What investments are looking interesting?
I am not a top-down investor. What does that mean? It means I don’t think about the macro-economy and investment sectors first, trying to determine what will happen from a big picture perspective, and then picking individual investments that fit my big picture themes.
I am a bottom-up investor. What does that mean? It means I look at individual companies, one at a time. I try to understand the economics of each business: what are its competitive advantages, does the company generate good returns on capital employed. I try to understand management: how are they compensated, how competent are they, how honest are they, how much of the company have they bought with their own money. Finally, I try to understand what the business is worth: I assess what the business would fetch to an outside investor thinking about buying the whole thing. Only when I can find satisfactory economics, management and valuation do I buy.
Although I am not a top-down investor, I’ve realized over the years that my bottom-up approach tends to uncover interesting investments areas. All the sudden, I start finding a bunch of cheap ideas in one sector.
In 1998, I found a ton of technology companies selling at dirt-cheap prices because of the Asian contagion and Long Term Capital Management fallout. I didn’t go looking for technology companies, I just realized after looking at several cheap technology companies that there was a theme.
In 2000, I found a ton of small cap value companies selling at dirt-cheap prices because everyone was selling small cap value to buy large cap growth and technology. Once again, I didn’t decide to look at small cap value companies, it was just where I was finding value.
Where am I finding value now? Not surprisingly, I’m finding value in financial, real estate, retail and building materials companies.
It’s probably too early to bite on financial companies. More write-downs are coming and it must be crystal-clear that the business you’re buying will survive and thrive in this credit crisis environment.
Some real estate investment trusts are selling very cheaply. I think some babies are being thrown out with the bath water, but you must be very selective to avoid buying dirty water.
Some outstanding retail companies are selling at dirt-cheap prices. Why? Everyone is worried about the consumer and whether they will be able to spend. In the short term, the consumer will be crimped. But, in the long run, the strongest retailers will gobble up market share and emerge stronger during the next up cycle. It may take patience, but it’ll work. Once again, avoid anyone with too much debt or poor competitive positioning.
Some building materials companies are looking dirt-cheap. The housing market is getting pummeled, so such companies are scrambling to scale back capacity to avoid losing too much money. Like with retail, the strong companies will emerge stronger and with more market share and greater pricing power. More patience on this, too, but what did you expect, a free lunch?
History has shown that great times to invest are tough times to put money to work. But, that’s when the bargains can be found. I’m finding more bargains than I have in years, so I’m happily buying some great companies and waiting for others to come to me as this volatile market unfolds.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.