Value Library

The following is an excerpt from the ABC Perspective - January 2000 - Pg. 3

The Tortoise and the Hare

You know the story of the race between the tortoise and the hare. The overconfident hare fritters away his speed advantage while the disciplined and carefully plodding tortoise wins the battle. The moral was "sure and steady" always comes through in the end.

This Aesop's fable recently came to mind when I had an interesting chat with a loyal and long-standing ABC client, whose judgement I deeply respect. This client was lamenting the fact that he had not personally sold a few of his cyclical value stocks and instead purchased a selection of the fast-paced Internet and high-technology shares. He admitted that when he went to cocktail parties he often had to subject himself to the weighty bragadaccio of a number of his friends who boasted of the huge sums of money they were apparently making. Their success centered on investment flip-flopping around the innumerable Internet and high-technology stocks and initial public offerings.

My client shook his head. His cocktail buddies never discussed such things as company balance sheets, P/E and cash flow multiples and quite frankly, they did not really care. They kidded him about being far too conservative and not getting on with the times. They were, in my client's words, playing the stock market like they were betting the horses at the racetrack.

While my client might have regretted not having invested in these high-flying stocks, this did not take away from his excellent grasp of investment common sense and historical reality. He went on to explain how nervous he was about the current state of affairs and how similar the present investment environment was to the October 1987 crash when concept stocks were the rage. His present concerns related to the huge U.S. trade deficit; rising long-term interest rates; soaring stock prices in the high tech, telecommunications and Internet sectors which were defying all historical value standards; increased levels of stock purchases on margin; and growing euphoria by overly-exuberant, inexperienced investors.

As I reflected on my client's comments, I had to admit that I shared a number of his concerns. I did acknowledge, however, that the "new economy" of high technology was probably sustaining powerful worldwide economic growth. But the all-pervasive high tech and day-trading mania was further adding fuel to the massive, red-hot speculation. At the risk of sounding like sour grapes I, too, lamented the fact that very few investors were analyzing stocks in a disciplined and carefully plodding fashion. Far too many investors were throwing all caution to the wind in their quest for fast profits.

After our conversation ended I thought about what we had discussed. While there may be nothing wrong in this high tech mania and current investment environment, I did, however, have a nagging sense of déjà vu of the "Tortoise and the Hare". Although these fastbuck investors may be initially leading in the intense race for investment profits, I firmly believe that the tried and true value investing of the plodding tortoise will come to greater success in the end.

Irwin A. Michael, CFA