairvalue, and Buffett made a significant profit on his investment. And to anybody who thinks Buffett doesn’t understand technology at all, his 1961 letter contains an interesting foreshadowing of the future of the map businesswhen he states: “There appeared to be a real opportunity to multiply mapprofits through utilization of Sanborn’s wealth of raw material in conjunction with electronic means of converting this data to the most usable formfor the customer.”If anything, diversification would have hurt Buffett’s efforts to turn thisinvestment into a profitable one. Left to its own devices, the board of Sanborn would have done nothing to unlock shareholder value. In order forBuffett to fully realize his margin of safety he could not have stood by passively. He needed to actively negotiate with the other shareholders to takecontrol, and then once in control, to develop the plan and execute it forunlocking that value. If he had been in 50 other similar situations with othercompanies, there is no way he could have spent the time and effort neededto do it. If anything, his focus was his margin of safety.A more famous example in the Buffett mythos is that of the DempsterMill Manufacturing Company. The company, started in 1880, was a majormanufacturer of windmills and farm implements.Buffett accumulated his 70 percent voting block in the company from1958 to 1962 at an average price of $28 per share. At the time the companyhad $9 million in sales, limited profitability, and tangible assets of about $75per share. Buffett made the point in his first letter to investors where hementioned Dempster that the price of the overall market was meaninglessfor Dempster. If General Motors went up, for instance, it didn’t necessarilyfollow that Dempster would go up. Because he owned 70 percent of theshares and there were very few other shareholders, there was no real public market for the stock. So he began to value the stock based on what hefelt the liquidation value of the business was, plus any value he thought wasleft in the underlying farm equipment business.Since Buffett now controlled the company he was very focused onunlocking the value. He decided to install new management in the com-
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TRADE LIKE WARREN BUFFETT
pany in early 1962. This resulted in the hiring of Harry Bottle to take overthe company. From the 1963 letter to investors in the Buffett Partnership,he writes: “A good friend, whose inclination is not toward enthusiasticdescriptions, highly recommended Harry Bottle for our type of problem.”This is the first mention in the Buffett letters of Charlie Munger (the“good friend” mentioned earlier). Munger ended up being Buffett’s partnerfor the next 40 years and participated in the decision-making of almost allof Buffett’s significant investments henceforth. Harry immediately cut costsand began selling off the inventory as well as the company’s unprofitablefacilities. Also, with the newfound cash on the balance sheet obtained fromthese liquidations, Buffett began investing this cash in a portfolio almostidentical to that of the Buffett Partnership. This was his first experimentation into the model that proved very successful later on when he took control of textile manufacturer Berkshire Hathaway.By the end of 1963 Buffett, with Bottle’s help, was able to basically selloff all the assets and realize a profit of $80 per share on his initial investment of approximately $28 per share.Again, this is an example where Buffett had two alternative routes forincreasing his margin of safety once he found a company trading significantly below book value:1. He could buy up shares in the company and then diversify his risk by
buying many more similar situations and hoping for the best.2. He could take control of the company, find effective management, sell
off the assets, and realize his profits.With both Sanborn and Dempster, he chose the latter approach. Wehave seen this in other chapters where Buffett always has a “back door” tohis trade in order to justify his margin of safety. For instance, in theArcata/KKR merger arbitrage situation mentioned in Chapter 5 on mergerarbitrage, Buffett figured that either he would make money if the Arcatadeal went through, or he would make money because Arcata was undervalued anyway. With some of these liquidation situations, Buffett figured hewould either make money because management will realize the benefits ofselling off assets to achieve shareholder value, or he would become management and unlock it for them. In both cases there was also no immedi-
Graham-Dodd and a Dose of Fisher
39
ate danger of assets being dissipated. In fact, both companies, Sanborn andDempster, were still mildly profitable and increasing their tangible assets,albeit more slowly than they had in the past.Other examples throughout this book can be found of Buffett takingthe Graham-Dodd approach. And by Graham-Dodd I’m not just referringto the idea that you should always buy a stock when it trades at 2⁄3 bookvalue and then sell when it trades higher than book value. I also want toemphasize the idea that you should not make an investment unless there is aguaranteed margin of safety. In every instance, whether it is an arbitrage,a fixed income instrument, a stock, or even the purchase of someone’s lifeinsurance policy, Buffett always reaches for that extra element of safety. Healways asks the question, “What if my initial premise, the initial reason formaking this trade, is wrong?” He then asks, “And what if the next reason iswrong?” And so on.
