the market won't know what has hit them, page-19

OK - can feel another big spiel coming...

The difficulty with "valuations"

I have a theory that goes like this:

For long term investments, we need to take a more fluid/flexible approach to valuations.

After all the company that is ultimately going to give us the best long term return, is the one that can continue to INCREASE the valuations at the fastest rate.

The problem with valuations and the application in "value investing" per se, is that a simple snapshot valuation does not give us the true picture.

By a snapshot valuation, I mean "what is this worth now - DCF, EV, sum of parts etc."

Here is what I mean:

If you take company ABC and say work out that it is worth $1 a share on a sum of parts model, and the market is valuing it at 25c, you could assume that it is cheap. And you would be right.

But is it a good investment? Perhaps. What happens if the company had no immediate plans to develop or grow, so there was nothing in the future to suggest that it might grow above $1? Or that is would not grow fast enough.

What about company XYZ. This company is also $1 on a sum of parts valuation and the SP is sitting at 80c. So is it cheap? Perhaps it isn't.

But what if I was to tell you that they had a whole pipeline of growth plans clearly marked out for the future for which the brokers did not or could not fairly include in the $1 current valuation.

So you can see "valuation" is a subjective thing.

And if you want to make a long term investment you need a stock that is not just materially undervalued, but one that has the real ability to create "value" that can not be fully quantified yet.

I can see what you are both saying to be honest (Shareholder & Champ). I actually agree with you Champ in the sense that the fair valuation on any respected metric is circa 12c at this time, and as these type of stocks trade, the 6c mark at an 100% discount is normal for CCC and about right - you are correct.

But what Shareholder, myself and others are trying to express, is that there is massive potential value sitting here (because of the strong growth plans) that cannot be seen or calculated in (and rightly so).

So we are looking off, perhaps way off into the future. Perhaps we are dreaming, but if Shareholder is correct, the valuation of CCC could start to ramp up very fast as these individual projects come on line.

Incidentally, this model that I have presented here, since we were talking about Buffet yesterday, is a very simple picture of the two parts of his investing career.

Up until about the mid 1970's he invested in "deep value" investments that often had strong cash or asset backing. The Ben Graham influence was strong, and often these guys did not care about what the business did as long as it was cheap, really cheap.

And it worked very, very well for them, but of course as the fund grew, they could not jump in and out of business at a whim, so they had to buy with a longer term focus.

This is where Charlie Munger comes in. He thought Buffet was crazy thinking like this, and should look at the quality of the business they were purchasing. Buffet has said himself that he would not have got where he was without Munger.

Berkshire Hathaway made their last major net/net purchase in the 1970's

And he still says he is about "85% Ben Graham" buying cheaply - but it was now a development on the idea. Still purchase dirt cheap, but change the idea of what "cheap" really means.

In 1987 after the crash he made perhaps his most famous purchase of Coke. It think from memory it was trading at about P/E 13, and he had waited for years to get it "cheap". By any traditional analysis, a PE of 13 is not dirt cheap, but Buffet saw "value" in the name and branding that could not be seen on the balance sheet.

And they have done very nicely from that one, becuase Coke as a business has continued to expand and develop.

I am in no way trying to suggest CCC is anything remotely near or even in the same universe as Coke (except the C's in the name), but I think this is where the conflict of understanding and idea is here.

Some of us are assigning considerable future "value" to events that we hope CCC will be able to pull off in the future.

Perhaps we are right, perhaps we are crazy. I guess only time will tell.

But what I do know, is the best long term stocks are ones with a strong growth trajectory and the management to pull it off - plain and simple that one.