Dec 3, 1999 at 12:00AM
In my day-to-day work as a news writer here at the Fool, I cross paths with Valuation Man and his ageless friend, Mr. Market, on a regular basis. For the most part, The Motley Fool news team's central mission is to explore the on-again, off-again relationship between these two financial personas. We write about their spats and reconciliations in the same way that society columnists gossip about the love lives of Hollywood celebrities.
Quite often, thanks to a material business announcement or some other one-time news event, the kinship of these two fellows is stretched pretty thin, sometimes even to the breaking point. Mr. Market has been known to turn on his heel and part ways with Valuation Man at the drop of a hat, without offering so much as a single word in the way of a rational explanation for his actions. But while Mr. Market's moods can swing between hopelessly depressed one minute and unabashedly optimistic the next, Valuation Man's views and opinions tend to be as steady and unwavering as a massive redwood.
As it turns out, Mr. Market is a hard nut to crack and his actions are next to impossible for an outside observer like myself to predict. Just when you think that you have the pattern of his zigs figured out, he unexpectedly zags. On the other hand, I have come to know the tendencies of Valuation Man quite well over time. And despite Mr. Market's penchant for irrational moves, I can take comfort in knowing that he will return in time to stand side-by-side with his old pal, Valuation Man. Like gravity or Donny and Marie, some relationships will endure forever no matter what changes take place in the world.
So, what does this discussion have to do with Drip investing?
As a Drip investor, I regard the interactions between Mr. Market and Valuation Man from a slightly different viewpoint than I do as a news reporter. Specifically, successful Drip investors spend a great deal of time coming to know and understand the workings of Valuation Man while using a tool called dollar cost averaging to deal with the erratic movements of Mr. Market. By investing the same amount of money into companies month after month, Drippers buy fewer shares when Mr. Market is awash in optimism and more shares when Mr. Market is beset with pessimism. In this way, we end up devoting a great deal of attention to Valuation Man and very little to Mr. Market.
And so it is with our current food and beverage study. Over the past few months, Jeff and I have spent a great deal of time talking about the relative business values of the companies on our list. Out of this analysis has come three finalists, all of which would make attractive potential purchases for a long-term Drip investor. These companies exhibit stellar business economics, have impressive track records for shareholder value creation, and earn consistently high returns on their equity capital. While not guarantees of future performance, these traits are highly desirable. Out of the 1,500 or so companies that offer Drips, only a handful can make these same three claims.
When we emphasize current valuation in our daily reports or on the Drip Companies message board, what Jeff and I are really referring to is the interaction between price and value. In other words, we're trying to see how well Mr. Market and Valuation Man are currently getting along. Ideally, we want to put our money into companies that will see their business values grow steadily over time. If Mr. Market and Valuation Man can find a way to see eye to eye on the issue most of the time, then that value creation will be reflected reasonably well by the market price of the company's shares.
Since we are investing our money in small increments over time, we are more concerned with current value than current price. To wit, in order to achieve our goal of 15% annual returns, we need to select companies that will see their business values -- not just their share prices -- increase by 15% or more every year. Share price appreciation is a by-product of value creation, not a determinant of it. Such a philosophy may sound counterintuitive to some, but this method of analysis is perfectly rational and will guide our stock-picking hands as we attempt to make a final decision before the year is through.
If a company can successfully build value over time, then its share price will eventually adjust to reflect the underlying value of the business. Without fail, Mr. Market will in the end fall into step with Valuation Man, even though such an adjustment may take years to happen. But as long-term investors, years are something that we have in abundant supply.
- Dec 3, 1999 at 12:00AM