|The plight of the value investor in U.S. equities has been a challenging and sometimes embarrassing one for the past several years, as the prevailing trend, instead, has been to pour great amounts of money into stocks or mutual funds that represent promising momentum plays, with little regard for the underlying fundamentals. The mood seems to be: If it has gone way up recently, we must jump on that bandwagon too and ride it up to still more stellar prices, however little the company whose shares we are buying may actually be making in net profits. Itís like the game of musical chairs. Everyone thinks or at least gambles that each time the music stops he or she will be among those who find a safe place to sit. Or, itís like the greater fool principal. Everyone likes to buy the rising stock and then sell it to an even greater fool, at a higher price, before the market as a whole wakes up to the reality that the shares are really worth much, much less than any of the greater fools have paid for them. Value stocks, those traditionally available for less that their intrinsic value, have for the most part been languishing in relative neglect during this period. Their day will come again, but certainly is not here yet. There are few market timers so good as to accurately predict just when that will be. Meanwhile, the major market averages, driven mainly by the skyrocketing prices of a handful of extremely favored growth assets, many of which have no underlying profits at all, keep leaping ahead, some to new records just this past week.
Even though our portfolio is largely filled with value picks, several of which have suffered such inglorious fates as Fruit of the Loom (FTL), which finally declared bankruptcy in the last week of December, after falling from around $13, when we had started buying it, to just over a dollar before that declaration, our equity assets have gone up significantly more than 15% per year lately. We distrust a market that gives even our picks, overall, such good returns. Ha. Accordingly, we have begun paring back on our equities. Each week our equities exceed 15%/Yr., we sell off the excess and put it into bond assets or money market funds. We figure this will give a little cushion when the inevitable major drop in equities finally comes.
If you are still wanting to invest in stocks now, James Grant, a celebrated value investor of similar caution to our own and some success in stock picking as well, recently was recommending Tenneco Automotive (TEN) (price $9 15/16).