Value investing: Michael Price’s investing tips: Avoid Excel sheet, junk consensus & be contrarian
Investing legend Michael Price is one such name. He is one of America’s most successful value investors and his balanced and level-headed approach towards has enabled him to generate lofty returns over the years.
Price is the President and Managing Partner at MFP Investors, which he started in 1991, and also a Director at Liquidnet Holdings. He is also associated with several other eminent organizations.
Legendary investor Seth Klarman credits Price as being one of his main mentors.
Born in 1953, Michael F Price graduated in 1973 from the University of Oklahoma with a Bachelor’s degree in Business Administration after which he was hired by Max Heine of Mutual Series Mutual Funds as a research assistant. He learned a lot from Max and considers him his mentor.
After Max Heine’s death, Price took over Mutual Series and later sold the firm to Franklin Templeton Investments. Price, though, continued to work with Franklin Templeton Investments until 1998, after which he became the Chairman of the Mutual Series fund. After leaving Templeton in 2001, Price started his own hedge fund, MFP Investors LLC.
Investment philosophy
Price’s investment philosophy is mostly based on the teachings of Max Heine. He attributes his investment approach, value investing, to his mentor.
Price likes to invest in companies that are going through a financial crisis and provides them with much-needed cash by buying their stocks at substantial discounts to their true value, and allowing them time to recover from their problems.
He tries to gain in-depth knowledge of the company’s prospects of overcoming the difficulties after which he buys a stake in it if his analysis shows that, barring its financial problems, the company has the fundamental attributes to make it a good investment.
Price usually buys enough stake in a company to enable him to influence the decisions of the management by recommending strategies which, if followed, can improve company’s performance and cause the stock to appreciate.
Things to keep in mind before investing
Price feels investors should have an inquisitive approach towards investing and should consider how much a company may possibly be valued when bought by some other investors.
According to Price, one can also take into consideration the intrinsic value of a company’s stock by using conventional metrics such as price over book value and price over cash flow.
He believes investors can extensively study mergers and acquisitions to further research the buying patterns or interest of other investors. One should keep in mind that not all firms are similar and each has its unique financial and managerial structure that determines growth and profitability of the business.
Further, Price says investors should carefully learn about the management and determine whether it really acts in shareholders’ interest or puts their personal motives first.
He further stresses the importance of determining the value of each segment of the company as separate entities. So, Price feels one should evaluate a company by how much it would be worth if someone wanted to buy it today.
He also offers a few tips to survive the market volatility and generate steady returns.
1. Don’t hold a lot of cash
Price feels investors should avoid holding a lot of cash because when the market rises, it can be a big drag. On the other hand, it is necessary to have some cash for future purchases and to protect oneself from the vagaries of the market.
He advises investors to have two-thirds of their portfolio in value stocks, and one-third in special situation instruments like arbitrage, distressed securities besides some part in cash.
If one uses this methodology, even if the market declines, the portfolio can outperform since special situations tend to have less correlation with the broader market.
2. All cheap stocks are not ‘buy ideas’
Price says one shouldn’t buy a stock unless there is a strong reason to believe that it is offering a value greater than what is being indicated by its market price.
Investors can conduct a thorough research to identify companies which have great potential and are undervalued, Price says and adds that not every cheap stock qualifies as a ‘buy’ idea and one should follow a rigorous research process while searching for the right company to invest in.
3. Don’t follow the herd
Price says investors shouldn’t pay much attention to what the market is doing in the short term as ‘Mr Market’ is not always wise.
Market’s nature is so unpredictable that it may sometimes sell investors a stock at a bargain or may pay investors more than it is worth, says he. Investors should avoid following the herd and look to a spot where nobody is looking. “Never, never pay attention to what the market is doing. … Stay away from the crowd,” he said in an interview.
4. Think like a business owner
Price says in order to get better at investing, one needs to think like a business owner. Investors should consider buying shares in a business like owning a partial stake in it.
If an investor thinks a share is a piece of paper that people trade back and forth, she is in deep trouble as an investor.
“The key question in investing is, what is it worth, and what am I paying for it? Intrinsic value is what a businessman would pay for total control of the business with full due diligence and a big bank line. The biggest indicator to me is where the fully controlled position trades, not where the market trades it or where the stock trades relative to peers,” he says.
5. Be contrarian
Price says to generate returns in investing, one must occasionally be contrarian and be right about that contrarian view. He says investors should look for mispriced bets, which can be found mostly where only a few investors are looking.
He advises investors to do original work and conduct thorough primary research before investing to find value stocks.
“If you really [want] to find value, you [must] do original work, digging through stuff no one else [wants] to look at… The really important thing is to eliminate the Wall Street consensus, the Wall Street research. You need to understand where the company is in the world and what the competition is for the products, whether the products are any good, and whether or not the company has any pricing power or barriers to entry… Think about the business, think about what you see without any input from Wall Street, do [your own] primary research,” he says.
6. Don’t get lost in spreadsheets
Price believes extrapolating past data into the future is a very usual trick favored by many consultants and analysts, but following such a methodology may do more harm than good.
He says this process seems logical to some investors, but it is loaded with danger as complex adaptive systems produce changes that can’t be extrapolated. “You can get lost in the spreadsheets. You can’t rely on the projections that you put in the spreadsheets alone… Depending too much on the Excel sheet to forecast discounted cash flow is a big mistake,” he says.
7. Don’t let emotions get better of you
Price says investors often make the mistake of letting emotions get the better of them and hate taking losses even if they are sunk, which leads to bigger losses in the long run. “The worst mistake investors make is taking their profits too soon, and their losses too long,” he says.
8. Take advantage of falling prices
Price believes the best time to start investing is when markets are going through a bad phase. He says normal investors may sell and panic in these conditions, but value investors like prices to fall, especially when they have dry powder and can take advantage of the drop.
“A good time to start in [the investing] business is when markets are terrible… We wait for bad news… I love to read about losses. A classic value investor looks at a price drop of a stock they like as a chance to buy more, whereas the ordinary investor panics and sells,” he says.
9. Follow value investing principles
Investors who follow value investing principles can avoid the flip side of bubbles, as value investing shines brightest when stocks are falling in price, since they are purchased based on value. “It’s easy to get swept away in a growth market. But I’ve been in this business for more than 25 years and I’ve watched investors figure out a way to justify incredible multiples, only to see valuations collapse back to the underlying worth of the company,” he says.
10. Make good judgments
Many investors may be intelligent but they need to have good judgement skills, which come with experience from facing the ups and downs of the market. Intelligence without judgment and the right temperament won’t make someone a good investor, he says.
Price believes being too intelligent can also actually be a problem, since the smarter one think he is, the more he may get into trouble trying to predict things that are not predictable.
“A lot of people have the brains. It is the judgment with the brains that matters, and that comes with experience and from thinking about things in the right way,” he says.
Price says the key to investment success is weathering the bear market, not outperforming the bull market.
(Disclaimer: This article is based on various interviews of Michael Price.)
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