Our Valuation vs. Their Valuation - 5 / 5 / 2009

A short one today readers, but maybe the most important one yet:

A few comments from the well paid talking heads this morning: "Its a Bear Market Rally", "We've gained nothing this year, the S & P is just back to even", "There is no way to value companies in this economy. There are no clear projections."

Let's address the last one, "There is no way to value companies in this economy. There are no clear projections." The speaker actually added, "We need to see 2nd and 3rd quarter results to be comfortable with re-entering the equity market."

I use him as an example as to why fund managers almost never keep up with the S & P 500 index. Folks, I want this guy to be a warning to you all. This is the standard mentality running your portfolio and your pension and 401k investments. Invest with guys like this, and unfortunately he is like most others, and you add risk to your investments - He would prefer to speculate with your money in momentum markets and stocks, rather than buy the best companies at significant discounts right now.

Investments in the public market are the purchases of companies undervalued by historic metrics, AND undervalued by historic performance. Speculative purchases are made by buyers of common stocks in public markets based upon forward looking information and estimates.

If you want to buy value, which has the effect of protecting your principal, you can't look at a company like Google or Apple that have been over bought based upon future projections and have price to earnings multiples of 30.0x and 25.0x respectively. Because at those prices you are betting that earnings will grow more and more every quarter, and that there is more future value in these companies than present value. And while you may be right in that perspective on these two fantastic companies, you are still speculating on their future value not investing in the value they have already built.

The often quoted Warren Buffet made a statement many years ago concerning Berkshire's value. He said that his goal is to provide transparent information on Berkshire to his shareholders and the public. If he was doing that right, the stock would be trading at fair value all the time. But he added, if someone wants to pay more than fair value and speculate on the future value of Berkshire's stock, I can't stop them.

Please re-read that last paragraph if you consider yourself a value investor. You might consider getting it tattooed on your arm.

GE - 13.10, stop loss moved to 10.48
Dell - 12.28, stop loss moved to 10.44
AXP - 27.28, stop loss moved to 23.18

Build Value Every Day

Brad van Siclen