Value Wins When Sky is Falling

“All assets are too expensive.” Everyone knows this, or claims to. Yet no one is selling. What can you do? Find the few securities that are reasonable on a value basis, and forget about chasing double-digit returns for now.

This week, I read the phrase “all assets are too expensive” in no less than four major publications: the Los Angeles Times, the Wall Street Journal, Forbes and Barron’s.

I’m reminded of a great passage from “Developing an Investment Philosophy,” a 1980 book by one of Buffett’s thought leaders, the late Philip Fisher.

Fisher correctly called the 1929 crash in a paper he published at an investment bank in summer of that year. His reputation as a genius was tempered, however, by the fact that he was wiped out in the next 2 years by the market decline.

How could that happen? The same way it’s about to happen to all of us today. Everyone seems to agree that everything is overvalued, but no one has the guts to simply sit out.

There are a few. Berkshire Hathaway is out, to the degree it can be.

What can you do to sit out? Well, you can go to cash. You can hold bonds — but they’d better be short term, because interest rates are set to rise. Or you can hold shares that are priced low relative to their asset values.

A good example of the latter would be Riviera Tool Company (RTC). I don’t own it and am not recommending it — this is just an example of a Graham-style investment. No long term debt to speak of, they survived the 2001-2002 nuclear winter, and they are cheap, cheap, cheap. P/E of under 9, and selling for less than book value. Insiders are buying.

Now think for a moment about what happens here if the dollar collapses. Do tool & die manufacturers become better off? Sure. Suddenly the heat from east Asia and Germany is gone.

Graham said it all 70 years ago: when a stock is selling for less than its net assets, you’ll have a hard time losing money.