Posts Tagged Value Investing
To understand how to invest as a value investor, you need to know where the financial carrion is going to be. The best way to do that is to not only read the news, but use it to look for the sharp corrections, either in a sector, or in the economy as a whole. Remember that what we seek are big companies that can outlive their bad news. We’re also looking for tax dodges that far richer people have set up that they have to let the general public into to validate, like the limited partnership oil pipeline or the oil “trust” that pay out high dividends that are even better because they are often almost completely tax free.
Value vultures don’t panic. We watch other people panic and profit from making smart buys when fear or some new investment idea that the Wall Street sharks sell to the suckers drives money out of businesses with real value.
Everything starts with money. Politics is no less a slave to the almighty dollar. Understanding current trends then, in American politics, the largest Gross Domestic Product nation in a financial world where GDP is king, is a good idea.
Our company also publishes truth-2-Power.com which focuses a lot on the people with the money, and what they are doing to manipulate you, and the systems that manipulate you.
What is a current trend in politics worth watching? The Civil War in the GOP. The Libertarian far Right and the Neoconservative near Far Right are slugging it out. Neocons are defense and world power. Libertarians are 19th century capitalism seeking little or no government and placing people into government who act as monkey wrenches to grind the government into dust.
The net effect of all of this is that compromise, the lubricant that makes politics between progressive and regressive and stay-the-course political postures, has dried up. Without compromise, coordinated efforts to boost the economy break down.
How does that relate to your money?
The stimulus did indeed work, with apologies to conservative investors who spend too much recreational time watching Fox News. It took a long time because of the safeguards that are put in place to avoid rampant fraud. Good or bad, it takes years to get construction projects for roads, bridges, and schools in motion.
If you look around, there are all kinds of capital improvement projects on roads and airports and what-not that took three years to get the money into the full pipeline, but it’s there now.
That means that if you’re a concrete supplier, or a steel supplier, or you own a construction firm that does large projects, some of this cash is finally coming to fruition. It means more money for shipping companies that move all of the materials, from raw to finished goods, too.
It also means that if you’re a new home builder, you might be seeing a few new customers taking advantage of low interest and contracts that will keep people employed through the “downturn.”
You also will note, if you read the news, that everyone is conditioned by the media to talk about how bad the economy over the last few years was, yet the people on Wall Street and those who invested wisely in 2008 and did not panic made hundreds of millions of dollars on purveying that bad news.
Many businesses used the excuse of the Great Recession to fire workers who had been technologically obsolescent for years but who could not be fired unless the business was under imminent financial threat. Companies laid off thousands of workers who computers replaced, and downsized departments. Many CEOs got fat bonuses for pink slipping people as they made their businesses more efficient, and rode through 2008-2011 pocketing the profit.
In the short term, all of these companies took hits. In the long term, the bigger, healthier ones have come out even more healthy.
If you read the news you might see that construction starts are estimated to be up. Stocks like Cemex (CX), which we follow, easily one of the biggest cement producers in the world, have been getting their debt in line over the last few years after taking a drubbing for being too leveraged (having too much debt) and getting caught in a risky position during the downturn. They may start to pick up as more people buy cement for bridges, roads, schools and housing. You might make a small investment in CX at the right time if you thought that the countries in which they do business will see some improvement in their overall economies in the next five years.
Also remember, while reading your news, that you have to take the right view of the news that you’re reading. News is written for the minute, hour, day or week. You are investing in 5-7 year time windows.
How good is the dividend on a stock to buy your patience? How much upside is there to the bad news? Calamities like a Black Friday or the melt down of 2008 are the real deal. False fiscal cliffs might give something of a bump but less so, because too many of the “smart” guys on Wall Street know that it’s false and won’t tell their clients to head for the exits of their investments.
Likewise, be cautious about giddy news of disaster in places like Greece. The European Union is going through growing pains. What drove them to union and a single (sort of) currency was not preference but need: The U.S. would always kill them individually for GDP, and a rising China further marginalizes their smaller ability to grow GDP as a bunch of fractious states. The likelihood that the EU will dissolve completely is zero. Yet financial folks sell that fear to push people out of European stocks and into whatever they are peddling instead.
Look instead for the EU to have to figure out how to cede more “national” power to the larger EU authority. They are, kicking and screaming, becoming more like the United States because the formula works and, even with their centuries-old traditional power structures and traditions screaming about change, the money dictates the political reality.
So it is wise, when reading the news, to look at companies in Europe with the viewpoint that all of those people to feed, clothe, entertain, etc. all have a value that is not going to be destroyed completely, even by temporarily myopic politicians. We look then, at long-haul companies in necessary services like French Telecom (FT) that sell communication services to the now-depressed EU and whose stocks pay handsome dividends. People still need telephones, and crave the Internet, so telephone stocks are becoming like entertainment stocks.. Good places to weather leaner financial years and to profit when people have the money to spend to watch HuluPlus on their iPads.
We look at non-dividend paying bargains like insurer-bank Lloyds of London selling at pennies on the dollar. European banks will be punished for a long time, perhaps up to a decade, for their sins, but eventually, they will start to get fat and healthy again. Banks are the lynchpin of the economy. If they remain unprofitable, the rest of the economy suffers because they will extract their pound of flesh directly out of their borrowers. They also have the political capital in any country to throw their muscle into getting what they want done. The bigger ones, as we’ve seen, ARE really too big to fail. The government needs them.
So when we look at the news, the normal stink of the rotting corpses of businesses sitting under the bad news of the day that temporarily drive away other investors are really our big meal.
You could get builders like Toll Brothers (TOL) for $18/share or less in 2009. Today it sells for $33 on a recovering market. At the time you bought it, the news was full of doom and gloom for the builders. Life would be bad for a decade or more. So another facet of reading the news is learning how to shed off some hype.
Go back and look at historic trends for companies in the market sector, like home builders, that you’re looking at buying. There have been corrections and shocks before. Did it really take a decade for them to rebound? Not really. Usually about 3-5 years, which, as we know, is a perfect value window for making an investment.
Remember too that the key to value investing is in the purchase of stable companies with good cash flow that are suffering from temporary set-backs of their own making or the economy’s. Read the news with that in mind, and you will start to see your Value Vulture carrion much more clearly.