Michael Price, president of the Price Family Foundation, Inc. and a managing member of the New York-based hedge fund MFP Investors, shared his insights on the investment methodology behind the success of professionals such as Warren Buffett and Mario Gabelli, BS ’65, with a standing-room-only audience at the Gabelli School of Business on December 9, 2015.
If you’re looking to make a good investment, you’d probably steer clear of stocks that are plummeting. But, according to Price, falling stocks could be worth a second look.
Value investing involves buying stocks that are trading for less than their intrinsic value. The presumption is that the stock market overreacts to good and bad news, which means that even small setbacks could cause a company’s stock price to fall. If the company is strong, the price will eventually rebound.
To value investors, this temporary drop represents an opportunity to buy into a valuable company while the price is unusually low. The trick, however, is to scout around for companies that are in this situation.
“You want to go where the action isn’t. When we read the newspaper in our office, we look for the earnings that disappoint, not the ones that increase,” Price said.
“It’s our job as value investors to pick through all the paper that Wall Street prints and find those pieces of paper, whether bonds or stocks, that are too cheap based on their underlying asset value.”