Value Library

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

Patience Revisited

I've written on this topic many times. In fact, I believe that investor patience, assuming a fundamentally sound security, is probably as important as the in-depth, fundamental analysis employed to select that security.

Value analysis today continues to be very frustrating as the market remains in "high tech momentum mode". Value stocks continue to languish. These stocks can be purchased at incredibly low multiples and at a discount to net asset/replacement values. I am astounded at the extraordinarily low valuations that the market is placing on value securities. In consequence, there is little wonder that many companies have recently initiated substantial share buybacks (International Forest Products, Canadian National Railway, Stelco, etc.) or are officially looking at ways to maximize shareholder value (MFP Financial, Maxx Petroleum, etc.). The two cheapest value sectors, in our opinion, are forestry and oil and gas.

But value stock performance is happening at a very slow pace in relation to the fast action of the high technology and momentum stocks. The resulting frustration and agony of low relative performance of value compared to growth/momentum portfolios is taking its toll amongst portfolio managers. Yet it seems to me that with the growing trend of mergers and acquisitions of non-performing value companies, substantial opportunities abound. Consider the recent takeover prices of previously out of favour value stocks. When takeover prices are set, the strike price is normally a very generous 25%-35% premium over the pre-announcement valuation. In consequence, the substantial frustration and agony are well worth the end result.

Equally frustrating is the "when to sell dilemma". The fact is that when value stocks are so out of favour and are trading at remarkably low valuations, the slightest uptick in price encourages one to sell. But quite often the sudden price improvement is but a mere tease as the stock evolves from a value play to a momentum play before soaring upward in price. The risk at that point is that one becomes impatient and sells too early.

Overall, "be patient" is easy for one to say. But to be a patient investor, in reality, is a very different story since investors are clamouring for instant gratification. Webster's Dictionary defines patience as:

"bearing pain or trials without complaint, showing self-control, calm, steadfast and persevering".

By definition patience is an extremely difficult yet all-important ingredient to investment success. Clearly the present market is severely testing our patience. I believe this is only temporary. The end result, in my opinion, far outweighs today's frustration.

Irwin A. Michael, CFA