Black Friday and Cyber Monday provide some helpful reminders of time-honored value investing principles. Let’s recap a few.
Discounting from previously advertised prices may not indicate a bargain is at hand. Imagine the following product being discounted 90%…does that make it a buy? No discount would make the product below a bargain, in other words, it is overvalued at any price.
Likewise, companies in the stock market are frequently selling at lower prices than the previous year or just a few months ago. However, this does not mean that these companies are now cheap. For example, Arch Coal is down 99.2% ytd and the equity is still overvalued. Another quick example from earlier this year is Lumber Liquidators. It might have looked attractive at $30 per share (60% off its earlier price) after 60 Minutes accused the company of selling formaldehyde-tainted flooring. Fast forward to present and the stock is down another 50%, trading around $15, down 76% ytd. Just because something is selling at a discount to its previous price doesn’t make it a bargain.
Knowing what price you want to pay before looking to Mr. Market for the prices he is offering is the best way to ignore the “bargain pricing” mentality when looking for good deals.
On the other hand, it is true that great companies do go on sale occasionally. Berkshire’s stock has fallen over 40% multiple times in its multi-decade climb from $18 per share when Buffett took over in 1965 to its current price of $201,790. I follow about 150 companies regularly, but of these companies, 20 are top-notch, Wells Fargo type companies. Even among this group of great companies, each one of them has gone on sale this year, down around 15%-20%, at least once or twice this year. A few months ago, our wash machine broke down. We bought a new one the next day. I was not going to wait for the Black Friday deals to get a discount, but waiting around for those discounted sales on your favorite companies is well worth the wait.
- Know what companies you want to buy.
- Know what price you want to pay.