MSFT

[leftcoast]

What was the catalyst for the 2000 tech crash, what caused the run for the doors?

 

IIRC, the catalyst was actually the outcome of Microsoft's antitrust case. The bubble burst coincided with a federal court decision that MSFT a monopoly.

 

I don't think that piece of trivia is particularly useful in predicting the future, though. Don't they say "value is its own catalyst"? I think the same goes for overvaluation.

 

I remember that day well.  The valuations unraveled quickly after Judge Penfield Jackson ruled to break up the company.

 

I remember it disctinctly because I had just flown out to Silicon Valley for a job interview the first week of April 2000. The newspapers headlines there all screamed "BLACK FRIDAY!" in font that looked like war had just been declared.

 

On my flight back to Montreal, the guy next to me tried to recruit me into his new dot.com startup. He offered me a job before he even knew my name. I told him I was actually a mechanical engineer and that I didn't know any Java. He said "That's okay, none of my engineers know how to program. Do you want to get rich or not?"

 

I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

[ERICOPOLY]

I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

 

I had 7/8 of my paper net worth evaporate (employee options).  It was over a half million in losses... I was 28.

 

 

[20ppy]

The verdict on MSFT's case was probably impacting some immediate areas of the tech stocks and market in general, but it was not broad enough to cause the whole market to go down in my opinion. I was impacted by it myself, but I didn't think it would cause the collapse of the Nasdaq issues as the ensuing events did. People knew that the Clinton Administration was biased again companies like MSFT and the appellate court may still give different results. Had it not been the other broader impacting events, the market would have recovered from the verdict on MSFT and continues the upwards trend. Many tech investors at the time didn't know enough about the MSFT case and they didn't care, anything Internet related would make people rich was the belief.

[Myth465]

I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

 

I had 7/8 of my paper net worth evaporate (employee options).  It was over a half million in losses... I was 28.

 

 

 

I thought I had a few bad days. Damn havent been there yet. Did it change the way you look at losses, gains, and investing. Thats nuts, not sure what I would do.

 

I was wondering why you had the Judges name on recall.

[leftcoast]

I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

 

I had 7/8 of my paper net worth evaporate (employee options).  It was over a half million in losses... I was 28.

 

 

 

Ouch. My first roommate in Santa Clara was an 18-year-old kid from Arkansas who dropped out of high school and moved to the Bay Area to be an IT admin for one of the recently IPO'd companies. When we met he told me nonchalantly that his options were worth almost $2 million. They were worthless a few months later.

 

Fast forward 12 years and here I am now working at Microsoft, a darling of value investors... and waiting for Vancouver's real estate bubble to implode just as spectacularly as the dot-com bubble did.

 

[ERICOPOLY]

I got the job (the one I actually interviewed for) and moved to California for ringside seats at the train wreck that had just started. The next 2 years were like watching the Hindenburg go down in slow motion.

 

I had 7/8 of my paper net worth evaporate (employee options).  It was over a half million in losses... I was 28.

 

 

 

I thought I had a few bad days. Damn havent been there yet. Did it change the way you look at losses, gains, and investing. Thats nuts, not sure what I would do.

 

I was wondering why you had the Judges name on recall.

 

Sure, I jumped right into real estate like everyone else.  That's where I got the bulk of the money for the FFH calls in 2006 (I tapped home equity and used proceeds from selling a rental).

 

This was my line of reasoning:  Seattle's high jobless rate after the tech bust kept a lid on real estate despite the low interest rates that were driving prices up all over the country.  I speculated that the price increases would spread to Seattle once the job market recovered, and that's what happened.  The lenders liked my income -- leverage was cheap and plentiful.

 

Around 2003/2004 I read a little bit about Warren Buffett and he mentioned The Intelligent Investor.  So I read that one and soon found Fairfax, I liked how in the early letters Prem described the company investment philosophy as based on Ben Graham, so I bought some shares.  Then I went looking for more info and found the MSN Berkshire Board.  There I learned much more about Fairfax.  Meanwhile I started chatting at work with a guy named Yu, and he soon joined the MSN Board and started discussing the call options.  He got me interested in the call options (explained to me how they worked).  So soon we were both loaded up to the hilt and we were both able to leave our jobs after that.

 

And of course as soon as I left my job the financial crisis hit with full force.  So it's like I can't catch a break from volatility.  I have financial PTSD.

[Myth465]

Lol interesting story. Ya this is getting old, I cant wait for a calm 8% return year in the market primary based on earnings growth.....

[Liberty]

Gannon on MSFT:

 

http://www.gurufocus.com/news/134180/should-you-buy-microsoft

[Parsad]

Very good blog response!  I think it was very balanced.  I think they paid fair value for Skype, but I like the acquisition. 

