Investorial

A September 19th Forbes.com article titled “Cash Is Trash” criticizes the abundance of cash sitting on the side lines of many value fund managers. The articles writes:

Some value fund managers, flush with an influx of new money from clients, are letting it pile up rather than investing it in value stocks they view as too pricey. While they wait for a better day, other value managers say letting money sit around in cash is sinful, and they swear good buys still can be had.

My first thought about that paragraph was thinking who are these “other value managers”? Oh wait, Megan Johnston must be mentioning those fund managers that always jump on the trend of the times. Those managers who called themselves “growth managers” or “tech managers” are the same ones now declaring that they are “value managers”. The paragraph did not describe anything close to a true value manager and sets the tone for an article that caters to hype and only serves to wet the appetite of investors who will hear what they want to hear.

Megan goes on in the article to say:

Worse, the cash claque really amounts to indulging in market timing, the belief that one can know when a market turn is coming. But the market and individual stocks have fooled many a stock-picking genius before, and those faux turning points were bitterly illuminating.

I was certain that Megan does not have a clue about value investing. Value managers are indeed market timers! But Megan is still referring to that term as a growth manager would! A true value manager does not care how the overall market is performing! They are making the timing on the individual stocks on their watch lists. They are looking for an undervalued situation, an oversell, a misvaluation, a potential situation that will unlock hidden value for shareholders, and times when the markets are overreacting to bad news that do little to affect the business fundamentals.

Value managers are absolutely making their purchases based on timing! Doing this successfully requires the manager to more or less be contrarian to what the market is doing. In plain english, true value managers love the opportunity to go against the market because they are the ones who truly care about buying low - as low as possible versus the company’s intrinsic value, in order to sell high later. Therefore, the number 1 rule to engage in such practices is to always make cash preservation the highest priority!

The article does correctly state that value investing has a better proven record than any other style over the long term. The articles comments that some of the most recognized value managers of Tweedy, Clipper and Longleaf were seeing their short term performance lagging their category peers. Well, that’s the market hype machine working at its best. Value investors are not a crowd that care about short term performance. These managers are hired for their expertise in keeping and growing money over the long term and are considered some of the best.

Warren Buffett, arguably the most notable value investor, has always said that the best time to sell a stock pick is never. If you can buy a stock, allow the market to close for 10 years and still be happy about the pick, then you should buy it. Value managers more or less follow that creedo, and they view the battle as half won if they are able to pick a good entry point; hence timing on an individual company basis!

The most successful value managers have been great managers of large amounts of cash at one time or another. Megan’s article served little purpose but to show her ignorance of what true value investing really is all about.

Related Links

Forbes.com: ‘Cash Is Trash’ by Megan Johnston

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