Undervalued Stocks: Is Patience the Key or Are There Better Ways to Predict Their Fat

[i4value]

If you are a fundamental investor, you look for undervalued stocks as you believe that this is a temporary thing.

But how do you assess that this undervaluation is temporary and not more enduring?
With the former you have the chance to make money. If it is the latter, you would probably lose money.

It is relatively straight-forward to assess whether a stock is undervalued. It requires a combination of research, analysis, and judgment.

And then you translate what you have found out into a business value. If the market price is lower that the estimated value, then you have an undervalued stock.

But can you assess that this undervaluation will be a temporary or more enduring thing? This is no longer about understanding the business prospects but reading market behaviour.

Some people look for catalysts so that the undervaluation would be short lived. Others rely on technical. But I have not been successful using these.

So I ended up holding stocks for 6 to 8 years hoping that the market will eventually become logical and re-rate the stocks. You would think that this is a terrible idea.

Well, over the past 20 years most of my stocks have been re-rated upwards. But there are a few that I sold at a loss after waiting for 8 to 10 years. The only good thing is that on a portfolio basis, over this period, I have done better than the index.

But I wish there was better way to assess whether undervaluation is temporary or more enduring. What have you done?

[sgmystique]

If you are a fundamental investor, you look for undervalued stocks as you believe that this is a temporary thing.

But how do you assess that this undervaluation is temporary and not more enduring?
With the former you have the chance to make money. If it is the latter, you would probably lose money.

It is relatively straight-forward to assess whether a stock is undervalued. It requires a combination of research, analysis, and judgment.

And then you translate what you have found out into a business value. If the market price is lower that the estimated value, then you have an undervalued stock.

But can you assess that this undervaluation will be a temporary or more enduring thing? This is no longer about understanding the business prospects but reading market behaviour.

Some people look for catalysts so that the undervaluation would be short lived. Others rely on technical. But I have not been successful using these.

So I ended up holding stocks for 6 to 8 years hoping that the market will eventually become logical and re-rate the stocks. You would think that this is a terrible idea.

Well, over the past 20 years most of my stocks have been re-rated upwards. But there are a few that I sold at a loss after waiting for 8 to 10 years. The only good thing is that on a portfolio basis, over this period, I have done better than the index.

But I wish there was better way to assess whether undervaluation is temporary or more enduring. What have you done?

What you have written resonates with me. I am really not sure if there is any foolproof way to assess whether undervaluation is temporary or more enduring.

After a few decades of investing (and being a value investor, most of my investments have been in stocks that I feel are quiet undervalued), the extreme cases being companies that have a market cap lower than the cash on hand and which have been consistently profitable and pay dividends year on year to boot...

However, the market prices remain range bound (and liquidity is also extremely low) since these are small caps with mostly long term investors.

This experience has led me to focus on the annual dividends that I can get from my portfolio, with capital gains being an added bonus. These have come about during temporary spurts due to certain specific industry or stock related events or delistings for a couple of my undervalued holdings.

[i4value]

I share the same experience. Over the past 20 years, dividends accounted for about 1/3 of my total gain. While I don't look for dividend kings, the stocks I buy are value stocks with dividend yield of 3 % to 5 %. I also have some REITs as value stocks just to boose the dividend portfolio dividend yield even though REITs have not been fantastic capital gainers.