Recently, our family's largest single stock holding, student-lending powerhouse Sallie Mae
It's tough being a value investor. It requires two specific skills to be successful: the ability to identify undervalued companies, and the patience to hold onto them while the rest of the market catches up. You can kick-start the first part with a subscription to Philip Durell's Motley Fool Inside Value newsletter, but the second skill takes nerves, willpower, liquidity, and confidence in yourself. Fortunately, if you can identify the correct companies, the wait can become a little less painful.
The last vote
Benjamin Graham famously said that in the short run, the market is a voting machine, but in the long run, it's a weighing machine. Fair enough, but as the short run drags on and on and you're still in the minority, the voting may have you feeling like Walter Mondale in 1984. Your confidence in your selection -- not to mention the confidence of your spouse, your friends, and, oh, let's just say the whole Motley Fool CAPS community -- begins to waver.
Sometimes, however, one very large vote gets cast that yanks the stock out of the voting booth and plops it squarely on the scales. This is what happened to Sallie Mae. After holding this stock through a 15-month, 30% slide brought on by scandal and speculation of reform in the student-loan industry, driven by having a new party in charge of Congress, it was gratifying to have J.C. Flowers et al. cast the last and deciding vote in the lender's favor.
Sadly, a tender offer is not always a guarantee of riches. Seven years ago, I held shares in Comair, a well-run regional airline, partnering with and owned in part by Delta Airlines. I thought Comair was a terrific bargain -- apparently more so than Delta, which offered what I thought was less than intrinsic value for the minority shares. But as Delta was the majority shareholder, was offering a premium to the then-current market price, and had engaged an investment bank to opine that the price was fair, I was left with no choice but to take the offer.
Get paid to wait
The sweetest of all deals is to find a value play that's paying a substantial dividend. A stock like this is a potential triple threat. First, snapping up the stock at a value means you start off at a higher dividend yield right off the bat. Second, seeing that quarterly dividend find its way into your brokerage account eases the pain -- especially if the dividend keeps increasing -- of waiting for the rest of the market players to catch up with your brilliant analysis. In fact, if you use a dividend reinvestment plan to leverage your investment, you accumulate more and more shares at bargain prices. Finally, when the market does come to its senses, you reap the gain. Look for companies such as Motley Fool Income Investor pick Duke Energy
Even with dividends flowing in, you'll still need discipline and patience. I sold our shares in Altria
Smaller pie, more ownership
Sometimes, it's the ultimate insiders agreeing with you that the shares are just too darn cheap and initiating a stock repurchase -- the company itself. Recently, Inside Value pick 3M
So, fellow value investors, dig in for the long haul; patience can be a very profitable virtue. Continually seek to verify your initial analysis with ongoing reviews to ensure that your companies are still the value plays you first thought they were. Seek out firms that look like good takeover candidates, and comfort yourself in the realization that it takes only one influential investor agreeing with you that a firm is a bargain to get the price back where it belongs. Finally, look for firms that pay you well, in the form of dividends or repurchases, to wait.
Duke Energy was recommended in the Income Investor newsletter service, and 3M is anInside Value stock pick. Try either of these investing services free for 30 days.
John Dutemple, CFA, is the president of Compton Advisors, LLC, a Missouri Registered Investment Advisor firm. He's also a musician. He owns Sallie Mae shares and plays air mandolin to "Maggie May." The Fool has a disclosure policy.