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TMFMycroft:

Here is the Rule Maker that I wrote today, it can be considered another one of the Fisher Lessons that I have posted here in the past


From that rule maker article:

One of the secrets to beating bear markets is to find managers who are like my father but who are instead running Rule Maker companies. One example that comes to mind is Jorma Ollila, CEO of Nokia (NYSE: NOK).

When did this become a secret? Well, of course if it is a secret how would I know? But then again "managers that are like your father but running rule maker companies" is such a vague definition that it fits almost any manager I can think of. Unfortunately, even if we find such a manager we have no clue as to whether her abilities are already overvalued in the market so that the stock will experience lousy returns.

Nokia and Cisco are part of a select group of global companies that have "EOS" -- economies of scale

Economies of scale, sure like Microsoft, Intel, Amazon.com, UPS, Goldman Sachs, and almost any global company I can think of. Unfortunately, even if we find a company that's a money machine it may already be priced such that investing in its stock generates bad performance.

Well, you have now discovered the power of EOS and understand that one should not concentrate on Wall Street but should notice what is happening on Main Street, i.e., in the real business world. This is a trick that few follow.

Are you saying that we are buying companies, not stocks? Stellar companies have stellar valuations and therefore may or may not generate stellar future returns.

Investors "kicking the tires" by doing their own research see that the picture on Main Street is quite clear. Cisco has more revenue and profits than most of its direct competitors combined.

Yes but Cisco is also awarded more market capitalization than most of its competitors combined. Therefore, whether the company will outperform in the future depends not at all on its current revenue and profit figures but future surprise improvements that you and I know little about today.

Nokia is making billions of dollars in profits off its handset division while its leading competitors

Yes and therefore Nokia is awarded a market cap that generously exceeds that of it leading competitors. You are not saying that Nokia and its competitors have the same market cap and therefore Nokia will outperform in the future are you? If you were I would agree, but then you've totally disconnected yourself from the real world.

So, Rule Makers like Nokia and Cisco will eventually benefit from the current hard times.

That may be true or it may not but you've presented no evidence suggesting so.

First of all, if the scenario that I have laid out is right, then maybe Wall Street is making a mistake in how it is pricing these stocks

That's a great hypothesis. Talking about Cisco and Nokia, two of greatest successes of our time and the market has mis-priced them! I submit that if you are right the market almost certainly has overvalued them.

Consider your results had you invested $1,000 every six months in Cisco for the last seven years. Below is a table of the prices you would have paid, all split-adjusted:

So what? You use as example a company that's been a great success with a minor recent setback that brings a small dent into a stock that has risen 10-20 times including the dent and claim that dollar cost averaging works! I promise you that any such company that you can retroactively identify will look great through dollar cost averaging. Unfortunately we are faced with a situation where we don't know the future. Dollar cost averaging into a stock that is overvalued in the market rarely brings market beating returns. In fact, dollar cost averaging into stocks that ex post are known as losers brings bad performance for sure. I don't know of any evidence that suggests that dollar cost averaging is a superior strategy ex ante. Of course, whenever you can invest more money in the stock market do so but don't consider this part of a strategy.

By dollar cost averaging into companies with superior management and EOS, you will win in the end.

This statement is totally unfounded. Even if you are able to identify superior management and EOS you could end up losing if the given stocks are overvalued. It's been a long time since I've read similar nonsense.

My view doesn't reflect badly on Nokia and Cisco, two companies that I've always admired, not even their prospects as investments, only your article.

Datasnooper.

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