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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Spekulatius who wrote (20330)	12/24/2004 9:23:56 AM
From: Steve168	Read Replies (2) \| Respond to of 78568

just looking at below cash or book value is too simplistic, you need to look at the underlying business Spek, once you think you can tell good business from bad while ignoring (or not focusing on) the hard numbers (price-to-book), you moved one step further away from Graham style below-66%-net-liquidation-value investing, and one step closer to "growth" or "momentum" investing. In the dot com years many people thought they "know" the business, and made a lot of money on the high flyers - JDSU, CIEN, QCOM just to name a few. When the party ended, we all know what happened. You may very likely make a lot of money on ADGO, but there is more risk in that approach. Did you notice the 50% drop in revenue, 90% drop in earnings in ADGO's 30-Sep-04 quarter? I guess we all have our unique styles, and I somehow like and believe the Ben Graham style, this style is not necessarily good or bad, other styles all have their times, and it is hard to tell which style will be in favor in the next year or two. But from all the academic studies (Fama and French, Piotroski, LSV, on several decades of stock performance) and my personal experience, low price-to-book (scrutinized book, not stated book value) is the single most significant number correlated to the next 1-5 years performance. Warren Buffett was a below-net-liquidation style investor first when he was running his investment limited partnership (same terms as today's hedge fund). After he got bigger, the net-nets are simply not enough for him to deploy his capital. So he started to count intangible assets such as brand names as value. He simply had no choice. The below-66%-net-liquidation-value field is the most fertile ground for small value investors. I am buying below-cash non-leveraged stocks when management started to cut costs, believing they have a reasonable chance to realize some value on their existing infrastructure (replacement cost is higher), such as TFS's TFT screen factory in Beijing. They have a reasonable chance to get some cell phone color screen orders. The other key factor is diversification, if you have basket of those tech stocks, the multi-baggers will help you beat the market even when 55% of your stocks failed to beat the market, as we had seen two years ago from ALVR, DUSA, PCYC (I mentioned those too many times already). Now CIEN, OSTE started the upward move, TFS, PRCS may very well be the next, and eventually even INFO may have a good chance to bounce up. If ADGO were dropped from $5 (or above) to $1.4, I may consider buying a bit, the fact that it stayed at $0.2-0.4 while millions of shares traded just over a year ago, made me nervous that those $0.3 shares are sold to me at $1.4. For TFS, few people bought below my price which is below $2. It may drop to new lows, but I am taking a calculated risk. There is a natural "reverse to mean" physical law in politics, economy and most significantly - stock market. When the business is good, new investment will come to the competition, capacity increased, price competition/cuts, resulting loss to most players, and digest the overcapacity. Same is true that after that bust, there is no investments, undercapacity, and survivors will enjoy 1-3 years of prosperity. Old cycle again and again. Studies showed the group of stocks that did the best in last 3 years will do worse in the next 3 years, than the group did the worst in prior 3 years.