Value Library

The following is an excerpt from the ABC Perspective - July 2008 - Pg. 1

Tenacity

I have always had the greatest respect for men and women of great discipline who stand up for what they truly believe in.  These individuals possess particular objectives, have a certain clarity of their views and stick to their plan without vacillating.  In more instances than not they are very successful in business, investing and in their family life.  There are times, however, when even these disciplined people are severely tested as to their convictions and stamina.  Those who are tenacious and are not rattled tend to be exceedingly successful in the long run.

Tenacity, discipline and patience have always been three very important investment tenets of our ABC investment style.  Moreover, our Ten Commandments of Deep-Value Investing, our monthly Lunch & Learn sessions and our two web sites are all direct products of our business model.  This model of tenacity, discipline and patience has served us well in the past and will continue to provide us with investment success in the future.  But there are times when no matter how good one’s tenacity may be, nothing appears to be clicking.  This is what is transpiring in the value investing arena today.  Dirt-cheap stocks which we purchased are trading at half the valuations of their previous multiples.  How do we explain this?  We can’t.  Instead, the market is focused on growth and momentum.  In consequence many prominent value investors, including our ABC Funds, have been punished the past year by the lack of value interest.

Interestingly, it is with a sense of déjà vu that I reflect on the last major non-value market of 1998-2000 when growthy high technology stocks overshadowed value investing.  This period of non-performance was a virtual purgatory for value managers.  The greatest investor names during that interval, including Warren Buffett, were severely questioned.  However, those managers who persevered subsequently performed exceedingly well over the next six years.

As I look ahead to the second half of 2008 and into 2009 we will continue to purchase grossly undervalued equities and liquidate those ABC holdings that are either fully-valued or are potential non-performers.  With regard to our deeply undervalued holdings we strongly believe the longer they remain mispriced the greater the probability for mergers, acquisitions and takeovers.  Moreover, it should be noted that it is now cheaper to purchase certain companies on the public North American stock exchanges rather than starting the same company from scratch.  While we are not certain what the catalyst will be to precipitate a major rally in value stocks, it is our belief that their undervaluation should also lead to more corporate share buybacks and insider purchases.  As a matter of fact, we are starting to witness a number of opportunistic ABC stock takeovers in the energy sector including Endev Energy, Gentry Resources, Ithaca Energy and Saxon Energy Services.  Clearly, aggressive industry acquisitors are identifying value well in advance of the market.

Irwin A. Michael, CFA