There Are No Bad Assets

From the Baltimore Clubhouse – There are no bad assets, just bad prices.

A hedge fund manager I once worked with in Pittsburgh used to say this to me all the time. It was his professional mantra.

I was reminded of the phrase the other night as I watched his beloved Steelers fall to the Baltimore Ravens. I thought of Pittsburgh, then the fund manager and then the saying. It’s funny how the mind works.

Anyway, the world of investing is rife with clever sayings like this. Most of them utterly forgettable.

But this one has stuck with me through the years. Probably because of its simplicity.

How good or bad a stock, bond, option or other instrument is really depends on how much you paid for it. Nothing more or less.

Famed investor Howard Marks of Oaktree Capital said something very similar:

For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.

So if you can find assets priced at a discount to what they’re worth, you’re guaranteed to profit.

The Club’s Chief Investment Strategist Alexander Green put it this way:

If you can find healthy companies that are relatively inexpensive relative to their sales, to their earnings, to their book value, and pay above-average dividends, these companies not only have a history of doing far better than the market as a whole, they also do it with far less risk.

To be sure, most measures of the U.S. stock market indicate it is far from inexpensive right now.

Nobel laureate Robert Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio is now the second highest it’s been since 1871. And Warren Buffett looks at the ratio of the market capitalization of all publicly traded U.S. stocks to size of the economy. The market is now 148.4% of GDP, the second-highest ratio in four decades.

Yet as ETF Strategist Nick Vardy pointed out yesterday, the S&P 500 is downright cheap if you take out the very expensive tech sector and Amazon. This suggests that, outside of tech, there are bargains to be had in this market. These would be companies that are still underpriced and poised to rise.

This makes me optimistic that, despite the fact that this bull market is more than 9 years old – the longest on record – we investors can still make gains.

Of course, finding those undervalued stocks is the trick. It’s something we specialize in here at the Club.

If you’re interested in uncovering these undervalued stocks, Alex is researching deep value opportunities that others are missing in this market. Check out what he has to say
here.

Good investing,

Matt