CHRIS BURRELL ’ S BLOG
It was noted that Microsoft was and is a real company , but with $ 1 of earnings per share ( EPS ), it traded at $ 100 in 2000 being a valuation of 100 years of earnings . Burrell commentary at the time was that Microsoft did not need to lose money , simply that the rate of growth of earnings would become more realistic and the stock would correct . This occurred with Microsoft falling from $ 100 to $ 50 to $ 25 finally to $ 15- where it stayed for the next decade . In aggregate , the US market fell from its high in 2000 and the Australian market ( bottom blue line ), which had been rather the tortoise caught the hare in 2004 and went above it .
It is however , a mistake to look at particular pockets of over valuation and conclude that the whole market is overvalued . This is not the case either in Australia or in the USA . Burrell continue to view independent research , which shows a number of opportunities for stocks to provide a forecast return of 15 %, which is what the Burrell model looks for . Fortunately patience in selecting defensive stocks and stocks which have growth at realistic prices has fared well and delivered most satisfactory returns for the financial year to date .
Finally a note on timing . Under valuations and over valuations of listed securities can continue for a long time . This is particularly the case for markets . One only has to look at how long the 2000 tech bubble in the US held up before it finally corrected . It is more difficult to predict over valued markets than undervalued markets because of sentiment and momentum . Given low interest rates , the starting point is to hold existing positions where valuations are reasonable . However , where stocks are speculative with no earnings and trading on revenue multiples , then caution is required .
The Burrell approach is to deliver market returns without taking above market risks on average . A common mistake of self-directed investors is to believe they need to take high levels of risk in growth stocks in order to achieve market returns . Buying good companies at fair prices is much preferred to buying dogs that may recover or speculative growth companies where the growth may never be delivered .
Chris Burrell Managing Director
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