By John Reizner |
In my eBook, A Way to Wealth – The Art of Investing in Common Stocks, I share my philosophy and practice of selecting mutual funds managed by value managers in order to build wealth over time. Most of the funds in which I have personally chosen to invest fit that category. So far, my original investments in most of the funds in which I have invested have multiplied over the years and I have by and large been satisfied with their performance in both up and down markets. My funds have included the Templeton Growth Fund, First Eagle Global Fund, and the Royce Opportunity Fund (sold).
I think the investor before purchasing a fund should look at the track record of his prospective choices, preferably over at least one full market cycle (bull and bear market performance). Look for funds which perform well in down markets as well as bull markets. You will be grateful you did if these funds are again able to sustain comparable performance when there is a bear market. I discuss this in my ebook as well as in the FAQs of my website.
Some value fund managers may look at publicly traded companies and attempt to calculate a private market value for the firm, and then buy them at a discount to that share price in the open market. When the stock market marks up the price of the company stock to their previously established private market value, they may sell the stock for a profit.
This method may lend itself to value managers loading up on companies when the general market is relatively lower, at “bargain” prices, and unloading shares as the market moves upward and stocks become more “expensive.”
Other value managers may look at price-earnings ratio ranges over time, an important measure of value. Sometimes downtrodden companies or industry segments will linger for months or even years at low price earnings ratios, before beginning spectacular advances.
The example of homebuilders gives some insight into how value fund managers may select stocks for investment. Many of them lingered at single digit price-earnings ratios at the turn of the century before turning upward. Since the bull market that began in late 2002, these stocks became favorites, even “growth stocks”, while still maintaining their low P/E’s (their earnings grew as well as their price during these years).
It is no secret that the builders have experienced a bit of a debacle recently as some have lost more than half of their share value during 2006 (D.R. Horton and Hovanian Enterprises, for example) as the real estate market weakened. We will see if and when these equities will revive.
Opinion is currently divided among the value investors I follow regarding homebuilders, with Bill Miller (Legg Mason) and John Neff (retired fund manager) apparently still looking favorably on selected builders.
As this instance shows, often value investors are early in the game. The equities they choose may not appear on growth managers’ radar screen until they are out of the “bargain” stage and have been growing their earnings for a while. I believe value stocks are frequently less volatile than many of their growth brethren. Thus the well-constructed value mutual fund may surrender less of its value back in down markets, and may provide upside gains in good markets.
My experience is that value fund investment is an important component of an investment program that is designed to build wealth over time. Funds provide diversification over many holdings, an added advantage designed to reduce the risks of investment concentration. There may be little reason why a well-chosen fund cannot be held for the long term as part of a long term investment plan.