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Subject:  Re: Investing Mistakes of 2005 Date:  12/9/2005  6:15 PM
Author:  lwitches Number:  661 of 1817

Not buying more Blue Nile when it dropped to $25-26 earlier in the year when rising diamond prices weighed on investor confidence. I didn't pick up on the fact that engagement ring buyers would spend the same, just select a smaller diamond.


p.s. I don't entirely agree Hewitt on the valuation now

Consider this: If Blue Nile grows 29% a year for the next 5 years (matching analysts' forecast), 15% a year during years 6-10, 5% during years 11-20, and then 3% during the terminal period, its real, or intrinsic value, is just $44. At a current price of $41-$42 a share, this leaves you little margin of safety in case of miscalculation or bard luck (Ben Graham's words.)

I think DCFs don't work too well in the case of rapidly growing small/mid-cap shares. Tom Gardner has pointed to a couple of reasons why ( on the MPX and QSII boards ):-

(1) These type of companies are investing in their future and hence current FCF is depressed due to currently high capex. FCF may grow faster than earnings in the future.

(2) Terminal rates of 3% may not be valid. The high growth period could be much longer. Clearly Blue Nile could grow faster now if they invested more in advertising, but they choose not to opting for long-term sustainable growth.
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