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Arne Alsin: Investors who understand value have a realedge
By Arne AlsinPublished: May 24 2008 03:27 | Last updated: May 24 2008 03:27
 You’re standing in line, waiting to buy a frappucino, and it hits you like a thunderbolt. It is abrilliant idea.Why didn’t you think of it earlier? You love the coffee sold here. You’re convinced thisparticular coffeecompany will continue to grow and prosper. So why not buy the stock? You call your brokerand act on theidea. You pay $40 a share forStarbucks(I do not have a position in this company). You checkthe quote afew months later and it is $20.What does the drop in stock price tell you?If you’re like many investors, the fall is critically important. You look at the price and it makesyou nervous. You’re upset. In your mind, it means you made a mistake. You worry that the stock price mayfall further.And so, if you’re like a lot of investors, you sell.It is a mistake. It is always a mistake to sell because of a decline in price. Why? It’s becauseprice, by itself,is meaningless.In order to attribute meaning to the price quote of Starbucks, a frame of reference is required:an appraisalof value. Is the stock worth $5 a share? Is it worth $100 a share? Only when you have a frameof referencecan you make a judgment with respect to price.If your neighbour knocks on your door and offers you $20,000 for your new car, a car you knowis worth atleast $30,000, you’re not going to take his offer. If your neighbour knocks on your door a fewdays later andoffers $10,000, you’re going to consider his offer frivolous, if not insulting. Why? It is becauseyour decisionmakingprocess is based on a frame of reference. It’s easy to make a decision when you compare thepriceoffer ($10,000) to the asset value ($30,000).For many investors in the stock market, it’s about price and price alone. Price drivesperception. If the pricegoes down, something must be wrong. Sell the stock. If the price goes up, enthusiasm follows.Buy thestock. Since many investors lack an understanding of value, they do the stock marketequivalent of selling a$30,000 car (value) for only $20,000, or even $10,000.Since the stock market is dominated by price-centric investors, those who understand valueenjoy asignificant edge. I gave readers of this column only one stock idea in 2007: TecumsehProducts, aworldwide leader in hermetic compressors, which continues to be one of my largest positions.It is up by 100per cent since I highlighted it last year.. . .Here is my first buy recommendation in 2008. It is a stock that I have been buyingaggressively, and that Ithink will more than double over the next couple of years:Office Depot. This story is amicrocosm of whatails most investors. That is, investors employ a linear bias when viewing the operatingperformance of companies. When a company is thriving, producing operating metrics that are at or near peaklevels,
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