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"" In case you haven’t noticed, Microsoft has just been killing it, with its shares closing Thursday at a record $404.87, hovering around a $3 trillion market cap, and going back and forth with Apple as the most valuable company on the planet. MSFT stock has run the table, outperforming the S&P 500 index over the past one, three, five, and 10 years. If you had bought $5,000 of the stock at its IPO on March 13, 1986, it would be worth over $22 million today. (Damn!)""

HC , thanks for the link !!!! much apprecaited !!

One of my sons is a fairly recent college grad and a newbie software developer for Microsoft (been there 1.5 years). He gets stock grants and also participates in their ESOP, and MSFT stock makes up about 30% of his NW. I know the standard thinking is don’t own lots of stock in your employer, and while Berkshire isn’t my employer I’ve done well over the past few decades with a big majority of my NW in Berkshire.

His basis in the stock is around 250 I think, and while he’s happy about the huge gains he’s wondering if he should sell some. The stock is held in an after tax account.

I told him it’s easy to sell when things are high, but hard to jump back in IMO. Plus the capital gains tax problem. Instead of selling, I recommended he keep building up some cash so he can take advantage of any big dips in the price.

Thoughts? Is my bias leading him astray because I got lucky with Berkshire?

I told him it’s easy to sell when things are high, but hard to jump back in IMO. Plus the capital gains tax problem. Instead of selling, I recommended he keep building up some cash so he can take advantage of any big dips in the price.
Thoughts? Is my bias leading him astray because I got lucky with Berkshire?

It sounds like pretty good advice in general.

Sure, I think there is always a price at which it really does make sense to sell out completely. But if you don't have a firm handle on the true value of something, it's danged hard to know where that price is. See Mr Buffett's comments about not selling Coke during its bubble, and saying later that really he should have sold.

Face it, most of us don't have a firm handle on the value of most of the things we own. A corollary is that trading a lot less is a good idea.

Jim

Jim,

Thanks for the thoughts. I certainly never have a firm idea on Berkshire’s valuation, but I seem to be able to get a rough estimation at times, and you certainly help me with that.

My son mentioned to me that he likes buying Microsoft stock because he thinks he “kind of sort of” knows what’s going on with the company. But then he immediately followed that up with how he really has no idea, so at least he’s not too overconfident.

I did tell him that the more I trade and fiddle around with my portfolio, the worse I generally do, so your advice is very good.

My son mentioned to me that he likes buying Microsoft stock because he thinks he “kind of sort of” knows what’s going on with the company. But then he immediately followed that up with how he really has no idea, so at least he’s not too overconfident.

As it happens, Microsoft is a good company to look at to remind one of the difference between price and value.

People paid insane amounts for Microsoft shares in the tech bubble, expecting that the business would continue to do extremely well in the next 10+ years.

What happened?
The business did extremely well in the next 10+ years, exactly as expected. But the stock market returns were zip for AGES, as the overvaluation wore off. The consensus was that it was a trend-bound trading stock, as the price was in a narrow range for over a decade. But the first few years that range was overvaluation, then the same range represented fair value, then that same range represented cheapness.

I'm not sure if this link will work, but give it a try.
https://bigcharts.marketwatch.com/advchart/frames/...

With a couple of blip write-offs, the earnings per share rose steadily for 20 years. (then accelerated)
But the P/E fell from the 60-70 range at the start of the century to under 10 by 2011, so the stock price did nothing good for shareholders.

I bought a whole lot of Microsoft in 2012. Hundreds of long-dated $25 call options bought for $5.31 each. Ahh, good times.

So, possible moral of the story: know the company, sure, but price does matter at some point.

Jim

I posted some thoughts on the MSFT board

https://www.shrewdm.com/MB?pid=123656125

tecmo
...

People paid insane amounts for Microsoft shares in the tech bubble, expecting that the business would continue to do extremely well in the next 10+ years.

PS

This past observation was not intended to make any comment about the valuation of Microsoft at today's levels, or suggest that it was crazy now.
I haven't seriously tried to value Microsoft lately so I won't comment.

