Value Library

The following is an excerpt from the ABC Perspective - January 2000 - Pg. 1

Discipline

We have discussed the subject of investment discipline a number of times over the past twelve months. It has been particularly relevant over the past six months when momentum stocks in the high tech, telecommunications and Internet sectors carried the market upward to new record levels. During this period these overvalued, high price to earnings and trendy concept shares soared in price at the mere hint of growth potential. Investors paid little attention to the fundamental attraction of individual stocks. In consequence fundamental value securities languished.

It was a very difficult period for disciplined value managers who obediently clung to their investment mandates. Expensive stocks became even more expensive whereas the listless value stocks became relatively cheap and virtual investment outcasts. Our opinion with regard to this state of investment affairs prompted my comments of last April, which I still believe are relevant today:

"I am astounded also because I am noticing companies with little or no sales, let alone earnings, which are trading at millions or billions of dollars of market capitalization. There is a dichotomy in the market between Internet, high-tech, large liquid companies versus small/mid capitalization out-of-favour value plays.

As a fundamental analyst one must refrain from joining the frenzied mania and instead hunt for cheap stocks. Sticking to one's discipline is key. Strangely enough there are still a number of cheap value stocks, which have not been discovered. In some cases we have scratched our head and wondered why they have not traded substantially higher. These value shares are the exact opposite or flip side of the vastly overvalued Internet stocks."

I believe investment discipline or obediently applying self-control to one's investment mandate is all-important. Although it might have been very disappointing and disconcerting to many investors who applied this regimentation while the high tech sector has surged upward, I believe this current state is a test of our convictions. This testing, I feel, is a healthy stimulus and excellent catalyst to reassess our investment values. The end result, I contend, will be a reaffirmation of the principles of value investing which have survived innumerable market cycles, fads and manias. I believe the current investment frustration is temporary and that tenaciously adhering to value disciplines will triumph in the end.

Irwin A. Michael, CFA