Bargain Prices – Swinging At The Fat Pitches by Charles Mizrahi
During the months preceding the market low in March 2009, there was plenty of low-hanging fruit to pick – financially sound companies that were trading at bargain prices.
After I researched a company and was about to recommend it in one of our portfolios, I checked and double-checked my numbers because I thought I had made a mistake. Mr. Market was offering these companies for a fraction of their worth … which I found hard to believe.
Charlie Munger: Invert And Use “Disconfirming Evidence”
I sent an email to a colleague and asked whether he’d go over my work to see if I had made a mistake. His response: “Nope, you’re right. That’s what stock prices sell for at market bottoms.”
This was especially true after the summer of 2008. Companies that had rock solid balance sheets, little to no debt, and were good/great businesses … were there for the taking.
Two of those stocks are still in our portfolios—and each of them is up more than 300%! We sold the other stocks when they became fully valued and replaced them with stocks that were trading at more attractive valuations.
Since the March 9, 2009, market low, the S&P 500 index has soared to new highs, more than doubling . Needless to say, there isn’t as much low-hanging fruit to pick at these price levels.
Our approach is a two-pronged one: we want to buy only financially sound companies when they are trading at attractive valuations. During bull markets that isn’t always so easy.
Ted Williams' Secret to Investing Success?
Boston Red Sox outfielder Ted Williams was the last baseball player to have a batting average of .400. In 1941, Williams batted .406, and since then, only four players have hit as high as .390. Many baseball historians say that Williams’s record will never be broken.
Investors can learn a lot about investing from him.
Williams had an analytical mind and was a disciplined hitter. He estimated his batting average in each area of the strike zone and would swing only when the ball was in the area where he had the highest probability of getting a hit.
He calculated that if the ball were thrown right down the middle (red zone), he would have a .400 batting average. If he swung at pitches in the lower-right or left-hand corner of the strike zone, he figured his average would plunge. The differential is extreme. In his best zone he hit .400, and in his worst zones he hit just .230, for a difference of .170.
Baseball historians have surmised that there were seasons when Williams could’ve notched another season of hitting .400. Instead, Williams refused to expand his strike zone. He would rather walk than swing at a pitch that could lower his average.
His analytical mind and discipline, along with a great swing, made him the last player to hit .400.
Advice for Investors
Williams’s approach to hitting is very similar to our approach to investing. It too involves discipline coupled with analysis.
We don’t use a strike zone as our guide and swing only at the pitches down the middle. Instead, we use a bull’s-eye and invest in only those stocks that are financially sound trading at bargain prices. Any stocks that pass one but not the other criterion we don’t invest in.
At the end of the day, after we find financially sound companies, it comes down to the price we pay. Over the past few months it has become increasingly difficult to find financially sound companies trading at bargain prices. The recent rise of the stock market has left very few stocks in bargain price territory. For now, the low-hanging fruit has already been picked.
“The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high. This isn’t a theoretical risk; it’s very real.”
As long as we continue to buy financially sound companies trading at bargain prices, we’re confident we’ll keep hitting the bull’s-eye. All it requires now are discipline and patience.