Thursday, December 13, 2007

Value Investing - seldom popular, always prudent

The first PF books that I ever read advocated a form of value investing. For instance, Peter Lynch’s Beating the Street, and the Beardstown Ladies common-sense investment guide expounded on the importance of due diligence. Doing your homework to find undervalued stocks and then buying and holding until everyone else got wise and bid up the price to a more reasonable valuation. Sounds easy. And if you have patience and courage, it is easy. It takes courage to buy a stock that no one else wants. It takes patience to wait for the market to figure out that stock XYZ is undervalued. Since I was new to investing, I thought this was the way everyone did it. LOL.

First Stock Purchase
I followed the advice and did my research. I had some brands that I liked and that I thought had some potential. From there I actually went to the library and checked out the Value Line. The Value Line’s Investment Survey provides an analysis of the company’s annual report giving an assessment of a company’s health and future prospects. Value line provided all of the ratios and financial data that I needed. I looked for such things as industry ranking, debt to asset ratio, price to earnings, management quality, etc. Finally, I had narrowed my stocks down to one – Apple computer. Apple was not in favor in the early 90’s, in fact, it was in distress. The perfect value play. I bought shares and held.

Value in Index Funds
I also looked for value plays in Mutual funds. I wanted low cost, broad based market funds. Since, I abhor fees and “no value added” expenses, I bought Index funds. My first selection was Vanguard’s S&P 500 Index followed by a couple more Small Cap Indexes and a Real Estate Investment Trust index.

The Dot Com Disaster
It was truly amazing. I got pulled in to fast and easy money. Why do all that work (due diligence) and then wait and wait? Instead, buy on momentum, jump on a stock when it's on it's way up, technical analysis is the mantra now. Yes, I made money, lots of money. Those were heady times – everybody was getting great returns – we had become stock picking genius’s and Warren Buffet and value investing was washed up. I was drawn into the crowd that kept saying that this was the “new economy”. All of that previous stock market history was meaningless. The favorite topic at the water cooler was the next hot stock………. And then I gave back a lot of money. For some reason, I am not sure, maybe it was sentimental, or just simple inertia, but I still held my Apple stock. My value play kept on.

Full Circle
The pain still lingers. That’s a good thing. I don’t want to ever forget the lessons from the dot com era. I cleaned out my stock portfolio. I sold off losers to offset capital gains from my Index funds. Then started reading value investment guides again, like The Intelligent Investor and Bogle on Mutual Funds. I have come back, full circle to value investing. I was fortunate, I only dabbled in dot com madness while maintaining my core index funds and of course my favorite value play: Apple. I am aware of a few co-workers and friends that poured everything they had into the skyrocketing market. And when it dropped, many assumed it was just a dip and used options to buy even more with borrowed money. That is a very painful lesson.

It will happen again and again
Don’t be fooled. After the 2000-2002 market dive, most of us were fearful of the market. We didn’t trust it with new investment dollars. So instead of buying into the market when it was cheaper, the crowd looked for a “new” type of investment. And the housing market took off…

No comments:

Post a Comment