My fishing friends always tell me
that the best place to go fishing is where the fish are and “not where
they are not.” This statement has always made infinite sense to me…just as
one should go apple picking where apple trees grow or go golfing where
people play golf, namely, a golf course. Once again, this is all quite
logical and shouldn’t be open to debate. However, with regard to
successful investing quite the opposite is true. Let me explain.
In hunting for investment bargains
we attempt to uncover dirt-cheap stocks which many investors overlook. We
search for companies that have low price-earnings and cash flow multiples,
trade at a discount to book or net asset value and are generally not in
investors’ sights. Many of these common shares are small capitalization
companies that attract little analytical and stock broker attention. These
stocks lacking investment recognition tend to trade at significant
discounts to their intrinsic valuations and may languish for years. In
consequence, once discovered by an enterprising analyst the shares can
often be accumulated at bargain basement prices. Hopefully this happens
before the stock rockets upward upon general market recognition. Strange
as it may seem, unlike the fishing or golf analogy, astute investment
analysts will often hunt for stocks where no other investors have tread.
Upon discovery these analysts will salivate when they unearth an orphaned
public security that hasn’t had its tires kicked for many years…and
therein lies the opportunity.
Buying stocks that other investors
have not noticed, however, is not a foolproof formula to investment
success. Firstly, it involves a lot of tedious primary research which may
not be readily available. Secondly, moving against a herd of investors
involves considerable investment conviction, patience but, more
importantly, a strong stomach. Being an early investor does have its
negatives, too, since these investment decisions are frequently undertaken
without full investment analysis or with imperfect information.
Furthermore, these undervalued security selections may continue to
languish for months before they are commonly recognized by the
marketplace.
In summation, the aggressive analyst
must undertake considerable initial research to fully understand an
obscure, “fallen between the cracks little gem.” Overall, it should be
noted that the risk/rewards of such selections often provide for
remarkable investment returns for the patient investor who happens to go
fishing where others have not ventured.
Irwin A. Michael, CFA
