Patience and More Patience

This market requires patience and more patience. Identify high quality companies you want to own, determine at what price and wait. That is what I’ve been doing. Also, since profit margins are hitting all time high, the “E” in the P/E equation is very deceiving. Earnings in many cases have been tremendously overly stretched to the upside: They’ll need to be un-stretched (i.e. normalized).

For instance, if you look at Moody’s (MCO), the stock, it may appear cheap, about 15 times 2007 earnings. Not bad for a legal duopoly. But MCO’s earnings are up tremendously since 2004. I’d argue that earnings since 2004 were bubbled by the housing-derivatives-easy-credit bubble. Thus when valuing MCO I’d put little faith in 2007-2008 numbers and go back to more normal times with 2004 EPS of 1.50 (as opposed to $2.50 MCO earned in 2007).

I’d gladly pay 14-15 times earnings for this still incredible business, thus Moody’s will go on my “Stocks I’d Love to Own” list at $21-22. Yes, stock has to decline 40% for me to become interested. Am I too conservative? Will I miss buying a great company? Possibly, but there are plenty of other great companies where this one came from.

Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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