How To Get Your Value Investment Groove Back


Jul 31, 2013

Written by Mary Buffett

Now that the Dow is over 15,000, a number of my friends have asked me if the opportunities for good investment values are simply now overpriced. Over lunch with a couple of friends in Los Angeles recently, an old friend in advertising wondered if she had simply missed the boat. Again.

She groused that when it came to her investment choices, she was always late to the party; she would arrive just in time for the market to collapse. She was a bit discouraged because after she went through her divorce, everything was now on her shoulders — including planning for her retirement and completing the education of her children. It left her depressed and downcast and she wondered if she would ever be able to retire. Like many around the table, we’d still like to think we’re young, but we all know our 20’s happened a while ago.

As I speak and participate in a number of investment conferences, I hear this a great deal. As cool and rational as we hope to be with our investment choices, the market itself is driven by wide swings of emotion. When there is a gap between the true state of the economy and the level of the Dow, it says more about our hopes and fears than any spreadsheet. Because we all lived through a series of market bubbles, ranging from real estate to stocks and precious metals, people tend to be a little gun shy. It makes perfect sense.

People forget that the market itself is driven by emotion more than anybody would ever dare to admit. For whatever reason, the marketplace reaches its highest frenzy just before the long drop into darkness. People were still buying homes in 2006 and 2007, long after the housing market began to contract. The emotional angel on their shoulder said if they didn’t buy now, the housing market would forever elude them. The coldly rational angel on the other should that when housing reaches 7 or 8 times the average wage, the market is bubbling up. Soon, the correction comes.

In any event, once the dust settles, we have to get up, clean ourselves off and plan smarter for the next time. We cannot curl up in a ball and hope to be saved by some shining white knight. In many cases, we’re all we’ve got. In short, as value investors, we have got to get our confidence back.

So, how do we get there? In our case, as women who are providing the nest egg for our children and ourselves, we don’t want to fall into the trap where prudence becomes paralysis.

For the value investor in all of us, just because the Dow has moved to new heights does not mean that all of the values have disappeared. On the contrary, the Dow only addresses 30 stocks. Some are the flavor of the decade, while other have been powerhouses for generations. Companies like Google were created in a Stanford dorm room, but there are others, like Eastman Kodak, who were replaced, and now struggle to emerge from court-appointed bankruptcy.

There are certain rules that are timeless, but I am going to add my own twist. Instead of looking at your portfolio like dating a boyfriend, think of it more like finding a spouse.

1. Invest in what you know 
This is something oft-repeated, but for some reason, rarely followed. When somebody asks me what I think about a company, I’ll turn it around and challenge them on what they know about the industry. Instead of following the blind herd, it also forces investors to think about how well these companies are run verses something as arbitrary as a stock price. Are they a well-run company? Prove it. Do they offer a durable competitive advantage and what is it? Show me.

2. Research, Research and more Research 
Thanks to the Internet, we face an overflowing tsunami of information, ranging from annual reports to analyst articles and corporate gossip. It’s all a few clicks away. If anything, sometimes we suffer from detail overload. We want to find the right information; it is your job to separate the wheat from the chaff. That is something you have to own. From your research, stack-rank ten companies that pique your interest. What is the quality of leadership? Look beyond their P/E ratio? Do they, like See’s Candy, make the same thing over and over again (which keeps capital expenses rather low) or are they like the auto industry, which has to reinvent itself with each new model year? By the way, gossip also qualifies as research. While some financial blogs have the look and feel of something from The National Enquirer, all sorts of useful tidbits that you can use begin to emerge.

3. Know the difference between value and price 
For those value investors who invest over the long haul, through good or bad, they know that brands that can maintain a durable competitive advantage over time will deliver. If consumer goods are your thing, linger around the supermarket aisles and do some field research on how people make their choices. Are they picking up Coca Cola or are they are going for the store house brand that is lower priced? The decision made in aisle 5 is replicated by millions each and every day.

4, Practice, Practice, Practice 
Raid the fake money from the Monopoly game that is collecting dust in your closet. Guess what — you now have a “pretend portfolio.” Take a few months and borrow Mr. Monopoly’s holding and begin to invest it in a variety of opportunities. Begin to identify your comfort zone.

Apply these rules and you will find that your comfort zone will begin to expand outward. On the other hand, if you find yourself worried at 3 a.m. about your “pretend portfolio,” perhaps you should go in a different direction. ook for companies that align with your values. The important thing about the “practice” option is that if you hear about a company worth your investment, you may have already taken it for a test drive.

And that is how you can get your value investment groove back.

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