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Patience: The Hard Part of Value Investing

January 18, 2011
I came across an excellent value investing related website from a fund manager in Canada. The website is called Value Investigator by Michael Irwin who runs the ABC Funds in Canada

They have a section where they provide commentary on some of their current ideas – Value Favorites. The Value Vault section contains old ideas that have been sold. The Value Library section contains some good articles and their commentary on value ideas. I found an excellent article in this list that talks about the toughest aspect of being a value investor – and that is being PATIENT.

I am taking the liberty quote some relevant parts here:

“Firstly, let me admit that the easy part of value investing is finding cheap stocks. We start off by diligently researching a company’s balance sheet, prospects, hidden assets, potential liabilities, and etcetera. As a second line of defense, we will also review a company’s technicals or stock price chart patterns to give us a trading perspective. Ultimately, if a stock cuts it, we attempt to buy our position. This process, in all candour, is the easy part of value investing. Now the hard part of value investing begins… and that is the patience of waiting it out until the general market (i.e. other investors) catches on to our new investment purchase. The realization of our ultimate price target, unfortunately, may take weeks, months or even years to play itself out.”

In all three cases, their market prices declined below our initial purchase price. At times it appeared that no one even cared about these fundamentally cheap stocks in spite of the fact that all three offered dividend yields of 1.5 to 2.5%. Moreover it was of little consolation to investors that these shares were trading at over 50% below their net asset or intrinsic value. We were questioned many times why these stocks traded so poorly and when (heaven forbid) might we throw in the towel and sell out. Clearly, patience and discipline became the hard part of value investing.

“In conclusion, we offer the following observations:

At the early stages of value purchases there is considerable frustration and investment agony until a particular stock’s value is recognized and its share price climbs.

Once recognized, the value stock rapidly runs up in price. This sudden appreciation and transformation from value to momentum share play will equally test a value investor’s resolve regarding the “when to sell” decision.
When all is said and done, I honestly believe that fundamental value investing, notwithstanding the time element, always wins out in the end.”

Read the entire article here

Currently, I own several stocks that have not moved up in over a year while the rest of the market has been generally moved up. It can be quite frustrating when your stocks dont even match the market moves on the upside. However, patience needs to be exercised along with an assessment of the company every quarter to see if the thesis remains true.

About the author:

Adib Motiwala
Adib Motiwala is a Portfolio Manager at Motiwala Capital LLC, an investment management firm that manages separate accounts for its clients.

Visit Adib Motiwala's Website


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