IBD degradation of Value Investing article, with which I disagree on all counts except one discussed in the 2nd to last paragraph.
Article Title: "Leave Value Investing To Fund Managers "
Author: DONALD H. GOLD
Section: Investor Education
Date: 1/26/2007
What's the first thing you look for when you want to buy a house, a car or a pair of jeans? Value. You want the best product at the right price. If Costco sells the same pair of jeans at half the price as the upscale store on Rodeo Drive, the decision is simple.
But applying that tack to your portfolio can be a recipe for disaster.
The big myth behind value investing is that it's safe. That book value rests just under the price you paid. You're working with a net, right?
Wrong. Let's start with the basic question: Why would you want to buy a company that's worth no more than its bits and pieces?
This company has no future, except in the rare event of a turnaround. If its prospects were decent, there would be a premium over its book value.
The search for "value" companies will often steer you the wrong way. When did big winners such as Google ever trade near book value?
Instead, the value method would build a portfolio of stocks such as UAL, parent of United Airlines. In March 2002, the stock's share-to-book-value ratio - share price divided by per-share book value - was a paltry 0.16. The stock tanked, and the company soon declared bankruptcy.
When UAL emerged from bankruptcy, the "new" company issued new shares. It was flying the same planes on the same routes from the same highly valued gates at the same airports. But the old shares had become worthless.
If you buy stocks worth only the sum of their parts, you could also encounter problems. Ailing firms often don't last long, let alone deliver big gains.
Some fund managers have found success in this precarious field. But they'll be the first to tell you that value investing takes a specialized approach. You need ample knowledge of the company, its industry and the market it serves to thrive.
Buy fundamentally strong stocks as they break out of well-formed price bases. That will give you the best chance for success. Cutting losses short will let you reduce risk. |