CHAPTER 3
Equities
arren Buffett has repeatedly stated that when he buys shares ofa company, he thinks of himself as an “owner” of that businessrather than as someone who simply wants to flip those shares fora small profit (i.e., a trader). As stated in Chapter 1, there are many occasions where Buffett does take a rather short-term (less than forever) viewof a stock, and he occasionally takes short-term profits or losses. However,that does not diminish the deeper sentiment expressed in his statement thatyou should not buy a stock unless you can put yourself in the shoes of anowner of that business and be able to say, “This business is going to generate a return worthy of my investment.”The best example is that of the old-fashioned lemonade stand. Whenyou set up a lemonade stand you outlay some cash for the table, cups, thefirst batch of lemonade, and maybe the sign that you put up the street pointing people in your direction. Whether or not your initial outlay of cash wasa good investment is directly related to whether this lemonade stand is agood business. Several factors play a role:
W
• For each dollar you put into the business, will you expect to eventuallymake that dollar back plus additional money (the return on yourinvestment)?41
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TRADE LIKE WARREN BUFFETT
• Could you have taken the same money and had a better investmentelsewhere (either in setting up another business or simply putting themoney in a savings account)? A corollary to this is that a “better investment” can also mean an investment with a similar return but less risk.As simplistic as it sounds, this is how Warren Buffett evaluates all hisstock buying and selling decisions. He doesn’t do anything based on sophisticated technical analysis, volume indicators, chaos theory, or neural networks. However, the reason it is hard to get high stock market returns isthat for a somewhat complicated business, the predictability of what thebusiness is going to earn (and what other alternative investments are goingto earn) is very complicated.At this point most investors snap their fingers and say, “Aha! Let’sbreak out the dividend discount model.” A business should be valued on thebasis of its total cash flows from here to eternity, discounted by whateverthe risk-free rate is. Why the discount? Well, assume that your business canearn five percent a year forever and that I can get a five percent return, forever, from Treasury bills. Your business is essentially worthless, then, sinceas long as the U.S. government is here to stay, putting my money in T-billswill be a better choice for me than putting it in a risk-filled business.Example: My StoryMy own example of the dividend discount model coming into playoccurred in early 2000. I had started a wireless software companyand at the time “wireless” was a favorite buzzword among investors.Despite the fact that we had minimal revenues and were burningmoney at a fairly quick rate (we were, after all, a startup company), wewere already being wined and dined by every investment bank and analyst. On one occasion a group came in from a tier one investment bankto pitch us. The head of the group started off by saying that Mr. X (awell-known analyst now barred from the securities industry) wouldcover our stock despite the fact that we were a wireless software company and he was an e-commerce/consumer analyst. Then came the funpart: valuation.The junior member of the team broke out his dividend discountmodel. Apparently we were going to stop losing money within a year(thank God!) and then start growing earnings per share at a rate of25 percent a year compared with a risk-free rate of nine percent. That
Equities
43
miraculous growth (about as miraculous as miracle hair growth curesfrom carnivals of the 1920s) would continue for 10 years (why not?)and then slow down to a more terminal growth rate of 10 percent. It allsounded good, but the reality never quite matched the pretty picturethis analyst created (although fortunately the company still exists, ascompared with most of its peers).So the question is, if the intrinsic value of a business can be determinedby its future cash flows, then how can we improve the predictability ofthose cash flows? Note that if investors could truly predict cash flows, thenWarren Buffett would never have been able to achieve his above-averagemarket returns. The key is not only to find companies where the cash flowsare somewhat predictable but also to find companies where, for whateverreason, the market perceives those cash flows as being at-risk. The morerisk the market perceives in those cash flows (or the more unpredictablethose cash flows are), the higher return an investor must demand to compensate for that risk.For example, American Express in 1963 fell victim to the notoriousSalad Oil Scandal. Anthony DeAngelis, a New Jersey meatpacker whostarted a company called Allied Crude Vegetable Oil Refining, was sendingsupposed shipments of vegetable oil to a warehouse in Bayonne, New Jersey, which then issued receipts for the oil. With those receipts, DeAngeliswas able to obtain up to $175 million in financing (on the basis of $60 million worth of vegetable oil as collateral) and then use that money to speculate on vegetable oil futures. The whole thing fell apart (as these thingsusually do) when DeAngelis lost it all on his speculation and had to gobankrupt. The company that vouched for the warehouse receipts andallowed DeAngelis to obtain his financing was American Express.When American Express did an audit to collect their collateral, theyfound that instead of $60 million worth of vegetable oil there was only$6 million. The vegetable oil had been watered down to make it appear asif there were more. To their credit, American Express very quickly madegood on the hundreds of millions of dollars in potential liabilities, but thisalso created a very big black hole on their balance sheet, temporarily wiping out all shareholder equity.Shares in American Express fell from $60 to $35 over a two-monthperiod. Shareholders and speculators were both playing a momentum game(if it can fall $2 today, it will probably fall $2 tomorrow) and some had legit-
