Friday, June 29, 2007

Looking Smart or Misery Loves Company

Buffett remarked that success in investing does not necessarily correlate with IQ. Thank God! I easily could have ended up doing something I don't enjoy as much as this.

The real key to success in this business is avoiding the influence of others (especially the market.) If you are easily swayed by others opinions, you can easily head down the wrong direction. If consensus is what you crave, value investing of the contrarian variety will drive you up a tree!

Discipline is incredibly important, but don't bury yourself in the details. I can recall Buffett describing his spending about half an hour in his analysis of General Dynamics submarine business shortly before buying a 15% stake in the company.So many investors get caught in analysis paralysis or intellectual need to execute to own. Analysis and thinking is required but the obvious bargains are...obvious!

A great idea is often a lonely idea.Ugly performance over the near term is frequently part of this approach. Your friends wonder what the hell you are thinking...your clients wonder if you are thinking at all !

A lack of sentiment, an iron clad ability to say no, and a tendency toward being intuitive and introverted doesn't make you popular in the cocktail party circuit. Buying unpopular stocks that everyone "knows" are going nowhere doesn't help your popularity either!

Other iconoclastic investors have joined me in a few of my investments. Geoff Gannon highlighted Legg Mason (LM) and our previous posts. Bill Ackman's Pershing Square has accumulated about $200 million (1.9%) of the stock. Bill Ackman has a terrific record in finding value and creating more value.

As well, ValueAct Partners has augmented its position in Advanced Medical Optics (EYE) another position that was recently posted. ValueAct is another group of outstanding investors who apply their unique thinking to unusual areas of value investing such as technology and biotech. ValueAct now owns 12.2% of EYE.

How unpopular are these stocks? There are three Wall Street analysts with buys or outperforms on LM; nine analysts in the non-committal, we really don't like it because it's dead money "hold." EYE has one brave soul with a buy, six with holds, and two with the dreaded "sell" or "underperform."

A client this morning told me that despite the flat response that these stocks have had since purchase that I am looking pretty smart. That sort of praise generally occurs after you have made them a lot of money not now. Smart has nothing to do with it...rational does. I am pleased that some very rational investors are aligning themselves in companies that many view as miserable, as going nowhere, or as dead money. Maybe its just that misery loves company. By the way, those guys are smart too.

I think both of these companies represent decent value in a market that is not making it easy to find bargains.

Disclaimer: I, my family, or clients own a current position in Legg Mason and Advanced Medical Optics.


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