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Alex1453 (89.94)

When Strategies Collide...

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July 18, 2009 – Comments (2) | RELATED TICKERS: MTL , HBAN , WSBC

Taking out the financial aspect of it, investing is little different than any other strategy game: you take a look at the game, analyze the players, analyze the moves, develop a strategy, and try to win. Over time, it only makes sense that we would tend to stick with strategies in which we believe and have worked for us in the past. Some like to keep their money local and invest in companies where they do business on a consistent basis; for others, the high-flying world of ADRs is the key to success. Look at the numbers....look at the momentum...Growth...Value...CAPS rating..."invest in what you know"....blue chips...techs, etc. Needless to say, there is a strategy, or perhaps even a group of strategies, that investor can and do employ; however, what happens when the strategies that we often use collide?

Example 1: Currently, I own shares in Mechel Steel (MTL),which is a steel, mining, and power company operating in Russia. From January 20 to June 1, the company's share price more than quadrupled, moving from $2.57 a share to $12.55 a share. If you think ADRs, CAPS rating, VALUE INVESTING (key to noting), or industrial stocks are the answer, then surely you must feel vindicated.

Example 2: During the same time period previously mentioned, if I would've invested in local companies, such as Huntington Bancshares (HBAN) or WesBanco, Inc. (WSBC), my results would've been movements of $3.81 to $4.04 and $20.64 to $16.75 respectively. So much for the recovery of banking/financial stocks! Unlike with Mechel, value investing, among the other types of strategies utilized, didn't work. 

Although I chose to focus on value investing for this writing, this could easily happen to anyone who simply focuses on one strategy. When focusing on additional strategiesfor investing, how do you handle the collisions that are bound to occur? All things considered equal, if two companies are good value plays, yet one has a higher CAPS rating and the other is a company/industry that you know and understand well, then who is the winner? How do you properly weight all the information that you are reviewing before making a "wise" investment?

2 Comments – Post Your Own

#1) On July 18, 2009 at 5:04 PM, SkepticalOx (98.69) wrote:

"All investing is value investing." -Benjamin Graham

Otherwise it's just speculation (or trading). I don't really understand how your strategies are colliding? Value investing is about buying a buck for fifty cents (or its reverse, shorting, is selling fifty cents for a buck). What other strategy did you have?

Value investing is about making the right choices, about giving yourself a margin of safety so you don't lose money needlessly. So what do you consider Example 1? Not value investing?

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#2) On July 18, 2009 at 5:35 PM, streetflame (32.92) wrote:

These companes are not classic Ben Graham-style value stocks.  Free cash flow is nonexistent for MTL and HBAN, debt is too high at all 3, tangible book is negative at MTL, HBAN has recently cut their dividend and MTL has none.  These are some of the reasons MTL was so beaten down when you bought it.

Ben Graham would have rejected all of them in favor of companies like Tesoro (TSO), Patni Computer Systems (PTI) or Energen (EGN).  The potential upside would not be as high as MTL, but according to him it would be more certain.  Value investing is not just about low P/E and P/B, it is about the quality and sustainability of the numbers as well.

As for the question how do you weigh all the information, when you compare 2 great stocks the obvious answer is to buy both.  Hopefully your portfolio is large enough that you can hold 10-20 of your best ideas (properly diversified), and don't worry about the ones that got away.  I think everyone struggles with this question and I would like to hear other people's responses as well.

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