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To: Tomato who wrote (38553)	8/9/2004 2:39:52 PM
From: Dale Baker	Respond to of 118717

Very interesting - I like this part the most; it mirrors much of what I was thinking in a column I just wrote (HTTS subscribers will get it next week). This is the antithesis of trading, mo-mo investing and the whole IBD approach to stocks. There are many ways to make consistent long-term profits in the market - I happen to like this one best. Greenwald: He has a strategy of very, very small stocks. So if he buys half a million dollars, then he has to file a 13D [required when you buy more than 5% of a company's stock] in some of these companies. But that means he's the only one there. So he satisfies the first criteria. He's got the basic valuation methodology. But one of the things we did in looking at his trades is that we looked at what he would have made if, when he made the first purchase of the stock -- the first time he bought it -- he just bought it there and he'd sold it at the first sales. So that he'd just done one buy decision and one sell decision, as opposed to buying it first, finding out, oops, the stock has continued to go down, but continuing to buy on the down side, having confidence in your valuation judgment. Of the 25% return, about 22% of it came from purchases at lower prices than the initial purchase. We've got Walter Schloss's archives, and it looks like -- we haven't got the numbers yet -- a large percentage of Walter Schloss's returns have come also over time from knowing that you're buying something worth buying. And then when it goes down, not getting frightened and dumping it, but continuing to buy. And then selling on the way up. Looks like that does a lot better than just averaging down. TMF: I recently spoke with Mary Chris Gay, who is Bill Miller's colleague. That's their strategy, she said: Lowest average cost wins. I suppose that's confirmed now. Greenwald: That's exactly right. But notice what that depends on. You have to have confidence in your valuation. And you have to have the discipline to stick with it, that if this is a good stock and nothing has changed about the underlying value of the company, then if it's a good stock at 8, then it's a better stock at 4, rather than people who will see a stock go from 8 to 4 and say, "Oh crap, something's going on here that I don't know about." TMF: And there are a lot of people who think like that. Greenwald: Who would think that and dump the stock. So the valuation rule is very important, which is part two of value investing. The discipline part of it is equally important. And it's important not only to persist when you see bargains, but also not to do stupid things. I think most value investors got in trouble to the extent they did -- and not a lot of them did -- in the boom because they just didn't have anything to do. There weren't bargains out there. And it's a big problem for them right at this moment. And they're tempted to do stupid things. So you have to have what I think of as a default strategy. When there's nothing active in value to buy, you have to think about what you want to do with your money. And it's not simply cash. You can do better than cash with various long-short strategies. If the market is really crazily overvalued, I think value investors have got to start to think about balancing things with appropriate short conditions. You have to have a well-articulated strategy of what you're going to do when you don't know what to do. And that's really the third part of value investing.