Monday, December 26, 2005

Be critical at your thoughts

At the 1999 annual meeting, Buffett also warned investors about the dangers of the richly valued tech sector, using some basic and irrefutable math:

"In the whole United States -- which is, by far, the most prosperous country in the world -- there are probably around 400 companies that are earning $200 million a year after taxes, and you could probably name 350 of them.

"Five years from now, instead of 400 being on that list, there'll probably be 450 on the list -- maybe 475. And a lot of those will be companies that are earning between $150 and $200 million today. So there'll probably be 20 -- or some number like 20 -- that come from nowhere.

"If you look at the number of companies selling today at a price which implies $200 million or more of earnings right now, you'll find dozens and dozens of such companies in the high-tech arena. A very large percentage of those companies aren't going to fulfill people's expectations. And I can't tell you which ones, but I know there won't be dozens and dozens and dozens of these companies making a couple of hundred million dollars a year. And I know they're selling at prices that require them to be making that much money or more. But it just doesn't happen that often.

"It's not that easy to make lots of money in a business in a capitalistic society. There are people that are looking at what you're doing every day and trying to figure out a way to do it better, underprice you, bring out a better product or whatever it may be.

"And a few companies make it. But here in the U.S., after all of these decades and decades and decades of wonderful economic development, we still only have about 400 companies that have hit the level that would be required of a company with a market cap of $3 billion. And yet some companies are getting $3 billion of market cap virtually the day they come out. You want to think about the math of all this."

So don't hesitate to say no if you are not 100% confident to say yes.


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