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Follow Up Thoughts On Interview Of Jerry Dodson, Founder Of The Parnassus Funds

Where Jerry and I differed in our opinion of a company, it was about value. My "rate of fundamental change" analysis extrapolates recent trends, in particular trailing twelve month trends. As he points out, in cyclical companies this can be dangerous. In fact, it can be dangerous in any company that is volatile up one quarter, and down the next or even up one year and down the next.

Years ago a client of mine offered this thought on the classic business mistake: "Expansion at the top of the cycle with borrowed money."

Basing one's analysis on trailing twelve month financial statement analysis (versus the prior twelve months) allows an investor to capitalize on emerging trends.

Basing one's analysis on average earnings, average price to book and average P/E ratio over the entire business cycle -- ten to fifteen years in most cases -- allows an investor to capitalize on cyclical swings in results and stock price.

The more predictable a company, the more stable, the higher its average return on capital, the lower its debt -- in all, the more significant its competitive advantage over competitors -- the greater the reliability of recent trends.

Studying Master Investor portfolios, I've noticed that ninety percent or more of positions are bets on improvement, on change. Today the company is X, and six months or a year from now it will be 2X.

Warren Buffett made a fortune betting on no or minimal change -- paying a reasonable price for quality. That's one of the key differences between his strategy and most investors, including Master Investors.