Why Value Investing vs. Value Trading Matters

I talk a lot about value investing with options, or using certain conservative, structurally advantaged option strategies to generate low cost basis acquisitions of high quality companies.

Yikes - I sound like an accountant.

Value investing with options - as I teach and advocate it - comes down to this: Buying great businesses dirt ass cheap.

Emphasis on "great" (OK - emphasis on "dirt ass cheap" too).

What Is Value Trading?

There's nothing wrong with what I call the value trading approach where you search out undervalued stocks regardless of their quality and long term earnings power.

Even a crap company like Sears Holdings (SHLD) is worth something.

And if Mr. Market gives you a short term opportunity to flip a temporarily mispriced stock for a quick and lucrative profit, I'm certainly not going to stand in your way.

But my preference is for value investing opportunities. To me, the value isn't in the size of the discount relative to the worth of the asset, it's in the quality of the asset itself.

And let's face it - it's a WHOLE lot easier identifying a superior business than ascertaining the precise fair or intrinsic value of a business.

In a way, price is a secondary consideration for me, because I know that I can always use options to adjust the price on my own - not one time, but repeatedly.

I don't need Mr. Market to misprice a stock for me, thank you very much.

Some Much Needed Clarity About Value Investing

Sometimes we get so distracted by all the noise and all the voices in the markets that we often forget some very basic principles such as:

High quality businesses consistently generate and increase their earnings.

Low quality businesses don't.

If you were going to start your own business which one would you strive to build - a successful business or a mediocre one that struggles to stay afloat?

Would you rather pay full price for a nice house in a good neighborhood with good schools?

Or pay half price for a run-down house in a crime-infested part of town with schools you're afraid to send your kids to?

Why would you treat your investments any differently than you treat your family?

Investing Lessons from the Oregon Trail

I spent 15 of my first 20 years growing up in Oregon.

As a result, I know a lot about fog, rain, and The Oregon Trail.

The Oregon Trail was a 2000 mile trail spanning from Independence, Missouri to the Willamette Valley in what was then The Oregon Territory.

Pioneers traveled in wagon train convoys in an exhausting, dangerous trip that took about 5 months to complete.

Near the end of the trail there was a split - one fork continued on to the Willamette Valley's lush farmland, and the other led to California's gold mines.

When I think of value trading vs. value investing, I'm often reminded of that final fork in The Oregon Trail.

We can look for the easy, one time scores and hope we find them (although, like mining for gold, even if we do find a nugget today, we'll need to find another one tomorrow, and another one the day after that).

Or we can embrace longer term opportunities to build something lasting and self-sustainable.

Metaphorically speaking, I'm convinced that not only is a nice piece farmland a safer bet than a mule and a pick-axe, but it's also going to end up being a lot more profitable.

Which Investing Fork in the Road Do You Take?

So which branch of the Oregon Trail are you on?

Are you scouring the markets for companies you've never heard of that seem "undervalued" based on this confusing metric or that complicated formula?

Are you approaching the stock market like it's a rummage sale and you're going through musty old boxes looking for items you can turn around and resell on eBay?

I honestly believe that most "value traders" approach the market the way they do because they don't believe there's a better alternative.

Because they don't believe that it's possible - except on rare occasions - to buy high quality companies at cheap prices.

And, yes, what I'm telling you is that you can.

It's always a huge eye-opener when value traders finally understand that not only can they get one-time discounts on high quality companies, but they can, in effect, get whatever discount they want.

And that they no longer have to go through Mr. Market's trash to build a future and provide for their family.

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