Where have all the bargains gone? On Oct. 9, 2007, the S&P 500 closed at 1565.15, an all-time high at the time, only to plummet less than two years later to a low of 676.53 on March 9, 2009. Anyone brave enough to hold the S&P 500 from peak-to-trough would have seen their investment decline to 43.2% of its worth.
This decline, especially near its climax, was not exactly easy to ignore with all the attention-grabbing front-page news and top stories on television at that time. Most people would have at least a difficult and emotional time "tuning-out" rather than "cashing out" of the markets altogether.
It would take over five years, until March 28, 2013, when the S&P 500 closed at 1569.19, for the investor just to break-even (and that is not taking into account inflation and the erosion of true purchasing power).
With the S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) making all-time highs this week, for many investors this is a cause for celebration, especially for those that have participated in the market's wild ride over the past six years. However, value investors are slightly less jubilant. Anyone who takes to heart Benjamin Graham’s immortal words, “Confronted with the challenge to distill the secret of sound investment into three words, I venture the motto: Margin of Safety,” must be experiencing challenges in finding value.
Our goal at KAI Investments is to outperform the U.S. stock market indices over the long term through the application of a quantitative, value-oriented investment framework. In our long-only portfolio we attempt, where possible, to calculate a conservative intrinsic value range over the next two to three years and then make purchases where there is a substantial discount to that calculated range.
Our Heatmap shown below lists the 4,000 largest companies by market capitalization (from top left to bottom right). The use of color indicates that the stock was eligible for purchase (i.e. the market price was less than the calculated purchase price) over the past 52 weeks, with the legend as follows:
|Color||Gain/Loss Since Purchase||No. of Stocks|
|Yellow||50% to 100%||62|
|Orange||0% to 50%||9|
|Red||Possible purchase opportunity.||0|
Over the past 52 weeks, there were a total of 166 stocks that traded at or below the calculated target purchase price. Today, we are unable to find any stocks with sufficient margin of safety to warrant purchase.
This is not to say that stocks or the S&P500 are overvalued, only that the "margin of safety" has declined substantially and in some cases disappeared altogether. If an investor can find a basket of companies that will grow their earnings at 20% per annum over the next 10 years, they will most likely do very well. However, they should be mindful that they are paying a fair price and pay close attention to the margin of safety.
We prefer to wait until the margin of safety returns.