Value Library

The following is an excerpt from the ABC Perspective - April 2011 - Pg. 16

Optimism

Successful portfolio managers are generally optimistic by nature. Entrusted to manage billions of dollars of other people’s money, we search out attractively-valued common stocks to insert into our clients’ investment portfolios. In this pursuit of value, portfolio managers rummage for an investment spin or angle such as a hidden asset, potential profit windfall or revenue breakthrough.

In the course of this hunt for value, I have observed that the foundation of this search is largely based on a sense of optimism. For instance, when initially looking at a prospective portfolio addition, we start off with a positive point of view. What can we buy that is fundamentally cheap? Although we will dig deeply and question a company’s assets, business model and pending prospects, we retain an open mind. We take the initial view that the company’s glass is half full rather than half empty. In effect, from our starting point we look for the “good” in a company and tend to give its corporate executives the benefit of the doubt.

Admittedly, it is easy to be burned by intellectually dishonest managers when we start from this base of optimism. However, it is our challenge to research deeply, to ask insightful questions and ultimately, to ascertain the veracity of our findings. While this analytical process often leads to superior investment selections, a stock might underperform due to an uncontrollable event such as a change in economic or political circumstances. In this situation, once we have undertaken to liquidate a disappointing holding, much like a bronco-busting cowboy who has just been thrown off a horse, we must get back on the research trail and, once again, continue our search for undervalued common stocks. We must not lose our nerve or resolve due to a bad pick. We must come to terms that no one is perfect and that occasionally one may “step on a rake” no matter how diligent or selective one may be.

In summary, I believe one must retain a sense of optimism. The point is, one must regain one’s composure and continue to troll for unrecognized investment bargains. At the end of the day it is well-worth remembering that the security selection process is akin to a nine inning baseball game. Occasionally, one might suffer a poor inning or two before coming back with a second wind to triumph to a well-earned victory.

Irwin A. Michael, CFA