Part 1 of this series, "Margin of Safety," is available here. Click here for Part 2: "1,000 Rocks."
If you've ever been accused of being a contrarian, a naysayer, a negative Nancy, or a Debbie downer, you may be a great value investor. In contrast to our growth-hungry friends, we value people love to imagine the worst-case scenario. We say "no" a whole lot more than any other word. The next big thing is just the next big thing to avoid. When someone asks us whether we want to hear about this investment idea they have, we may politely indulge, but on the inside we're already grumbling.
Value investing isn't the easiest method of investing. But when broken down to the basics, it is a doable, logical process that you can start practicing today. Before you know it, you'll be on your way to investing like the world's greats.
Be wary, be confident
Value investing takes a special kind of attitude. I mentioned in Part 1 of this series that a bad attitude goes a long way in searching for the best value stocks. Another element, though, is conviction. When, after hours and hours of research and analysis, you have found what you believe is a brilliant value pick, go for it. There is a tipping point in stock research where people open themselves up to too many third-party opinions, especially with the Internet. You can find any opinion you want on a company, good or bad, if you keep searching. So if you've studied the company, modeled it into oblivion, and perhaps run it by your trusted value-investing confidants, then stop there.
I made a mistake once, while here working at the Fool, with a company called Blyth (NYSE: BTH). This wasn't very long ago -- just about a year. At the time, Blyth had already been rising in stock price, and certain value gurus had taken notice -- Joel Greenblatt being one of them.
Blyth is a multilevel marketing company, similar to Herbalife (HLF +1.11%). Blyth popped up on the radar when its CEO, Bob Georgen, bought $20 million worth of the stock on the open market. Talk about an insider purchase; this was perhaps the boldest one I had ever seen. Upon further analysis, I realized that Blyth was deeply undervalued, given its promising health-shake business, ViSalus. ViSalus was a similar product to Herbalife's, but it was growing much faster. Blyth had been slowly acquiring the company piece by piece depending on certain performance targets (a wise move in any acquisition) and was intent on keeping the company's original management team in place in order to maintain the stellar growth and stability of the business.
By December of 2011, ViSalus witnessed 21 consecutive quarters of growth, and sales rose from $600,000 to more than $35 million in a year and a half. The product was poised for about 500% growth in 2011. This was all happening as investors were focused on Herbalife and its debatable accounting practices. No one was paying attention to this hidden gem.
I loved the idea, and I wanted to buy into it -- not to mention write some articles for the Fool about the pick. But then I read too much. I read about the "sketchiness" of multilevel marketing firms and their unsustainable business models. I ignored the fact that Warren Buffett, everyone's favorite value investor, bought a multilevel marketing company for Berkshire: The Pampered Chef. When it came time to write about my big stock pick in detail, a fellow Fool told me it was a shady company that wasn't right for the Fool and its readers.
It wasn't that Fool's fault, as he was expressing his honest opinion -- as we like to do here at the Fool. It was my fault because I let my conviction drop. I didn't write the article, and I didn't buy the stock.
Blyth was trading in the $40-something-per-share range and went to about $80 per share before the stock split two for one. The company declared a special dividend as well. I had completely missed the boat -- not because of any research or analytical errors, but because I lacked confidence.
The lesson here
As a value investor, you will be berated from time to time. People will tell you your picks are awful (value guys often go for the unloved stocks). They will tell you value is a dead art (as they did after the financial crisis). In the investing community, there are as many opinions as there are high-frequency trades. It is up to you to determine what is worthwhile and what is not. If you have done your work and reached the same answer again and again, who cares what the man down the street says?
When you hold a stock for the long run, you will witness ups and downs. Stocks never stay on course forever. You will hear "no" a thousand times for every "yes."
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