Michael Lewis, is best known as the author of “The Blind Side”, and “Moneyball”; very popular books that have been turned into movies, but Lewis isn’t a screen writer, he was educated at Princeton in economics and started his career at the investment bank Salomon Brothers. What’s the connection? While Hollywood focuses on the feel-good family stories in the previously mentioned books, these stories are really about getting to the truth using statistics. In “The Blind Side”, Lewis reveals that the Left Tackle is often the second highest paid player on the team, because protection of right-handed and high salaried Quarterbacks necessitates this. In “Moneyball”, Lewis tells the story of how the baseball experts focus on the wrong statistics and that numbers for on-base percentage and slugging percentage were the best metric for determining the effectiveness of these players, not RBI’s and basic batting averages. The result was that the Oakland A’s who had one of the smallest budgets in the league could hire players with these characteristics at low prices. It also illustrates how Billy Beane, the protagonist, was heavily recruited for all the wrong reasons which ultimately led to his failure as a baseball player. Does this sound familiar to you? Does it sound a bit like value investing; buying stocks that may not seem very exciting but have proven qualities that lead to it appreciating, but that most people overlook?
Lets look at the headlines from today’s Yahoo Finance page. “Citi Group pays $158 million on mortgage fraud pact, Apple falls, drags market lower, HP: should investors ride the wave or take some profits, Walmart wins with back-to-basics approach”. First, these companies are already well known among the public. Second, what do any of these articles tell people about actual profits, sales, or rates of return. Notice that none of these articles are about medium sized companies, and when I say medium sized I’m talking $3 billion to $10 billion in market cap. Unfortunately, I’ll bet that the majority of investors rely on these articles to determine whether to invest. Again, the real information is found in mundane SEC filings called 10Ks (annual reports) and 10Qs (quarterly reports), not these fluff pieces that change their sentiment with the wind.
The lesson is, value investing is relatively boring, but not that difficult. Look at the metrics that actually matter, not the after-effects, and buy low so that you have a greater chance to sell higher. Don’t buy something that is trading high hoping that it just goes higher because you have “a feeling”, or “a hunch”. This is called the “greater fool” theory for a reason. Does it make sense that Facebook, which will have its IPO soon may be valued at $80-$100 billion, when it currently has only $3 billion in sales? Don’t forget, Facebook has expenses too, so profits would be much lower, and don’t forget about taxes too? Maybe the company will be worth it, but there better be be ton of growth. Are you willing to bet your money that the growth will come quickly AND with profitability? Friendster and Myspace were wildly popular too; what happened to them? Obviously, this is not a company that would attract a lot of value investors.
Tags: value, value stocks