I was just illustrating that sometimes, at least at extremes, the current valuation level is very important and a motion to adjourn is called for, so an investor should watch out for that.

Jim

My son doesn’t have any control over the price right now, as the stock grants just come when they are scheduled. And the ESOP thing is on auto pilot. He does get a pretty good discount off the market price, but he’s definitely buying at a rich valuation right now.

Maybe he should stop the ESOP and put that to cash instead? I think he gets a 15% discount.

The Barron’s cover story is MSFT, for those with an interest.

My son doesn’t have any control over the price right now, as the stock grants just come when they are scheduled. And the ESOP thing is on auto pilot. He does get a pretty good discount off the market price, but he’s definitely buying at a rich valuation right now.

Maybe he should stop the ESOP and put that to cash instead? I think he gets a 15% discount.

Cardude, if your son would prefer to be compensated in cash than in MSFT shares at a 15% market discount, maybe we can arrange a trade!

Seriously, short of truly stratospheric multiples, I think the lesson of Microsoft under Satya Nadella is just roll with market sentiment. They are crushing it on all fronts. There are occasional lulls when they grow into their multiple, but they don't last long.

I bought a 2% position in 2016. They had revenues of $91 billion and net income of $20.5 billion that (fiscal) year. I sold 40% of it in 2021 because of, you know, valuation concerns. The sale returned 88% of the capital I invested originally. The stock is up 75% since then and is now my biggest position because thankfully I stopped messing with it. In the fiscal year that ended last summer, they had revenues of $212 billion and net income of $72 billion. They are currently building artificial intelligence into their massive, entrenched, enterprise software subscription businesses, with price hikes to match. What are the margins on AI assistants -- its various "co-pilots"? We have no idea. And won't, for a while.

The trailing P/E, which will change this week with the fiscal Q2 report, is 39. That certainly seems high for such a behemoth -- the most valuable public company in the U.S. at the moment -- but Q1 net income was up 27% year over year, the cloud business is No. 2 to AWS and growing faster, and AI revenue is just beginning. If it fell 15% from its current quote to $348, the discount available to your son, the trailing P/E would be 33.

If they meet analyst estimates for Q2 (year-over-year EPS growth of 26%) the P/E on shares discounted by 15% will be 32. Also, they generally beat estimates, so these numbers might be marginally better.

I get the valuation concern, but I also get the regret that comes with cutting and running too soon when you're lucky enough to own a great investment. Please tell your son an anonymous internet message board poster (totally reliable!) thinks he's very fortunate and should buy every discounted MSFT share on offer. Look at it this way: If he turns right around and sells them, the discount will cover most of his tax bill!

Ultimate,

Thanks for that thoughtful reply!

I got the numbers wrong, he gets a 10% discount and can contribute up to 15% of his salary.

Last time I talked to him he said he is going to keep buying it. Like you he is very bullish on the company, and not worried about overvaluation concerns.

I’ve made a few mistakes over the years. Bought a couple of dogs that went to zero. Would love to have that money back. However my biggest mistakes have been sell side. I sold out of Autozone after it tripled and missed a 60 bagger. If I put that in a coffee can I’d be retired and my Berkshire holdings would look like an after thought instead of being 20% of the portfolio. I bought into MSFT in the mid $20s and sold half when it started to run. Idiot. Every decision to sell Berkshire has also been a mistake.

My point is, buying a stinker and watching it go to zero hurts far less than watching a winner run after you were too smart by half. The dollar difference between those two mistakes isn’t even close.

The coffee can approach is genius.

My point is, buying a stinker and watching it go to zero hurts far less than watching a winner run after you were too smart by half. The dollar difference between those two mistakes isn’t even close.

The coffee can approach is genius.

I had a girlfriend who would buy a few thousand $s of every tech darling she ever heard of.

But she would never sell anything! I was sure she was smarter than me, so why would she do that. "You've got to get rid of these dogs" I would say.

She has owned NVIDIA for years. I dabbled in it years ago but didn't keep much.

Remebering also when I bought Apple in the 1980s and sold it when it went down a little. Yay me!

Yeah that coffee can is looking pretty good.

R:

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