10/7/10 CAT & MSFT – Changing places

10/7/10 CAT & MSFT – Changing places


Where have all our good stocks gone? Why they are right here……..

I never thought I would see the day when MSFT had a more desirable profile than CAT. The day has come. These stocks have traded profiles. While CAT’s dividend yield has crashed its P/E has sky rocketed! The exact opposite has happened to MSFT. These stocks are typically of the role reversal we have seen the past 3-18 months. I find it shocking that the stocks we previously enjoyed success with no longer fit our profile while the stocks we avoided now fit our criteria.

These are not the only stocks that we have had this experience. There are several that have fallen out and in that, we already established long held opinions on. The lesson learned is that investing is a life long experience and we must constantly look for new stocks to value and run our screens regularly. Oddly enough as we recently reviewed the stocks that had their dividends fall and P/E’s rise, we found that we were actually pretty good value investors.

Value investing is an investing style “invented” by a fellow named Benjamin Graham. If you have not heard of him, you most likely have heard of his most famous disciple, Warren Buffett (aka: the sage of Omaha). Graham exhorted the stock market participant to first draw a fundamental distinction between investment and speculation. In his book “Security Analysis”, Graham offered a clear definition of investing as opposed to what he called speculation. "An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."( Benjamin Graham, "The Intelligent Investor", 4 ed., 2003, Chapter 1, page 18). Graham liked stocks that he could understand and abhorred speculation. Analysis and valuation were keys to his view of successful investing. Modern value investing is defined buy identifying stocks selling below their potential value and buying and holding them until they reach their potential. Sound familiar?

No doubt if Ben were alive today he would not only be reading our blog, but employing our strategy…………..