Waiting for the Right Pitch

For a value investor a pitch must not only be in the strike zone, it must be in his "sweet spot."  Results will be best when the investor is not pressured to invest prematurely.  There may be times when the investor does not lift the bat from his shoulder, the cheapest security in an overvalued market may still be overvalued.  You wouldn't want to settle for an investment offering a safe 10 percent return if you thought it very likely that another offering an equally safe 15 percent return would soon materialize.

An investment must be purchased at a discount from underlying worth.  This makes it a good absolute value.  Being a good absolute value alone, however, is not sufficient for investors must choose only the best absolute values among those that are currently available.  A stock trading at one-half of the underlying value may be attractive, but another trading at one-fourth of its worth is the better bargain.  This dual discipline compounds the difficulty of the investment task for value investors compared with most others.

Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available.  Investors should never be afraid to reexamine current holdings as new opportunities appear, even if that means realizing losses on the sale of current holdings.  In other words, no investment should be considered sacred when a better one comes along.

Sometimes dozens of good pitches are thrown consecutively to a value investor. In panicky markets, for example, the number of undervalued securities increases and the degree of undervaluation also grows. In buoyant markets, by contrast, both the number of undervalued securities and their degree of undervaluation declines. When attractive opportunities are plentiful, value investors are able to sift carefully through all the bargains for the ones they find most attractive. When attractive opportunities are scarce, however, investors mus t exhibit great self-discipline in order to maintain the integrity of the valuation process and limit the price paid. Above all, investors must always avoid swinging at bad pitches.