Newsletter – May / June 2012 – Value Investing

Value Investing

Many investment advisors claim to be value investors. They use statistics such as earnings per share and book value per share, to judge the so-called value of a company. If the price of the stock is below their calculated value, it’s a bargain. If the stock is trading higher than their calculation, it’s selling at a premium.

I sometimes wonder if investments have value that’s not accurately accounted for in their bookkeeping. Accountants call it goodwill. A good example would be Tim Horton’s stock. Some people buy their coffee just because they like the Tim Horton’s brand. That Tim Horton’s brand is a great example of goodwill. What’s the brand really worth? How do you put a value on something like that? Between the accountants and the stockbrokers, they have figured out how to value goodwill. But is it really value? Or is it just something they made up?

At CastleMoore we think differently. We like to talk about the value of your portfolio. We are less inclined to value Tim Horton’s or Starbucks: for us, it’s important that they add value to your portfolio. It’s important to us that the price is going up over time. And we think it’s important to you too.

A case in point would be the wonderful financial story of Apple and Research in Motion stocks. Apple’s stock has been going up forever, it seems. RIM has been going down for what, to its shareholders, might seem like forever. Apple’s new products seem wonderful to securities analysts and Research in Motion’s seem less than wonderful. If we measure value in traditional accountants’ ways, using earnings and book value, Apple seems overpriced and Research in Motion seems a bargain. But Apple keeps going up and RIM keeps going down. The way traditional analysts approach it, value investing is tricky business. For CastleMoore, life is simpler. We’d like to own lots of stocks like Apple and none like RIM. Investments in up trends add value to your portfolio. Investments in down trends are disasters for your portfolio. CastleMoore’s investment techniques involve adding investments that go up in price and weeding out investments that go down in price. That’s our value. It’s easy to say, but not so easy to do.