 

The thing that changed my mind altogether on buying MSFT was the deal with Nokia.  I think that is big!  It will strengthen the moat by allowing Windows Mobile to become more prevalent.  It was what justified my belief in the company being around for another 10 years.  With so much free cash flow, a rock-solid balance sheet, and the probability that I will recover all of my capital at a minimum in 10 years, I thought it was a worthy play using LEAPS. 

 

If it goes significantly cheaper, then we will move in and buy equity.  Regardless, it is probably the largest LEAP position we've ever taken!  Cheers! 

[goldfinger]

Very good blog response!  I think it was very balanced.  I think they paid fair value for Skype, but I like the acquisition. 

 

The thing that changed my mind altogether on buying MSFT was the deal with Nokia.  I think that is big!  It will strengthen the moat by allowing Windows Mobile to become more prevalent.  It was what justified my belief in the company being around for another 10 years.  With so much free cash flow, a rock-solid balance sheet, and the probability that I will recover all of my capital at a minimum in 10 years, I thought it was a worthy play using LEAPS. 

 

If it goes significantly cheaper, then we will move in and buy equity.  Regardless, it is probably the largest LEAP position we've ever taken!  Cheers! 

 

Totally. I think the strategy behind Yahoo+Facebook+Bing can allow MSFT to gain traction online too (most users I know go to Yahoo + Facebook, all they need is an integrated search engine and be told to use it). And they signed lots of big federal and institutional contracts with their cloud technology too. Noticeable that the city of San Francisco signed (at the door of the Silicon Valley).

 

[goldfinger]

Also around me I am seeing everybody buying the XBox360 with Kinect even though they already own a PS3 or a Wii. Imagine the convergence capabilities with all those technologies.

[Valuebo]

Very good blog response!  I think it was very balanced.  

 

It wasn't bad but I have a few remarks.

 

- He doesn't review Servers & Tools at all (hey its $0,50+ in earnings/share) but he really likes the low margin business in xbox.  ???

- He "hates" the search business, which is showing great growth lately and can over time grow into the (smaller, possibly 1/3th of google?) second big player of the market. (imo)

- He focuses on himself as a consumer but for MSFT businesses are the key (for ex., 90% of Office revenue comes from businesses, mainly volume licensing agreements) and their moat in that area is much stronger because of the stronger "network effect" and high switching costs to alternatives.

 

 

But he had a dead on analysis on the "4% of MSFT's market cap acquisition of Skype" as a defence and opportunity because of integration options, the low marginal costs that make MSFT the extraordinary profitable business that it is, ... .

[ERICOPOLY]

Also around me I am seeing everybody buying the XBox360 with Kinect even though they already own a PS3 or a Wii. Imagine the convergence capabilities with all those technologies.

 

They are literally giving away XBox360 consoles now to students (gift with purchase of PC).

[collegeinvestor]

I don't like the option trade.

People that are buying the leaps might end up making a lot of money in the future but why not just buy the stock if you think it's a good buy? Also the people that post on here are way smarter than me so I might be wrong but here is my analysis (very simple):

The stock hasn't moved in 13 years what makes you think NOW all of a sudden the stock is going to move 2x and you will make a quick and easy fortune on your leveraged time-based "investment"? Seems odd....

[goldfinger]

I don't like the option trade.

People that are buying the leaps might end up making a lot of money in the future but why not just buy the stock if you think it's a good buy? Also the people that post on here are way smarter than me so I might be wrong but here is my analysis (very simple):

The stock hasn't moved in 13 years what makes you think NOW all of a sudden the stock is going to move 2x and you will make a quick and easy fortune on your leveraged time-based "investment"? Seems odd....

Look at earnings they may get now close to 2.50$/2.70$ for the year. The PE is going to look rather small for a company with growth in earnings, an aggressive pipeline of new products and 45B$ in cash or so. It will get even more so that they are buying back stocks like nuts (10.8B$ in the last 3 quarters). You would get to PEs of in between 9 and 7 or so end of year depending on how you account for the cash. That looks rather like depression valuations now for this company and if they show that they'll be around for a while longer (which the pipeline seems to indicate) then I believe the market will correct this inefficiency rather quickly. The stock went to 32$ last year and corrected again. But that's not uncommon. Look at Gillette's stock price when Buffett bought it for example.

I could not see that kind of articles in the last few months: http://money.msn.com/stock-broker-guided/latest.aspx?post=622d65f2-1b5b-4305-a9b7-a3ef70115fa9 too. That may be telling us something.

 

[onyx1]

Based on this metric, MSFT is at Spring of 2009 levels!  Enjoy.

 

(See attched .ppt slides)

[ERICOPOLY]

I don't like the option trade.

