Value Library
The following is an
excerpt from the ABC Perspective - April 1999 - Pg. 1
Patience: The Hard Part of Value
Investing
Over the past twelve months we
have written innumerable pieces about patience and value investing. We
have stated that fundamentals and value always win out in the end. Not
surprisingly, we continue to hold to these strong views.
We hunt for undervalued common
stocks and whenever possible we attempt to sell overvalued shares when
they reach our target prices. Our operating policies, style and
discipline do not change. But there is a very hard part to successful
value investing. Let me explain.
Firstly, let me admit that the
easy part of value investing is finding cheap stocks. We start off by
diligently researching a company's balance sheet, prospects, hidden
assets, potential liabilities, and etcetera. As a second line of
defense, we will also review a company's technicals or stock price chart
patterns to give us a trading perspective. Ultimately, if a stock cuts
it, we attempt to buy our position. This process, in all candour, is the
easy part of value investing. Now the hard part of value investing
begins… and that is the patience of waiting it out until the general
market (i.e. other investors) catches on to our new investment purchase.
The realization of our ultimate price target, unfortunately, may take
weeks, months or even years to play itself out.
For instance, three recent ABC
successes, including Oshawa Group, Cogeco Cable and Astral Communication
each took up to two years from the time we originally bought the shares
to when we recently sold them. While we eventually earned 100 to 200%
returns over a two year holding period, there were times when each of
these three investments were quite frustrating. In all three cases,
their market prices declined below our initial purchase price. At times
it appeared that no one even cared about these fundamentally cheap
stocks in spite of the fact that all three offered dividend yields of
1.5 to 2.5%. Moreover it was of little consolation to investors that
these shares were trading at over 50% below their net asset or intrinsic
value. We were questioned many times why these stocks traded so poorly
and when (heaven forbid) might we throw in the towel and sell out.
Clearly, patience and discipline became the hard part of value
investing.
To say in retrospect that it was
all very easy would be untruthful. But whatever the catalyst, Oshawa
Group (Sobey takeover) or Astral and Cogeco Cable
(internet/communications frenzy) suddenly appreciated to our price
targets. Fortunately, our patience and resolve, which had been severely
tested, prevailed.
But even the sale of these
securities was not easy. Take Cogeco Cable for example. We sold this
holding in both the ABC Fully-Managed and the ABC Fundamental-Value
Funds in late January at $26 (our cost $8.50 to $9.00). This was the
height of the internet/cable euphoria. The stock price had simply
overshot our price target and no longer represented fundamental value.
Fortunately, several brokerage analysts had suddenly affixed
"outperform status" on the stock, which enabled us to sell our
huge position in a relatively illiquid stock. While it is possible that
Cogeco Cable may eventually reach $30 to $35, we stuck to our value
investment discipline and our selling philosophy. The sale proceeds
added a significant 6% cash position to each ABC fund, which we are
using for other out-of-favour, undervalued stock purchases.
In conclusion, we offer the
following observations:
- At the early stages of value purchases there is
considerable frustration and investment agony until a particular
stock's value is recognized and its share price climbs.
- Once recognized, the value stock rapidly runs
up in price. This sudden appreciation and transformation from value
to momentum share play will equally test a value investor's resolve
regarding the "when to sell" decision.
When all is said and done, I honestly believe that
fundamental value investing, notwithstanding the time element, always
wins out in the end.
Irwin A. Michael, CFA
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