Kenny's approach was simple. The automobile industry may be really weak and Toyota has probably the best technology out there in the industry. From a Singaporean point of view, there is probably no way I will purchase a Ford over Toyota. Kenny has been studying in the States and he feels that people there are really patriotic especially those in the south. So even if Ford does not have the best car for value out there, most Americans will want a Ford compared to a Toyota. National pride is the key factor over here and this leads to the notion of Ford grabbing a "greater share of a smaller pie". This is enough to justify our optimism in Ford. It is not about the numbers. I'm sure that the numbers will never justify this.
So the issue here will be why national pride is the most important factor over here compare to other factors say technology, price, global demand and etc. This is something that really varies from people. I guess national pride is just not in sync with most Singaporeans over here and that's why they can't see the importance of it.
I'm not trying to force you to think like us. The importance of this approach has two important benefits.
No.1: It covers the blind spot of fundamental analysis thinking. Over here, the economy and the latest trend of automobile industry will probably throw the whole idea of Ford away.
No.2: It frees your mind and not restricts your thinking on stuffs like valuation. I don't think I can justify Ford at $12. I don't know if there is anything out there to justify it. The only thing that I know is that Ford has a story to tell.
Weirdly, all three of us are really not people who go by the numbers. I hope that you can really get something away from Ground Zero Approach. Ciao.
Jin
3 comments:
To a great extent, I believe national pride could have played a significant role in empowering Ford.
But I was just wondering, if US citizens are generally partiotic, how then do we explain the burgeoning trade deficits they started to accumulate since the 1960s?
From what I understand, a part of it has to go to its monetary policy stance that it takes. I don't think I have the full capability to explain the economics at play but from another point of view, US has a spending culture. So while they do buy US goods, they do consume a lot of goods from other countries.
I find that the best indication of how undervalued a stock is is the price to sales ratio or what is commonly referred to as market cap.
Simply stated. If a company does 1 billion in annual sales but it has a market cap of 100 million dollars than the price to sales ratio is ten to one. In other words the market is valuing a company that does 1 billion dollars in annual sales at just 100 million dollars. But what does this mean. It means everything if you are a classic value investor.
Here is a perfect example of why the price to sales ratio is so very important if you are a value investor in stocks. If our 1 billion dollar company is breaking even that is they are not making a profit nor losing money. Lets say the company has 250 millon dollars in long term debt and 80 million dollars in cash. We will say they are in the food business they make a wide aray of food products. Maybe the company did a buyout of another company a few years ago that did not work out as well as expected. So thats why the company is having trouble making a profit but things now seem to be moving in the right direction. If I purchase shares in the company for say 10 dollars. And over a five year period the company improves their earnings performance to the point where their now earning say 60 million dollars on sales of one billion two hundred million dollars. Thats a profit margain of 5%. If the stock were to now trade at twenty times earnings that would now mean that the price of the stock would be at 120 dollars a share or another way to put it the marketcap is now one billion two hundred million instead of 100 million.
The problem for me is not that this investment method is not effective it works great. I purchased seaboard stock back in 2000. I think it was for 190 dollars a share around that. I following the exact method I describe above. I sold my shares about five years later for 2500 dollars yes thats correct 2500 dollars or more than twelve times what I paid for the shares. Seaboard was profitable when I bought it and profitable when I sold it. The stock was just a great undervalued stock that was overlooked by investors.
Like I was just saying before the problem is not with my investment method. Its that stocks like seaboard are very rare indeed theirs just not a whole lot of quality companies out their selling a very low price to sales ratios. Another issue that I have been having is when a company of decent quality trades at a very low price to sales ratio its not long before a private equity firm or the family of a family owned company takes notice and usually makes a low bid for the shares and takes the company private preventing me from realizing the enormous gains that mght have been possible had I not been forced to sell my shares out to a party that was making a very unfairly low offer for the shares of the company.
Another thing to keep in mind when it comes to value stocks that have a low price to sales ratio that could give the buyer a tremendous advantage is this.
I mentioned earlier that are food company had 80 million dollars of cash on their balance sheet now if the company choose to they could buy back a large chunk of their stock maybe 30 million dollars worth of the shares outstanding it would only cost them 30 million dollars they still would have 50 million dollars of cash left on their balance sheet. This means that under the positive earnings outlook for the company the stock price could even be much higher than 120 dollars a share. If the company were to retire a large percentage of their exsisting shares in a stock buyback.
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