What is a Value Investor?

I was just on CNNfn.com and I came across an article by Scott Fearon, CFA.  He is discussing what we can learn about investing by looking at the death of pay-phones (http://cfainstitute.tumblr.com/post/111879028236/what-investors-can-learn-from-the-death-of-the-pay). His point, in a nutshell, is that back in the last 1990s, he received “Buy” recommendations from analysts about inexpensive pay phone companies but they were inexpensive because they were a dying company. Now those are penny stocks, if they even exist. He said the value investor who cares about those metrics miss the forest for the trees…hmmm.

I don’t disagree, much, on that point about why pay phone companies were a bad buy in the last 1990s.  However, I would make two points.  1.) Most EVERY company that wasn’t a high tech high flying company was ignored in the late 1990s and had lower valuations.  Unlike today’s market, small and midcap companies were actually reasonably priced even during that late 1990s boom because the overvaluation was centered on high tech highly valued companies.  2.) He has no idea what a true value investor does.

Scott goes on to point out that value investors need to care about growth.  Uhhh.  We do.  That’s what he is missing.  A true value investor isn’t just looking for a “cheap” stock.  They are looking for an ignored stock or company, for whatever reason. Last year when I was buying Microsoft like crazy in the $25 range, everyone was telling me how stupid it was because Microsoft was dying…yet when I looked at their yearly revenue and profit numbers, every single year they were growing.  So here was a GROWING company who everyone was ignoring because they weren’t sexy anymore and therefore was selling at 8-9 times earnings. THAT is value investing.  I didn’t buy Radio Shack when it was dying.  I didn’t buy his example of JC Penney because it was dying and a true value investor isn’t looking for dying businesses.  They are looking for OVERLOOKED businesses.

Ironically, we see an article like this during a major bull market and at a time when valuations are through the roof.  I get it.  It’s easy to dismiss value investing when things are going gang busters.  Ironically, the best investors of all time tend to be value investors and they tend to do best when markets are dull and down.  That’s when they get the best deals.  When the markets are so far down that people don’t even want to buy the good companies at good prices, that’s what a value investor is looking for. Not the dying companies when markets are going great.

Patience Is A Virtue I Normally Do Not Possess

2014 finished in a way that was quite disappointing.  In terms of the stock market, I have missed out on the majority of the gains in the S&P 500 since it was at 1500 or so and I have even bet against Amazon and the entire market along the way.  Clearly I have missed the mark.

I was just scanning Yahoo Finance and came across an article where Bill Ackman is announcing that he is in the money on his short of Herbalife.  If you are not familiar with the story, please take some time and look into it.  Ackman shorted the company by calling it a “Ponzi Scheme” as many reputable investors (Carl Icahn and George Soros) praised the company and bought shares in it.  The stock climbed from the $30 range all the way up to $82 per share, and I believe he had lost about $1Billion at that point.

But he kept insisting he was right.  EVERYONE said he was wrong.  He said “Nope, i’m right. You’re wrong.” Now, granted, the stock isn’t done yet. It could bounce right back up but right now, he is not only making money but he also feels vindication I am sure.

I’ve been shorting Amazon (AMZN) for over 2 years now and have been “wrong” because the stock is above my original short price.  I’ve shorted the entire market as well and so far, I’ve been wrong.  But there are bright spots.  Amazon went from a high of $408 and now it’s sitting under $290.  Not quite the darling it was just a year ago.  The stock market, overall, has had many jumps and falls over the past six months which are typical during the topping process.

I hope, and I’m confident, that I will end up being right, but patience, my most lacking virtue, is what I need to stick with and what most investors have a problem with.  We need patience.  In my other businesses, I want things done yesterday, but with investments, you have to give the time to let things pan out if your analysis is correct.  Even then, you will be wrong sometimes.

Everyone forgets the tough times during the good times and the good times during the tough times. That’s why sound financial analysis is important at all times.  Be patient for the opportunistic times because that is when true wealth is built.

Antoine Walker Went Broke – And He Blames Investing

Antoine Walker is well known for making $110MM playing basketball in the NBA and recently filing for bankruptcy.  Flat broke. Doesn’t even own a car in his name.  He has come out and been open about what happened and what he went through, which I very much respect and love to hear…but a bit of me has lost some respect for that story.

What I am about to say DOES involve some assumptions, but I want everyone to focus more on what my overall message is about what happened to him.

If you read this article and the video in it (http://finance.yahoo.com/news/former-nba-star-antoine-walker–life-after-losing–110-million-214644672.html), he talks about his spending but during it, he also says that what really made him go broke was “bad real estate investments.”  But look at the other things that were said about his spending.  Multimillion dollar homes for his family members. Not one family member..but many. Flying around in private jets with 9 or 1o of his friends.  Losing millions in gambling at casinos.  Buying four or five cars for each house he was at.  Yes, real estate was probably the final nail in the coffin, but he was on the path to going broke LONG before that.  And then he blamed the real estate bubble that so many didn’t see.  I get it.  We don’t always see those things, but not because we don’t see them…we aren’t looking for them.  I won’t even get into that right now…

My point is, he spent like crazy and made some bad investments.  Even if his investments did well, was it likely that his spending would have been able to keep up? I don’t know but I seriously doubt it.  He made $110MM, but after taxes and agent fees, that’s $55MM.  He owned four or five multimillion dollar homes, so that takes about $20MM out of that number.  And when you lose millions gambling and then how much more does it cost to fly private jets and take 9 or 10 of your buddies on every vacation you go on as well as buying expensive gifts for all of them…you can do the math.

Bad investments can always cause a lot of problems. I would never minimize that fact. But to say it was what is what he really did wrong? I think that’s denial and try to run away from the all too common problem that athletes have…they just spend too much money.