Value Library

The following is an excerpt from the ABC Perspective - July 2008 - Pg. 16

Opportunity

With equity markets in disarray investors have become extremely nervous and fearful.  Moreover the perception that financial uncertainty is growing in crescendo is worrying investors.  As a result, many are shying away from common stocks no matter how undervalued an individual selection might appear.

Presently, the general investment view is that risk is rapidly increasing and that preservation of capital should be maintained.  Once again, no matter how attractive a common stock may be investors will tend to pass on the opportunity and rationalize that they will purchase the security later at probably a lower price.  Although we agree with the principle of capital preservation, it is often during tumultuous times, such as today, that alluring, dirt-cheap opportunities occur.  Simply explained, as panicky investors retreat to the sidelines there is little or no competition to purchase out of favour stocks, and therein, lies the opportunity.

The fact is opportunities often present themselves unexpectedly and without great fanfare.  The window of opportunity is frequently quite limited and is not considered an obvious opportunity at that time; it might even be viewed as foolhardy.  In the end, investors will generally lament not taking an opportunity once it becomes quite obvious to all.  However, by then, the price of the security will have bounced up to its true value.  In my opinion when opportunity knocks an investor must be proactive and react without hesitation.  But to act quickly an investor must have the utmost of conviction and confidence; this becomes a question of significant investigative research and analysis completed within the shortest possible period.

Interestingly, looking back over the years I am amazed at how often events repeat every half dozen years or so and how prescient comments made years ago can be so relevant today.  In all candour, having experienced challenging periods like this at least six or seven times over the last 30 years I frequently look back to review my past comments to consider their relevancy.  Accordingly, I offer a January 2001 commentary which I believe is particularly pertinent to today’s market place.

“It is our view that value stocks remain cheap and are primed to move higher in price.  Moreover, it is our intention to do considerable investigative research over the next several months to ferret out grossly underpriced value securities.  The selected stocks would be those which should benefit from the present changing economic conditions as well as mergers, acquisitions and takeovers.  Although our current research and purchase strategy may be vulnerable to continued share price volatility, we believe that investor patience will be amply rewarded over the next 12 months.  We profoundly believe that opportunity knocks and we intend to be proactive.”

In retrospect, as I relate these 2001 comments to our mid 2008 investment environment it appears to me that nothing has really changed.

Irwin A. Michael, CFA