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TRADE LIKE WARREN BUFFETT
imate fears that American Express was going bankrupt. To some extent,these fears were not entirely irrational. If American Express managementwas lax enough to let this scandal happen, who knows what other problemsmight lie underneath?First, however, Buffett was comforted by management’s instant andhonest response to the losses, taking the hit, and indemnifying many of thethird-party victims to the scandal.Second, Buffett recognized that this scandal had nothing to do withAmerican Express’s core businesses—the traveler’s checks and creditcard businesses.Third, Buffett is always impressed by businesses where a large floatcan provide liquidity to the underlying operations of the business, as in, forinstance, the insurance business. The traveler’s checks business involvesconsumers paying cash up front to American Express; American Expresspays out that money at some future unspecified date. In the meantime,American Express can do whatever it wants with customers’ money. Thisidea of a float-based business is almost like getting a zero-interest loan.Eventually, American Express has to pay all the money back, but with nointerest charges attached. The cost of financing doesn’t get any better thanthis (at least until the 2003 SQUARZ bonds that Buffett himself put out—thefirst negative-interest bonds in history).Finally, Buffett wanted to see what the consumer perception was ofAmerican Express’s problems. He went out to Ross’s Steakhouse in Omaha,stood behind the cashier all evening, and watched as customer after customer used their American Express cards to pay for their meals. He wasable to conclude two things:1. The American Express brand was not affected at all by the scandal; in
fact, it was stronger than ever. This idea of brand strength was used byBuffett repeatedly (starting with this incident) over the next 40 years asa “gut” predictor of future earnings.2. It was clear that the merchants were not worried about being paid by
American Express. In other words, the Salad Oil Scandal was a onetime hit against earnings, but the underlying business was strong andgetting stronger.Buffett started accumulating shares at $35 apiece and sold thembetween two and four years later. Five years after the incident, American
Equities
45
Express shares were trading as high as $185 a share. Note that this was nota long-term buy-and-hold “forever” investment for Warren Buffett, eventhough it had many of the characteristics of his buy-and-hold investmentslater on: strong brand, predictable earnings, strong moat, and so on. But atthis point, the cash Buffett had to put to use, which consisted of the moneyin his hedge fund, was a lot smaller and allowed him to be more nimble.Taking advantage of this nimbleness in a way that he can no longer do dueto his enormous size allowed him to go in and out of trades as needed, taking profits and moving on to the next opportunity.What created the phenomenal trading opportunities (and excesses)of the dot-com era from 1997 to 2000 was directly related to the notion ofintrinsic value. Basically, people had no idea what these companies wouldmake. However, it was clear that the Internet was a revolution on par withthe printing press. Suddenly, the cost of commerce got much cheaper. People could shop from their homes, implying that the bricks-and-mortarapproach of setting up stores everywhere, and the costs inherent with thatkind of business, were not necessary for the winners in the Internet commerce gain. Additionally, the Internet also decreased the costs of communication as well as the costs of software development, since networkprotocols and interfaces were built into the underlying ideas of the Web.With all of the costs out of the picture and a potential customer base inthe billions, the earnings created would be phenomenal and so would thereturns—if it were possible to pick the winners.The idea that the Internet was a bubble is often implied by Buffett adherents but not necessarily by Buffett himself. He simply states that he had ahard time valuing these companies simply because he was not a computerexpert. He had no way of determining what the future cash flows of thesecompanies would be or which companies would be the winners. Nor doesBuffett take a “VC-style” approach to his investing. Buffett likes to make asfew bets as possible; with luck every bet pays off. A typical venture capitalistportfolio might have 20 investments, with 10 failures, eight break-even investments, and two home runs. What happened in the so-called Internet bubbleis that the public became venture capitalists instead of value investors. Manyof the companies did turn out to be worthless. But the basic idea was correct.There were enormous opportunities in the Internet space, as evidenced byeBay’s earnings just a few years after its inception (see Exhibit 3.1).Never have a company’s profits grown this quickly so soon after itsbirth. Does this mean that all of the Internet speculators were correct and
