The Importance of Value
On September 15, 2000, I made my first purchase on eBay.
It was for a pair of cuff links that had the presidential seal set in cobalt blue, and they were a beauty.
I got very excited bidding up the price because I really wanted them.
This was back in the day when my computer was hooked up to a modem in my den, so there was lag time from when I submitted my bid to when the bid was accepted.
In the last few minutes of bidding before the auction was closing, I was the highest bid at $75.
Each time I refreshed the page, someone else was outbidding me by $10.
In the next few minutes, I got caught up in the heat of the moment and bid as high as $275.
In the last seconds, I was outbid and upped my bid once again to $300.
I waited for a few seconds for the computer to refresh... and then the screen showed I was the winning bidder.
I will admit, I was a pretty happy camper knowing I won the auction.
And then... reality set in.
Being a pretty frugal guy, it finally hit me that I paid $300 for cuff links... and I didn’t even own a shirt with French cuffs!
The excitement of the bidding, the new technology of eBay, and the thrill of winning blinded me to the fact I just bought something I really didn’t need.
Then I did a search for the cuff links I won and found out they could be bought at the White House Gift Shop for $75.
A few minutes later, the seller sent me an email “congratulating” me on my great purchase.
Boy, did I feel like a monkey’s uncle... I paid $225 more than the actual selling price. A simple search a few minutes before I placed my first bid would’ve saved me money.
Almost 17 years later, I still have the cuff links in my drawer, and I occasionally wear them to remind myself what I fool I was.
But the $225 I overspent reinforced a lesson that I temporarily forgot in the heat of the moment.
I completely forgot the first rule of investing: before making a purchase, know the value of what you are buying.
That was something I did every day of the week prior to buying a stock.
I would spend a considerable amount of time trying to get an estimate of the intrinsic value of the business and then check if the stock price was above or below my valuation.
If the stock price was above my valuation, I moved on. If the stock price was below, I would buy. It’s that simple.
All I had to do prior to making my first bid was find out the value of the cuff links. If I did that, I would’ve known that any bid above $75 was foolish.
Fortunately, I follow that rule before making any stock selections.
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One of the recommendations we made recently was Wendy’s (NASDAQ: WEN).
When I did my research, I valued WEN at $15 per share... yet Mr. Market was offering it for $10 per share.
At that time, Mr. Market put fast-food restaurants in the unloved and unwanted pile due to the bad press they were receiving on the nutritional content of their offerings.
The industry was in the process of offering healthy alternatives, but the stock was still trading at a steep discount.
We added it to our portfolio at $9.44 per share and had the patience to hold it.
WEN is currently trading at more than $15 per share, for a gain of more than 62%.
Currently, our valuation for WEN is much higher than its current stock price, and we are holding it in our portfolio.
What makes sense in stock picking is something that I should have applied to buying cuff links on eBay.
As a rule, I never again participated in auctions, and I always make sure to know the value of what I am buying prior to making a purchase.
All my best, Charles Mizrahi Twitter: @IWPeditor Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street. And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters. Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
All my best,
Charles cut his chops on the trading floor of the New York Futures Exchange before moving on to become a wildly successful money manager on Wall Street.
And with more than 35 years of recommending stocks under his belt, Charles has knocked the cover off the ball, compiling an amazing record of success and posting gain after gain for his loyal readers. He is the editor of Park Avenue Investment Club and the Insider Alert newsletters.
Charles is also the author of the highly acclaimed book, Getting Started in Value Investing.
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