“It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.” - Seth Klarman
Markets go up and down. It’s unavoidable, but how do you handle it?
Over the past couple of weeks, one aspect of investing that has frequently come up in my discussions has been related to price but ultimately it all leads to volatility.
Value Investor’s Guide to Volatility
The higher the beta, the more chances you get to pick up stocks at cheaper prices and the quicker you can realize the intrinsic value of your stock
Volatility is just another day. Focus on the business. The taste of a Coca-cola doesn’t change every second as it tries to follow it’s stock price.
Price is useless on its own. Compare it to intrinsic value.
Volatility reveals how focused and confident you really are.
Conquer volatility and it will make you a better investor.
Even if all of the above is attributed to genetics as Klarman states, it’s nothing that can’t be trained.
Compare Price to Intrinsic Value
What many people forget about price is that, it is merely a tool. Price does not indicate the future of the company. The fundamentals determine what price the company should be trading at. The price does not determine the fundamentals. One way is to perform your own fundamental stock analysis.
So in the current volatile, yet upward market, the important thing isn’t to fret over what price to buy.
Just recently, I bought more ROIAK, even though I am up 230%. Why? simply because it is cheap compared to what my intrinsic value calculation.
Price has to be compared to something for it to be useful. The majority of people compare it to earnings (EPS) to determine the cheapness factor but the real comparison should be made tointrinsic value.
If you bought a stock originally at $1 because the calculated intrinsic value was $5 and 2 months later, the price is at $2 and you still believe it to be worth $5. Do you buy or do you sell?
Most people sell just because they’ve reached 100%. I still don’t understand the logic behind this though…
Keep it Simple
I like to tell people to keep it simple.
I also explained that a no brainer value investment criteria has to be simple. Don’t cloud your thoughts and facts with information that isn’t very important. You’ll end up wasting your time poring over the 30th piece of information when you should be focused on the top 5 or so facts.
You wouldn’t stuff yourself at dinner time only on the sides right? The important part is the main dish. So stop confusing the side with the main.
You should also be able to clearly express why you purchased a stock in 2-3 sentences. Any more and I think you need revisit your holdings and why you purchased.
Here are some simple explanations of the positions I hold.
INSM is a net net stock offering a big margin of safety. It’s current position with a huge cash balance allows it to pursue strategic alternatives to increase shareholder vale. Bio-pharma is outside of my circle of competence but I feel the downside is very well protected.
Radio stocks (SALM, ROIAK, ETM, EMMS) are cheap because the perception is that they will all die. Huge over-reaction. All radio stocks were hit by the credit squeeze but have since paid off huge amounts of debt straight from their operations and have been cutting costs while advertising has slowly been recovering. Huge margin of safety.
DCU is a very boring, overlooked business able to generate good FCF by good management. Balance sheet is strong with good conservative management. Time will correct the current mispricing.
The only thing that you shouldn’t be saying about your stocks is
I bought _____ because Jae did
Stop Focusing on How Much You are Down
This year I was down 30% at one point. I bet you didn’t know right because the eyes always just fixate on the highest point of the graph in my portfolio updates.
I tried to pick up pennies in front of a bulldozer with the EMAG arbitrage and ultimately got run over. It doesn’t feel good when your portfolio drops about 30% in value but as much as I was sickened, I started seeing value everywhere. So I bought. I sold some bad positions at a loss and bought what I felt were very cheap.
It’s easy to drown yourself in calculating how much you are down but re-focus on how you can allocate capital, or better yet, just grab a cup of coffee knowing that in the end price meets value.
To put everything into perspective, just ask yourself one simple question.
Q: Is this stock cheap compared to the intrinsic value?
A: Yes (then buy more). No (then sell)
DisclosureI hold all stocks mentioned at the time of writing
About the author:
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.
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