Archive for September, 2010
Anyone Can Value Invest: You Already Know How
Posted by Brian Ross in Value Investing 101 on September 8, 2010
“Average” people shy away from the stock market. It’s got lots of scary buzzwords. It’s too technical. Many who “tried their hand” at it tell me that they got burned when the market lost a lot of its value a couple of years ago.
Yet there were people like me out there who were busily buying when these folks were panic selling.
Everyone has the potential to value invest. Most of you already value shop. The two are not really very different.
If it’s explained in English that you “get,” the world of value investing opens up the door to making a lot of money, without having to lose so much sleep at night.
It also lets you bypass a lot of those Wall Street types who want to make it hard, complex. After all, they make their living preying upon, er, serving, you.
Our “sweater on sale” analogy is pretty much the core of value investing.
You look for the best deal on the stocks, bonds, and mutual funds that buy. You buy stocks in great companies that are either under some temporary bad mojo, or that are just being dragged downward temporarily by larger events in the economy, ranging from sector panics, like mad cow disease and anything in the beef industry, to 9/11 attacks to the big market melt-down of a couple of years ago.
In this regard, other people’s bad news is your good news.
When Mad Cow hit the world, it never touched MacDonalds, but their stock was slammed nonetheless. It went down more than 50% in the matter of a few months, and took nearly two years to recover. If you bought it at the low, though, or even on the way down you made anywhere from 20% to 100% profit on having the patience to hold on to it while the lemmings (our friends who market time and day trade) thought that it smelled like rotting fish.
Understand that we invest. We do not speculate. Speculation, the moving of things other than stocks, which are an equity ownership stake in the company, and bonds, which are buying a chunk of the company’s debt to be repaid with interest, is nothing more than gambling.
It may be fun. It may produce some great results in short runs, but it is unstable, and unpredictable, and leaves you vulnerable to much bigger fish.
We have the comfort of knowing that some of the best companies get hit with lousy news or bad days, but that they will endure and succeed. It is the companies that display leadership, tenacity, and good execution during their days of trouble, real or imagined by the stock market, that we’re looking to find.
Investing is like a big, wobbly ship. Every day it wobbles from side to side, mostly as the lemmings go running from one great deal to the next. The trick is to be buying on the other side of the ship, and either hold something of great value that was dirt cheap when it was dumped that recovers, or sell it as it overheats to the lemmings who move in and out of the stock as their computer programs and stock gurus tell them to do so.
Before you’re ready to invest, you need to understand the basics of value investing so you will be able to understand what a bargain sweater, or that two-for-one deal actually looks like.
That will be the subject of my next article.