As a value investor, I am always looking for wisdom on the subject. And it comes from many sources -- including books, shareholder letters, conversations with legends in the field, or parallels in life. Value is often in the eye of the beholder, and while we use ratios, metrics, and other biases to help determine what might be cheap, there are no hard-and-fast rules. That makes value investing somewhat mysterious, but equally intriguing.
As a huge fan of baseball, I recently purchased a one-of-a kind piece of baseball history at auction. It was a diary of the Cleveland Indians 1948 season that was kept by then-Indians coach, and Baseball Hall of Famer Bill McKechnie. That diary is special for several reasons. It was signed by McKechnie, chronicles the Indians' last world championship season, which was also Satchel Paige's rookie year in the major leagues, and was it was written in the hand of a baseball hall of famer.
In fact, Bill McKechnie was the first manager to win a World Series with two different teams. He was also Babe Ruth's last manager, during the Sultan of Swat's swan song with the 1935 Boston Braves. It does not get much better than that in terms of historical significance, and it sold for much less than I'd have imagined. That's why I ultimately ended up with the diary -- I believed it was cheap, and my final bid was good enough.
This has parallels with value investing. Buying a stock is nothing more than bidding. When we see a company that we believe is cheap, and decide to pull the trigger, we are bidders in an auction. When we walk away with our prize, it is with the belief that we purchased it on the cheap, and will ultimately realize a higher price.
That belief is based on an assessment that the market does not recognize something that we do (correctly or incorrectly). Perhaps the company owns some assets that are not correctly factored into the stock price. Or the market is punishing it too harshly for recent events. Sometimes, markets just lose interest, companies fall off investors' radar and with little or no analyst coverage, languish until a positive event occurs -- or they become too cheap to ignore. Of course, in this context, I am referring to smaller value names.
Once you pull the trigger, you have to realize that the current value is not the price that you paid, but rather the price that you would realize upon sale. It's what the next investor is willing to pay you for the asset. With smaller, more esoteric, and more thinly traded names, that price could be all over the map. Patience and conviction are extremely important in these cases; "fire" sales can be devastating.
One of the hardest parts, but equally important, is the ability to acknowledge that your original assessment/valuation was incorrect. That can represent a double whammy: admitting you were wrong and then selling at a loss. That never gets any easier. Making matters worse can be the situation where you give up on a name, believing that the story will not pan out as you'd thought, only to have been premature with that call. I've had that happen several times, most recently with ModusLink (MLNK) , which I sold in November at a very small loss. Since that sale, shares are up 34%.
As for my baseball diary, it's anyone's guess what it might be worth. To the next buyer, it might only be worth half of what I paid. After all, who would want to own a nearly 70-year old set of notes scribbled by a man that's been dead for more than 50 years? It's all in the eye of the beholder.