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EXHIBIT 3.1Year
19992000200120022003
eBay's Earnings over the Past 5 YearsEarnings (in millions)
$10.8$48.3$90.4$249.9$441.8
Buffett was wrong? Absolutely not. It is just a different approach. And theeBays of the world happen once in a lifetime; Buffett’s results, however,have stood the test of time over a 50-year period. I was always very surprised with all of the investors who consistently turned up their noses at theInternet and refused to even acknowledge that the potential was there.Even in the summer of 2003, Barron’s had a cover article suggesting thatperhaps Yahoo!, Amazon, and eBay were in another bubble; the magazinepicked the exact companies that would end up doubling their earningsgrowth yet again over the next year.That said, Buffett likes to keep it simple. He looks for earnings predictability with companies that might be distressed but whose quality ofbusiness still remains high. Why might investors (Mr. Market) be puttingmore risk on the future earnings flow than Buffett? Here are a few reasons:• Market risk. In recent years the market has become fearful that afuture terrorist attack might slow down the U.S. economy and put pressure on even predictable earnings streams. As detailed in Chapter 12,Buffett does not care so much for market or systemic risk, assumingthat there is no real event that can so drastically change the value of allsecurities in the market that he worry too much.• Fear of corruption. When the Enron scandal broke in late 2001, theshares of many energy companies, even the most conservative utilities,fell in sympathy despite the enormous predictability of those earnings.In Chapter 7, we will see how Buffett took advantage of this marketfear to place a private investment in a public utility.• Litigation risk. In the tobacco industry, the market and earnings havealways been predictable but the fear of mass class-action litigation hasoften kept the price lower than would be suggested by any measure ofintrinsic value.
Equities
47
• Setback in the business. When mad cow disease surfaced in England, shares of McDonald’s reacted, reaching multi-year lows. Investorshad to assess whether this would have a permanent effect on the business. If the answer was “no,” then the assumption would be that theshares would go back to where they were before the stock started tofall—about a 50 percent return. If the answer was “yes,” then one hadto assess how far the stock had yet to fall. If the stock had another 10percent to go, but you felt there was more than a 20 percent chancethat the market had already discounted enough the effects of mad cowdisease, then the buying was certainly worth it.The risks of investing go on and, in each specific case, are usually fairlystraightforward. When a market or stock starts to sell off there are usuallycountless news articles, Internet message board postings, and televisioncommentators documenting the rise and fall of once-proud companies. TheInternet has closed the information gap and has made it possible to quicklyassess the veracity of any story quickly. Similarly, very standard tools canbe used to examine the predictability of future cash flows.Note that we are talking about future cash flows and not necessarilyprice/earnings (P/E) ratios. In Chapter 11 I discuss the pros and cons oftrading based on P/E ratios, but this section necessitates a few commentsfirst. The P/E ratio refers to the price the stock is currently trading atdivided by its net income per share. For instance, if a stock trades at $20,has 30 million shares outstanding, and earned $30 million last year, then ittrades at a P/E ratio of $20 × $30 million divided by 30 million shares outstanding, or 20. Many people also look at the earnings yield, which is simply the P/E ratio upside down, or E/P. In the above example, the earningsyield would be five percent. The earnings yield is what the company couldpotentially pay out to shareholders if it did not reinvest its earnings in thebusiness. If the earnings yield of a given stock is much higher than Treasurybill interest rates (that is, if the P/E ratio is low), then many investors thinkthat the stock constitutes a good investment. We’ll look at this later inChapter 12.Note that the E in this equation might not be real earnings at all, but amodified definition of earnings, which might include various non-cashcharges such as depreciations, amortization of goodwill, and (should a company do this) options-related expenses. Also, for each company, the method
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for booking revenues varies significantly and is often an issue. The same canbe said for how expenses are booked. For example, can a marketing expensebe amortized, as Worldcom tried to do to the tune of billions of dollars? AOLwas notorious for doing this throughout the 1990s but it didn’t slow downthe rise in their stock price. Worldcom, however, almost instantly wentbankrupt when their accounting discrepancies were exposed.P/E ratios also do not tell you anything about the predictability offuture earnings, the quality of current earnings, or the fundamentals of thebusiness. Nor do we have any reason to believe that Warren Buffett looksat the P/E ratio. In fact, many