People that are buying the leaps might end up making a lot of money in the future but why not just buy the stock if you think it's a good buy?

 

The options do have more downside protection (if that matters for anything with the stock at this level).

[Santayana]

How do the options provide more downside protection?

[ERICOPOLY]

How do the options provide more downside protection?

 

The same argument as goes for puts.  Calls just have an embedded put.

 

One can use puts for leveraging a short position, and that's risky, or one can use them for hedging a long position, and that's not risky.

 

Right now the embedded puts in calls are really cheap.  I suppose a foreign investor may want to keep their money in the bank earning 6% interest rates, and not take on USD risk.  I think if you were Australian and had $20 per share cash in the bank, you could sleep better holding the $20 calls knowing that USD erosion won't erase your returns.  Meanwhile your 6+% yield on that cash will be safe and earning back what the embedded put cost you.  You miss out on the dividend in the event of the stock going up -- nothing is free but that makes for a fairly cheap hedge against market panic and currency risk.  On the other hand, if the stock goes down early in the life of that option the value of that embedded put rises.

[Myth465]

I don't like the option trade.

People that are buying the leaps might end up making a lot of money in the future but why not just buy the stock if you think it's a good buy? Also the people that post on here are way smarter than me so I might be wrong but here is my analysis (very simple):

The stock hasn't moved in 13 years what makes you think NOW all of a sudden the stock is going to move 2x and you will make a quick and easy fortune on your leveraged time-based "investment"? Seems odd....

 

With options the stock only has to move a bit over the next 1.5 years, and 2.5 years if you wait for the 2014s. The stock would have to move up a good 15% - 30% for a shareholder to win. An option holder wins big on a 15% - 20% move. The calls have very little premium in them because the stock hasnt moved in 13 years. It hasnt moved because it was overpriced. They have grown through that and are now ready to run. It lacks a catalyst, but you can roll over a 3% option position pretty easily....

[biaggio]

I am also trying to learn re use of options.

 

If we use MSFT options as an example:

 

Jan 2013 call option at strike price of $25 selling for $2.60

For $2.60 you have the right to buy MSFT for $25 in Jan 2013.

Current price of MSFT:$24.19

To me it looks like you win if the the common sells for greater than $25 + $2.60 or $27.60 (which is an appreciation of ~14% for the common over the next 18 mo.)

OR

Is the idea that the option will move more before the expiration as the price of the common approaches or exceeds $25, with the option of selling the option in 12 months (or some other time before expiration) and buying the options expiring in 2014 (ie. rolling over the option) or just selling for cash , say for instance if all of a suddenly it pops to $35 for an example. Then the option will likely be worth at least $10 ($35-25) which is almost 400% appreciation of the option vs a 36% move in the common.

 

Downside is that if you  hold option til expiry then if not at $25 then you lose  all your  capital, but if you roll it over  then you can buy yourself more time for   MSFT to appreciate?

 

Any enlightenment would be appreciated.

[turar]

I think it's both, you have both options. Also, in the money 2013 calls with strikes like $15 are selling for $9.50; i.e. 15+9.5 = 24.5, with current price at 24.2. Or 12.5 + 11.8 = 24.3, vs 24.2. That way you don't have to worry about expiring options.

 

Eric, what do you mean by "One can use puts for leveraging a short position, and that's risky"? Are you just talking about risk of the premium for a put?

[ERICOPOLY]

Eric, what do you mean by "One can use puts for leveraging a short position, and that's risky"? Are you just talking about risk of the premium for a put?

 

Yes, simply because I said the word "leverage".  People automatically assume options are used for leverage, but often not.

 

You might simply have a position that's grown too large after a run-up but you don't want to pay taxes the entire gain.  So you buy puts on it and write puts on something else.

 

You're both writing and buying puts, but did you increase your risk?  You have diversified your downside, but you still have the concentrated upside where perhaps you have more conviction.

 

[Liberty]

Microsoft has received five times more income from Android than from Windows Phone

 

http://www.asymco.com/2011/05/27/microsoft-has-received-five-times-more-income-from-android-than-from-windows-phone/

 

A rough estimate of the number of HTC Android devices shipped is 30 million. If HTC paid $5 per unit to Microsoft, that adds up to $150 million Android revenues for Microsoft.

 

Microsoft has admitted selling 2 million Windows Phone licenses (though not devices.) Estimating that the license fee is $15/WP phone, that makes Windows Phone revenues to date $30 million.

 

So Microsoft has received five times more income from Android than from Windows Phone.

[sswan11]

Anybody seen this series?

 

http://moneymorning.com/2011/05/23/where-money-goes-die-after-decade-decline-can-microsoft-intel-and-cisco-pull-off-rebound/