Professional fund managers may have more extensive resources than individuals, yet they still fall victim to the very behaviours exploited in Value Investing approach, such as overconfidence and extrapolation.
In investment, don’t get distract by big dream and big fancy word (IOT, Artificial Intelligence, Smart City/Home, Robotic Manufacturing, Moon Tourism, Bitcoin, Advance Technologies, etc). Instead, focus more on management strategies, scaling up, X-Factors, capital allocation, etc. Strict adherence to value investing approach is as important as selecting appropriate stocks. Let’s examine a few specific areas where value deals might be found.
Value Investing practitioners frequently search for bargains among companies or sectors relegated to the scrap heap by the public. For example, stresses on the financial system in the aftermath of the 1990–1991 recession resulted in tremendous bargains in the banking sector. Many banks were sold for less than their book value. As the economy recovered, regional and money-center banks staged a powerful rally.
Geographic Hard Times
Value investing practitioners can also look for troubles unique to a particular geographic region. In the 1980s, the collapse of energy prices temporarily depressed economies in the oil patch of Texas and Oklahoma. Similarly, budget cuts in the defense sector hurt the California economy in the early 1990s. Economic woes and the threat of currency devaluation in Southeast Asia in 1997 weighed on sentiment and dragged down share prices for a number of solid businesses. Remember, the goal is to profit from the opportunities surfaced when public overly react to a temporary situation.
Another source of potential value deals is the daily stock tables, which contain information on companies whose stock prices have fallen to new lows. Major business publications like Investor’s Business Daily or The Wall Street Journal (The Star, The Edge Markets, etc in Malaysia) regularly list companies that fell to new 12-month lows the previous day. Such companies certainly qualify as out of favor and could warrant further investigation. You may be surprised at how often companies that pop up in these three categories (out-of-favor industries and regions or in the new-low stock tables) also pass the tests of financial health, earnings generation, and understandable businesses.
Value investing practitioners may also find opportunities among companies whose share prices have fallen sharply in a short period. The Brandes Institute published a study exploring the validity of the Wall Street adage “never catch a falling knife.” This long-standing maxim advises investors to avoid purchasing stocks that have declined sharply in a short period of time. When it comes to bankruptcy risk, Wall Street’s warning may be on to something. While the annual bankruptcy rate for publicly traded companies is under 1 percent, a full 13 percent of the “falling knives” identified in the study went bankrupt within 3 years. However, investors who “never catch a falling knife” might be missing an opportunity to earn significant returns. On average, the falling knives in the study, including those that went bankrupt, outperformed the S&P 500 Index by an annualized 17.7 percent in the 3 years following their identification. This means that a diversified portfolio of falling knives might enhance overall returns significantly. For more information on Brandes Institute research results, you may visit their Web Site.
You may also study the portfolios of value investing practitioners, who have put together lengthy and outstanding track records. For example, a review of the equity offerings of value-based fund groups such as Longleaf Partners, Third Avenue Funds, or Tweedy, Browne could point to potential investment opportunities. A fund’s shareholder report, which lists its recent holdings, can usually be requested over the Internet, or in writing.
Warning: Don’t buy a stock only because a highly touted professional investor has done so. You should understand and have confidence in the logic of the decision to avoid buying or selling at the wrong time or for the wrong reason.
Good value-based ideas can be found in such publications as Barron’s, The Wall Street Journal, The New York Times, Investor’s Business Daily, or The Financial Times. These publications each print rosy developments— and some not so rosy—about companies that Wall Street already loves. Occasionally, they also feature information about companies that meet value criteria such as having undervalued assets. As you review these publications, try not to pay too much attention to one of their favorite topics: short-term movements in the price level of the overall market. Remember, true value investors focus on a bottom-up, company-by-company search for large discrepancies between a stock’s price and its fair value. Accordingly, the broad market’s day-to-day fluctuations are of little significance.
Typically, initial public offerings (IPOs) are not recommended for the average value investing practitioners. Consider the conflict of interest associated with these shares. Private owners seek to sell shares at the highest price possible while value investors seek the lowest possible price. Be especially wary of IPOs when the stock market is surging to successive record highs. The hype that usually accompanies IPOs during a bull market tends to push their valuations beyond the range that would interest a value investing practitioner. Price-earnings ratios for IPOs, for example, can reach double or triple that of the overall market; some of the hotter new offerings sell on nothing more than “a wing and a prayer”. With expectations set so high, the odds of disappointment are often too great. A value investing approach to stock selection requires that investors pay only for what is seen, not for what is hoped.
A Brief View on Starbucks Business
Starbucks may look like a boring business in this era. However, by strategizing itself to be *The Third Place*, it creates a value such that other than home and office, Starbucks now becomes the third place for consumers. Has the management focus on this strategy? A simple observation on Starbucks stores will display the success of their strategy.
Easily replicated business system and working capital: Starbucks has a standard template for its business sytem and working capital, such that they can be easily duplicated from one country to another. Consumers will have similar Starbucks experience in China and Malaysia as it is in US (an experience coined by “Glocalization”). Starbucks also practices a decentralization management culture, where every store managers make their own decision, enhancing ownership and creativity.
Learn from mistakes and improvise on its expansion strategies: Starbucks has once failed in Australia market, because it didn’t come to think about domestic culture taste and the importance of *Glocalization*. Several years after they cut their losses in Australia, they return again in 2018, targeting tourist instead of local consumer.
Remark: Starbucks management team continues to focus and devote themselves into improving Starbuck business, scaling up sustainably, and keeping the system easily replicated in each of country.
- VALUE INVESTING TODAY, Charles H. Brandes
- Security Analysis- Benjamin Graham & David Dodd