Boeing, from Purchase to Sale: A Value Investor’s Exercise of Patience, Discipline and Risk Reduct

From the time I was a little tyke, I knew the benefits of having cash available to make a purchase. With it I could easily buy something under very favorable terms when others were in desperate need of that cash. Maybe that drive to make a purchase at a bargain price is in my DNA, or it might just be from following my Mom around to all the yard sales in town, watching as she bargained to save a nickel. So it should be no surprise that when I discovered the value approach to investing it felt right in every way. Buying a small ownership in a business, via the public securities market, at a price that was less than the value I could reasonably place on the entire business just made sense to me.

Shortly after I began this journey into professional portfolio management as a value investor, I found that it doesn’t take very well with the majority of individual investors. And it has almost zero appeal to the mass army of financial advisors working on behalf of broker-dealers or investment consultants guiding their institutional clients. Value investing does not appeal to the get rich quick crowd, nor does it fit into a predetermined bucket based on one or two single factors like price-to-book or price-to-earnings. Not to mention that the academics who study markets state that any outperformance that comes with value investing is simply the reflection of a higher level of risk.

Value investing is not contained to any single type of investment or market. It is universal in its application to common stocks, bonds, real estate, or any other type of asset that has potential to generate future cash flow. The problem, as with all investing, is that the amount of future cash flow is never certain. For common stocks, both the amount of cash flow and the timing of when that cash flow (if ever) will be paid are uncertain. Because of this risk inherent in all types of investing, each of us will have to apply some form of risk reduction to reduce the impact of uncertainty.

The primary method of reducing risk is through diversification and asset allocation. In addition to these broad categories, value managers believe that purchases of common stocks require a margin of safety. This means buying when the current market price is less than the fair or intrinsic value of the entire enterprise as calculated using publicly available information. What is interesting is that most individuals and professional investors think that common stocks have less risk when prices are high relative to fair value. It is why the buy high, sell low club continues to add members.