Again with the Sopranos
Not long ago, my colleague Roger Friedman penned an article about investing like Tony Soprano where he urges stock buyers to simply invest in superior companies and "fugeddaboud 'em."
By an interesting coincidence, I noticed the news wires this weekend were hot and bothered with a holiday story about the investing style of Tony Soprano's shrink. Well, make that the investing style of the actor who plays the shrink, one Lorraine Bracco. Bracco, the article explains, thinks stocks are like "Chinese." (Chinese?) She sticks with real estate because it makes her feel like the boss.
The money line has got to be the one where Bracco says that real estate "is like porn for me."
Sound healthy to you?
So we've all got urges
Of course not. But she's not alone in giving in to that "I must have it" impulse -- which has her bailing out of routine cab rides in order to run into open houses. Real estate "investing" is still the hot way to make money these days, or that's the perception. We've got TV shows documenting the flipping game, and recent poll numbers I've seen show average Americans predicting that real estate prices will continue to rise by double-digit percentages.
Whether that wishful thinking is well-justified, I won't speculate. I will note that buying what everyone else wants is never the way to get it for a fair price, much less cheap. It's why people pay half a million bucks for a 600-square-foot wreck near me. It's how they get you to shell out a few hundred bucks for a pair of True Religion (NASDAQ:TRLG) jeans. It's how some people I know in farm country got snookered into buying worthless platinum futures back in the '80s. And it's why people paid nearly $150 a pop for shares of CMGI (NASDAQ:CMGI) back in the bad old days of 2000. They're worth a buck and a half now.
Times are different now?
Sure, they're always different. Until they turn the same again.
For all I know, Bracco may be a veritable real estate whiz. But keep in mind that someone who takes home millions from a TV gig can afford to make some big screwups that might sink the likes of you and me.
Does that broken plaster mean a one-time leak in the shingles, or is the foundation failing? What do you mean the garage sits on the city's property and the city wants it back? Dozens and dozens of snakes breeding in the walls? (These are all costly situations I've seen firsthand, by the way. And I lived with the snakes.) There's a lot more to worry about than whether prices continue rising and whether you can flip that house before that nifty interest-only ARM readjusts.
Real value, real simple
On the bottom line, overpaying for 422 Taylor Street is no better than overpaying for a Motorola (NYSE:MOT) phone or Motorola stock. That's because every asset has a value, and that value might be far different from the price. Pay premium, and you're in real trouble when it turns out people aren't quite so hot for what you got.
But what's a stock worth? Contrary to what people out there think, putting a value on a stock isn't like reading "Chinese," as Tony's shrink suggests. In fact, it's downright simple.
Every quarter the firm tells you how much money it took in, how much it spent, and how much accrues to you, the part-owner. If you want a better picture of how much of "earnings" is really cash being produced, you have a friend in the cash flow statement.
Figure out what kind of cash the company is likely to produce. Discount that cash flow to the present, apply a margin of safety, and buy when you see a bargain.
It can be that simple. It's how I came to say to myself, "Hmm, Microsoft (NASDAQ:MSFT) looks to be worth about $35 a share, and it's selling for $26 and change." It's how I've scored big with firms such as J2 Global Communications (NASDAQ:JCOM), Nokia (NYSE:NOK), and a lot of other companies that didn't happen to be popular when I got them. All of these companies had strong cash flows, and it was pretty simple work to find out that the going price was less than the real value.
Foolish bottom line
A lot of people would rather roll the dice on something they can stand on or pound a nail into -- like that "fixer-upper" down on Dangleberry Lane -- than do a couple hours' math and buy stock in an out-of-favor company. Your choices are simple. You can suffer at the hands of that psychological hang-up or profit from it. I choose to profit from it, as do my colleagues at Motley Fool Inside Value.
Every month -- well, every day, really -- Inside Value analyst Philip Durell is out there doing nothing more complex than scanning the market for mismatches between price and value. It takes a bit of work, yes, but it's a lot easier than replacing a rotting sub floor and sistering joists under half a house. And best of all, you can learn to do the work yourself, without costly trips to Home Depot (NYSE:HD) for saw blades and bandages.
Of course, looking for cheap goods and avoiding the popular "investments" always takes a bit more guts, but I think that kind of moxie is the kind of thing that both Tony Soprano and his shrink would appreciate. If you want to make up your own mind and learn the ropes, a free trial of Inside Value, complete with valuation tips and tools, is just a click away.
For related Foolishness:
- Should you be investing like Tony Soprano?
- A beginner's look at cash flow.
- Learn how to buy low and sell high.
Seth Jayson doesn't advocate fugeddingaboud everything, but he does believe that you can be too clever with your stock trades. At the time of publication, he had shares of Microsoft and Home Depot, but no position in any other firm mentioned. View his stock holdings and Fool profile here. Microsoft and Home Depot are Inside Value recommendations. Fool rules are here.
