Value investing takes patience

Many years ago, Sir John Templeton was asked to reveal his secret for investing success. His reply has been often quoted since: “buy when others are despondently selling and then sell when others are actively buying.”

I was reminded of Sir John’s advice recently when I attended AGF’s fall road show at which Charles Brandes and his associate Chris Richey were featured speakers.

(Road shows are elaborate sales presentations staged by mutual fund companies and securities promoters to tout their products to financial advisors.)

Brandes’ San Diego-based company manages the successful AGF International Value Fund. He’s cut from the same cloth as Sir John. They’re both value investors to the core, disciples of the school of Benjamin Graham.

(Graham, with David Dodd, Sidney Cottle and Charles Tatham, co-authored the seminal
book Security Analysis way back in 1934.)

Sound company, bargain price?
That means Brandes doesn’t give a hoot about macro economic trends. He doesn’t care which sectors of the economy are likely to outperform. He isn’t impressed by index valuations.

He and the money managers who work with him want know only two things:

  • Is this a sound company?
  • Is its stock selling at a bargain price?

That doesn’t mean they are totally disinterested in world events. On the contrary, they are keenly tuned to them because they believe dramatic developments can produce great investing opportunities.

One of the first things the Brandes organization did in the weeks following the September 11th attacks was to carry out a detailed analysis of the battered airline industry to see if there were any stocks of interest at depressed prices.

Value investing tools
To identify potential winners, they use the usual tools of value investing: p/e ratio, price to book value, low debt/equity ratio, high dividend yield and the like. Their goal is to come close to matching index performance in up markets while preserving capital in down markets.

The problem with value investing is that it can sometimes take an agonizingly long time to produce results. As Irwin Michael, one of Canada’s top value exponents, keeps reminding us, value investors must have “patience, patience, patience”.

Next page: Turnaround takes time

Turnaround takes time
That has never been truer than it is today. We all know that the North American economy, and the world, will recover from the current downward spiral. A new age of prosperity and growth will emerge.

But no one has a clue how long it will be before that happens, not even Federal Reserve Board chairman Alan Greenspan. He admitted as much to a U.S. Congressional committee in mid-October.

  • The optimists predict the turnaround will come after the first quarter of 2002.
  • The cautious say it will more likely be later that year.
  • The pessimists don’t see it until at least 2003.
  • The doomsayers believe we’re heading into a new depression that could last for much of the decade.

In all cases, the prognoses are hedged with ifs, buts, and maybes. In short, no one is going out very far on their particular limb because no one can predict what will happen tomorrow.

Events affect markets
Think of the effect on the markets, the economy, and consumer confidence if President Bush goes on TV on a Sunday night to announce the capture of Osama bin Laden by a strike force of U.S. Rangers.

Then think of the reaction if another hijacked plane is flown into an office tower on a Monday morning.

Almost every company is qualifying its forecasts for the fourth quarter and for 2002. “If this doesn’t happen, then we expect these results,” they say in carefully crafted ambiguity. Everyone’s doing it.

Message for investors
The message for investors is very simple. There are bargains emerging in this marketplace, but no one can predict when the pay-off will come.

If you take stock positions now, make sure they are in quality companies and be prepared to hold them for months, perhaps years. No one can forecast when an investment will perform to expectations.

So select what you consider to be solid securities with good potential, and then wait for events to take their course.

From the October 22nd edition of the Internet Wealth Builder.