This weekend, I read Howard Mark’s latest memo – Inspiration from the World of Sports. No new concepts were covered, but it resonated because I was having the same thoughts just this week based on a personal experience.
I'm taking a module called Equity Research Seminar as part of my undergraduate studies and students are required to do stock pitches for the curriculum. I pitched on Goldlion Holdings this week, a retail company listed in Hong Kong and something that we have written about a long time ago. Net of all liabilities, cash and investment properties, its retail business is trading at an implied P/E of 1.4x. What could result in such low valuations? The Goldlion brand image has severely diminished during the last decade. What was regarded as a luxury brand is now relegated to the realms of being old-fashioned. Profitability has declined in recent years (but which Chinese retailer is spared?) and these facts were not lost on the audience. What was lost was its 1.4x P/E valuation.
“The truth is, most great investments begin in discomfort – or, perhaps better said, they involve doing things with which most people are uncomfortable. To achieve great performance, you have to believe in value that isn't apparent to everyone else (or else it would be already reflected in the price)…”
What I found interesting was that I had already reiterated that the retail business was not a sexy one. Unfortunately, human nature causes most people to have the same notion and need for comfort. Consequently, most fixate on finding that home run where everything is perfect, ignoring everything that comes in between. In fact, the TA quipped, “Someone actually covered this stock in the value investing module (emphasis added). We didn't like the fact that its brand was so poor.” The irony was not lost on me.
Buy low, sell high
Here's another peculiarity of a similar vein. Everyone knows that you have to buy low and sell high. Buy during the troughs of cycles, sell at the peak. What sectors are at the trough now? Steel, oil and gas, shipping and casinos. Yet, every time it is mentioned that stocks in these sectors are cheap, the reply invariably is “Yes, but they are in a down cycle.” I've heard this from fund managers and students alike.
Investor psychology is a funny thing.