3M Company: It Didn’t Take a Crystal Ball to See That It Was Overvalued: Part 3
Regular readers of my work will attest to the fact that I am an avid proponent of valuation. So much so, that I cannot recall writing an article where I didn’t discuss the importance of only investing in a stock when it was fairly-valued, or better yet – undervalued. This obsession with valuation inspired one reader to dub me as “Mr. Valuation.” Frankly, it is a mantle that I covet proudly. I bring this up for an important reason. Long-running bull markets like we’ve been in since the end of the Great Recession are very difficult markets for value-oriented investors to navigate.
The reasons are simple and straightforward. First, it is very difficult to find attractively valued stocks when investor sentiment is wildly optimistic. Rising stock prices lead to investor overconfidence which often further leads to complacency. Consequently, valuations based on fundamentals, even when they reach dangerous levels, are easily ignored. Rationalizations overtake logic; therefore, bull markets can persist far beyond reason.
This exuberant environment is a scourge to value investors like yours truly. As a result, I have often lamented to clients that I live in money manager hell. At precisely the time when clients are lavishing me with compliments (the height of bull markets), I find myself in a state of what can only be described as depression. All I see is danger, while all clients see are the recent profits even when they are unjustified by fundamentals.
However, reality inevitably takes its toll. Unfortunately, the “when” is rarely predictable but inevitable nevertheless. Consequently, selling overvalued stocks that have performed far above what fundamentals dictate creates client unrest and even reprimands, even though it’s the right thing to do. This leads me to sharing what I found as fascinating comments on an article I read on 3M Company (MMM) while conducting research for this article. I will provide excerpts of these comments, but the authors will remain anonymous.
To me, this first comment was both on the money, and perhaps the most interesting: “Same company it was 3 months ago. You should be buying now.”
This comment led to a second comment that I also considered credible: “Correction: you should have been selling 3 months ago.”
However, this third comment was the inspiration to the title of this article, and I believe speaks to what I have written above: “You realize both could be true right? Anyone with a crystal ball might have sold 3 months ago and could be buying now. I personally don’t have a crystal ball, so I’ll just stay long and sleep well.”