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Right Price Checklist: Conclusion

By Teenvestor on Sat, 2008-04-19 21:14
(via mikesnewsletterinvesting.blogspot.com)

The final part of the series goes over how to conclude you investment analysis, see if there's a margin of safety and find a catalyst. I then decide whether or not to purchase shares of Best Buy.

Chungst on Wed, 2008-05-21 20:24
Title: Catalyst is wall street speak for short term trading

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.

George on Thu, 2008-05-22 12:53
Title: Re: Catalyst is wall street speak for short term trading, Agreed

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.