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No. of Recommendations: 5
But still I wonder if there aren't occasional situations -- BIDU is another one for me -- where, in a small corner of your portfolio, it isn't worth it to just close your eyes and deploy a small amount of capital you're willing to lose in pursuit of that game-changing multibagger.

There's no truly correct answer here. It's very much a question of personal philosophy. For me, I think value is paramount, even with great businesses, because we see reversion to the mean time and time again. I think it's even more important when investing outside of the US because in the context of MercadoLibre, for example, you have massive variables related to taxation and regulation.

Back to AMZN, I also think people need to be careful about saying what a great investment Amazon.com has been. It certainly has for some, but take a look at the chart:

http://finance.yahoo.com/echarts?s=AMZN#chart2:symbol=amzn;r...

Even if you bought it for $50 in 1998, your annualized return has been just 8%. If you bought it at the peak, it's been 10 years and you just broke even.

Of course, the price back then was insane whereas the price in 2005 or so was just ridiculous. And while the returns from insane have not been good, the returns from ridiculous have been just fine (about 15% annually). But what price is too high a price to pay for AMZN? It's hard to know. But at the end of the day, a stock is worth the present value of the cash it can deliver back to shareholders. In Amazon's case, the growth in the stock off and on has been driven by multiple expansion, but you can't spend multiple expansion when it's all said and done.

With a market cap still under $2 billion, I'd be interested to know if you can see this rationale, if not agree with it, when it comes to MELI.

MELI is no doubt a great business, and looking back, I think I got a little too cute with it. When I sold it, people were coping with massive losses and I knew a bad quarter was coming due to currency exposure. So I sold because there were better near-term opportunities elsewhere (and if you reallocated your proceeds into my next pick -- CMFO -- you've done quite well).

And for a little while, I was right. MELI reported bad earnings due to currency and the stock dropped from $30 all the way down to $18. At that point, I actually wrote up a re-recommendation for MELI. But before it could get published, the stock went back up to $28...and it hasn't looked back.

Of course, LatAm is very hot today because people think Brazil came through the economic crisis unscathed. But if you're going to pay 65x earnings for MELI today, you're paying a premium price to invest in what has historically been the world's most volatile region both politically and economically (I think it's averaged 1 coup per 4 years since 1900 or some such -- the exact data is the Fukuyama book Falling Behind).

Similarly, with Baidu, you have a great business, but do you want to pay 70x earnings for the leading company in a space (the Internet) that the PRC governmen is rapidly and harshly regulating?

That's too expensive for me given the risk v. the reward because at current prices I think Baidu offers just 12% or 13% annual returns (or less depending on your comeptition assumptions) v. a potential for total capital loss.

All told, it's tough to watch expensive stocks go up when you know they're great businesses, but these stocks are volatile, emerging markets are very volatile, and so I think patience is a virtue here in the end.

Tim
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