Security Analysis

"Many shall be restored that now are fallen and many
Shall fall that now are in honor."
~Horace - Ars Poetica

Picked up Security Analysis ~ 1940 (2nd edition) from our school library today. Hope i'll have the discipline to complete this book by the end of this holiday.

The quote above appears on the first page of Security Analysis, and forms part of the foundation for the idea of value investing. Today i met Jerry in the MRT station, and he asked me what exactly is "value investing"? and my immediate answer is 'cheapo investing', buy things that are 50 cents on the dollar.

But why would investable assets be sold at half price?
Most of the time it would be because of fear, and at other times because of complexity, or difference in perception.

1. Being human, we are largely driven by emotions. Although economic theory suggests that we are all rational agents, but when it comes to little pieces of paper with market prices written on it, we cease to be rational.

Keynes define rational investment as the activity in estimating the yield of the asset. However, most investors (or should we call them speculators???) prefers not spend effort in 'estimating yield', but are more interested in selling the security he has purchased at a higher price. With such aim in mind, as a security gets bidded higher and higher, frenzy takes over and the security and its underlying value gets disconnected.

As panic selling occurs, then the converse is true. It is at the point of panic selling will there be large number of mispriced securities an great opportunity to pile on great stuff on the cheap.
see the chart of Amazon.com from 1997 to 2001. It's share went $1 to $105 back down to $8, while the underlying company continue to grow its retail platform and sales volume. Investors who have the forsights and the guts to pile on to this unloved former darling are greatly rewarded.

So buy when there's fear in the air and sell when there's frenzied buying. haha. easier said than done.

(2) Complex /special situations, creates another possible avenue for mispriced security. Examples such as spinoffs, mergers, restructuring, complex capital structures historically have provided dilligent investors rich rewards.

One such example could be Tyco. It has recently split itself up into 3 company after almost a decade of wheels and deals. But the future of Tyco International is murky at best. So while the company is generating loads of free cash flow, the market is ignoring this and is focusing whether Tyco Intl can find it sense of direction in the long run.

Another example that I'm interested in but not able to decipher is Liberty Media Corporation and the sprawling empire John Malone controls. From 1 company in the early 90s, it spun off Discovery Channels (hugely profitable), swapped Liberty's stake in Rupert Murdoch's News Corp in exchage of a 41% stake in DirectTV (owned by News corp). And at the same time split the company into 3 with 2 classes of shares each. Some value investors are piling on to some parts of the company. But since I do not have sufficient understanding of what has happened, all i could do is stand a watch. However, this is also a potentially price - value disparity.

(3) Difference in perception. One man's meat is another man's poison. Value investing could very well work due to 'difference in taste'. In general, people are excited about great stories, (e.g. the next breakthrough drug) but if we can find a solid good old boring company, there's a chance that it can be a value buy. F&N in the early part of this decade is a company percieved as a boring beverage company. But in the last 3 years, people start to see it as hot property stock stock, and bidded up the stock accordingly. Only time will tell if this optimism is warranted.

Another possibility is Xin Hong's idea about generating superior return by focusing on a way longer time horizon than the rest of the investing population. This i believe hold a great chance in beating the general stock market return. Cuz in the long run, the stock market is more of a weighing machine rather than a voting machine. My only contention is that if we are in for the very long run, we better get the economics of the firm and industry right, aka competitive advantages.

Even great civilisation gets destroyed by its own undoing, other civilisations or natural disaster. Just hope that those enterprise that we back our capital with will stand the test of time.