Value Investing News - BBY - Comments

Re: Catalyst is wall street speak for short term trading, Agreed

George — Thu, 22 May 2008 12:53:56 -0400

Chungst, I like your take on the need for investment catalysts, or really the lack of need. I've never really bought into the notion of finding catalysts for long term investments. However, I've never been able to articulate my distaste for catalysts the way you have.

The key to avoiding value traps is to try to determine if management is honest and to make sure the companies you buy have sustainable competitive advantages that will allow you to wait out Mr. Market's fickle tastes.

Catalyst is wall street speak for short term trading

Chungst — Wed, 21 May 2008 20:24:26 -0400

One of the advantages of youth and being inexperience is that you have a truly open mind to really learn and challenge the established wisdom.

Having worked on wall street (next door to NYSE) and in asset management on the buy side for a number of years, I want to share with you that if you need a catalyst as part of your investment thesis, then you are focused on short term trading.

I recall a story of a US Senator asking Mr. Buffett how does the value gap of a stock shrink over time, and Buffett said there's not set pattern, i.e. hinting there is no catalyst.

Therefore, if you are concerned about a "value trap," then it wasn't a under-valued company to being with. For example, if XYZ stock gives me a 10% earnings yield while the yield on 30-year US treasuries is at 4.5%, then I shouldn't worry about the lack of movement in my stock price. To me, every year, the company is adding 10% of value to its book value (assuming no dividends) if it continues to have an earnings yield of 10%! In this case, there is no trap and thus I don't need a catalyst.

Good luck in your journey in continuing to accumulate investment knowledge.

Some Counterpoints

MagicDiligence — Mon, 14 Apr 2008 11:54:24 -0400

Hey Mike,

Nice piece. The related transactions are not too bothersome. For many of them the company may be getting a better deal then they could get elsewhere. In any case, it's better than the tons of perquisites (perks) you see with other companies - things like country club memberships, private parties, personal use of aircraft, etc.

The board as well makes sense to me. A CFO of McDonald's would have knowledge of international finance - an important strategy of Best Buy's growth. A chairman of Pepsi's Mexico operations provides them a unique perspective on a market they are entering. These are all good uses of board seats.

Finally, the accounts payable line has been growing roughly in line with revenues. BTW, a high accounts payable line is actually a good thing for retailers - it means they are able to pay suppliers slower (which greatly improves DSO, leading to better cash flow).

Thanks again for a good article.

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Adding fundamental analysis to a winning
value stock strategy.

www.magicdiligence.com

I'm glad people enjoyed

Mark Perkins — Sat, 05 Jan 2008 02:31:05 -0500

I'm glad people enjoyed this.