In this series, we’ve asked Covestor managers: “What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”
Author: Paul Franke, Quantemonics
Covestor model: Relative Value
The most successful and repeatable lesson I have learned investing money for 25 years revolves around searching through out-of-favor, unloved sectors and stocks for real long-term value. Usually this means reviewing the balance sheets and business prospects of stocks that have underperformed the market averages for a number of years.
This was the basic strategy employed during my years running the Maverick Investor newsletter in the 1990s, and is one of several strategies I will be using at Quantemonics Investing on Covestor.
I’ve also learned that it can be valuable to be an activist at times with my smaller company investments, especially when a stock is undervalued. I have in the past written letters to the board of directors and management team of companies whose stocks I own, explaining the changes they need to make as I see it.
The lesson both new and old investors alike should ponder and try to emulate on their own is to look for strong companies in the weakest stock market sectors over the last year or two to find attractive candidates for the coming years. Sticking with business enterprises holding few liabilities and leading brand names is helpful in whittling down the possibles from the impossibles.
The potential pitfalls of deep value and contrarian value investing are many. For example, is easy to conclude that any stock that has fallen 95% is due to bounce back, or to imagine sectors that have been out-of-favor turning on a dime. But if investing were easy, EVERYONE would be rich! Not so fast.
Uncovering hidden gems or a piece of gold in an acre or two of rock and dirt is not easy. Many stocks that appear undervalued according to the various accounting and ratio metrics have been discounted by the market for future economic changes or a new events not visible in past accounting statements.
The real challenge is determining the difference between actual, real world risk for a business operation’s future success, and the current implied risk as measured by today’s stock quote.
Quantemonics Investing will be searching for and investing in similar undervaluation stories, among other strategies, on Covestor.
