I’m always trying to draw analogies to value stock investing, because that strategy has proven to be the most lucrative over the long term for me and many other value stock investors.
You know the popular TV show Pawn Stars? That’s the show where people enter this Las Vegas pawn shop with all manner of wacky items — muskets, Civil War coins, pirate booty — and either sell it outright or take a loan against it.
The colorful characters running the shop are in the catbird seat because nobody else is going to buy a musket or pirate booty, except for an auction house, which makes me think the sellers aren’t too bright. (Why aren’t they going to an auction house?)
That’s when I realized that this was the perfect analogy for value stock investing — it’s when market inefficiencies create opportunity for those who recognize a value stock.
So, let’s look at how to recognize value stocks by way of market inefficiencies, and invest in them the same way the Pawn Stars do in wacky items.
How Pawn Stars Can Help You Invest
When a client enters a pawn shop with a musket, in its own way, that’s when value stock investing begins.
First, the seller is unaware that his item will fetch a higher value at an auction house. That means the Pawn Stars can appraise it, buy it and turn it over to an auction house for a profit.
With value stocks, the same thing is happening. The market is unaware that the item has a value higher than is currently being assessed. That means value stock investors can appraise it, buy it and sell it via stock market auction at any time in the future, when they believe it reaches fair value.
Second, the seller lacks utility for the item, whereas the buyer might have utility for it. (I guess that might actually qualify more as a market efficiency, since that’s how markets are set up, but in any event, it’s still a value stock analogy.) Because the seller has no utility for the item, he’s willing to sell it — and sell it for a lower price than it might be worth. That creates a value for the Pawn Stars, who have utility for it. It might be that they just like having cool things. It might be that, now that they are famous, they can add it to their store collection which drives traffic into the store. It might be that they can sell it for more than it is worth.
The value stock investor sees that a stock does not have utility to portions of the market. Peter Lynch often talked about value stocks having certain characteristics, like having a boring name, a boring business or doing something distasteful (like funerals). The market might not have utility for value stocks in a big growth stock or valuation bubble environment. Such was the case in 1999 with the dot-com bubble.
The value stock investor swoops in and buys the stock because it has utility. He believes it will provide him with superior returns to the market or other parts of his portfolio.
And he’s often right.
Some value stocks that presently appear in my screen:
- Portfolio Recovery Associates (PRAA) — a debt collector. Nobody like debt collectors, and they are likely next in line for the CFPB to apply scrutiny to.
- Apple (AAPL) stock is a value because it trades below its growth rate and has a ton of cash. It’s full value hasn’t been recognize but other investors think it is too expensive.
- Whole Foods Market (WFM) is a value play right now, as the market has overly discounted it due to alleged competition and pricing pressures.
Your thoughts about Pawn Stars’ worth as a show aside, there’s plenty to learn there just about how the world of business is conducted. One man’s trash is another man’s treasure, so to speak, and one man’s unloved stock can be another man’s stepping stone to retirement.
Related Pawn Stars News
As of this writing, Lawrence Meyers was long AAPL and WFM. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at [email protected] and follow his tweets at @ichabodscranium.