Growing Rich - Arabictrader.com

KIRK KAZANJIAN
IGNORE BOOK VALUE
Book value also used to be a traditional measure of whether a
company was cheap. The thought was that if you could buy a company
at or below book value, you were getting a good deal. It was a
theory popularized by Benjamin Graham, a man who is often thought
of as the father of value investing. But Yacktman and the others I
interviewed all agree this measure of value is no longer relevant.
“When you concentrate on book value, you wind up buying asset
plays, which I view as moving sidewalks,” he says. “Will buying based
on book value work over time? Yes, if you consistently purchase
companies that aren’t disasters. But I feel you can enhance this approach
through buying good businesses at cheap prices, not necessarily
at book value. You’ll almost never get a truly good business for book
value. Freddie Mac, the financial services company that packages and
resells mortgages, dropped down to that level in 1990. But situations
like this are extremely rare. They are so rare, I don’t think you could
run a portfolio based on those parameters alone. While I use some
value techniques, I consider myself to be a growth manager. Value
managers will buy a stock at a low price, even if it’s not growing.
Over time it’s hard to make money that way. The classic example of
this is General Motors versus Philip Morris. These are both stocks in
the Dow Jones Industrial Average. Since 1965, when the market first
hit 1,000, General Motors has maybe doubled. Philip Morris, on the
other hand, is up about 250 times. General Motors is the moving
sidewalk. It sells for a low PE and closer to book value. Philip Morris
is the escalator. I’d take Philip Morris over General Motors any day.”
Accordingly, Yacktman argues that the real core of a company’s
value isn’t the physical assets on the balance sheet, but rather its
ability to earn a high return on assets over a sustained period of time.
“The economics of the business are what matter,” he says. “I like
companies with what I call an unfair competitive advantage. They
have some unique feature that allows them to stand apart from the
crowd. I didn’t fully appreciate this concept until I had been investing
in stocks for several years. The common thread among my biggest
winners is that they have all been good businesses with low-capital
intensity.”
56