GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Bill Miller: Count me somewhere between bullish and very bullis; About Amazon

October 31, 2006

Warranted beliefs are more stable and more reliable than emotions. US economic fundamentals are solid and notable excesses are absent. Earnings growth continues apace, as does merger and acquisition activity, and record corporate buybacks. Managements continue to be disciplined in capital spending without being miserly. Balance sheets are strong. Interest rates and inflation remain subdued, and the recent pullback in oil prices removes a source of inflationary pressure. The Fed is vigilant but not hostile. Most importantly, valuations are not demanding and the US stock market remains undervalued in my opinion.

Since more things can happen than will happen, if we can identify where our expectations differ materially from those embedded in market prices, we can construct portfolios that we believe will earn higher risk-adjusted rates of return over time than could be earned by a passive investment program.

This involves always keeping in mind a basic business principle:only compete where you have a competitive advantage. WarrenBuffett refers to staying within your circle of competence. Social psychologists tell us, though, that we are prone to overconfidence when it comes to assessing our abilities, so even when we think we have an advantage, we may well be mistaken.

In markets, competitive advantages are three: informational, analytical, or behavioral. Informational advantage is when you know something material that someone else doesn’t. It is the easiest to exploit and the hardest to find. The securities regulators make it their business to see to that by mandating public release of all material information, by regulations like FD, andstiff penalties for acting on inside information.

Analytical advantages come from taking publicly available information and processing or weighting it differently from the others. The market appears to be pricing Amazon.com as though its current operating margins in the low single digits are a permanent feature of its business model, as they are of bookseller Barnes & Noble. We think that is wrong and that Amazon’s margins will soon begin a steady climb toward and perhaps into double digits. If our analysis is right, we stand to make an excess return from our holdings in Amazon.com.

Read the complete commentary


Rating: 3.0/5 (3 votes)

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide