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.