Time Tested Method: Value

If you read my recent posts, your impression may be that I am a short-term trader. Truth be told, I consider myself a value investor with long-term perspective. Lately, that "long-term" have been two to three weeks because the market allowed me to earn that rate of return in that time frame.

Although I can put on a speculative hat, I think it is not worth my time. Trading is not easy. I did everything from trading gold, miners, oil, financials, to options. The end result was a minimal return or big loss. Being a short-term trading is one of the most difficult occupations I know. I have an uncle who does day-trading in Hong Kong market. He said this to my dad last year "everyday is like a casino, your heart pounds faster than normal". That is not the mentality I want to live with.

But I began my investing life pursuing the "quick cash" and "fast money" which led me to trading, a method of buy and sell stocks in short period of time with disregard to their value. I learned to read charts and indicators. Along the way, I discovered the Dow Theory. Many of you may know it as technical analysis or simply charts reading. With detailed study, I found that Charles H. Dow, the founder of the Dow Theory, placed tremendous emphasis on value. Dow stated this back in 1901 "Stocks fluctuate together, but prices are controlled by values in the long run". Strange, isn't it.

Turns to current situation and we have a problem. Because the recent rally have been so big, I believed the market will move down. At the same time, I see companies that I believe to be undervalue, what do I do? I go out and buy them with a mental note that price may fall farther but their value will continue to grow, a positive divergence to those with money to withstand the downturn. To illustrate what I mean let's look at some charts.

Note: On the charts I wrote December, but it's actually November.

The first chart is the Dow Jones Industrial Average ($INDU). Noticed that we reached the November 2008 low at 7449. The market deteriorated in the following months and the Dow dipped to 6469 in March 2009.

Now turn your attention to the stock that I've been following closely over the past year. It is Carlisle (CSL). The stock reached a low point of 16.36 in November 2008. Something extraordinary happened after market continued to deteriorate. The stock reached a low point in March 2008 at 17.63. That is 7% higher than November.

Let's look at some stock we all know and can relate to, Intel (INTC). It is also a Dow Jones Industrial component so it is a great compare. Intel reached a November 2008 low of 11.84. In correlation to the Dow, the stock failed to move up and declined in February 2009. However, it reached a low of 11.95. Only 0.009% lower than in November.

Here is a chart of the All-American stock, General Electric (GE). The stock hit a low in November 2008 at 11.89. As economy deteriorated, no buyer stepped in to support the stock. It fell to 5.68 in March 2009. The most recent rally brought the stock back to the November low level only.

Summary

Value creates a floor in price. When price decline, smart money realized the value and they come in to buy the stock. Clear examples are in Carlisle and Intel. The opposite can be said about GE.

When you consider to purchase any type of investments, pay attention to the value not the price. In stock, you can look at price/earning, dividend yield, price/cash flow, and price/book. In real estate, it will be income ratio to mortgage, rental rate to mortgage, or cash flow projection.

Art

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