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Story of One Value Investment Not Found In the Stock Market

August 25, 2017

I recently bumped into a friend who is now retired. We struck up a conversation and the man proceeded to tell me a story that seemed to bear some relevance to the topic of investing.

  

A number of years ago, my friend was employed within a small division of a larger company. One day the company decided to shut down his division and transfer him to another area. As part of the closure, the company had decided to liquidate a number of spare parts related to the division’s discontinued product line.

  

My friend thought to himself that he might be able to find a market for the odd lot of parts the company was selling. The idea certainly involved risk, but the probability of success seemed good, assuming the inventory of parts could be obtained at an attractive price. So, the man went to visit management and offered to take the equipment off their hands. As it turns out, management reacted favorably to the idea of selling to him. What price did they want, my friend inquired? The company offered to sell everything at approximately ten cents on the dollar – a ninety percent discount to the company’s own cost.

  

My friend thought the price was more than fair, agreed, and took possession of the parts. The deal turned out very nicely for him. After only three months, he had sold enough parts to recoup the entire purchase price. Every sale thereafter was almost pure profit. He continued to sell parts for years afterward.

  

Even though my friend’s story did not involve the stock market or other assets we would typically consider “investments,” it struck me nonetheless as a classic case of value investing. Following are some of the investment lessons I took away:

  • Keep your eyes open – you never know when or where the next great money-making opportunity might come along.

  • Stick close to your area of expertise – competency is the foundation of boldness.

  • Buy quality goods – there is always a market for quality merchandise that meets a genuine need.

  • Pay much less than full value – a lower cost can both lower risk and, at the same time, increase future profits.

  • Be patient – the ability to hold on and wait for a fair price is enormously valuable in cases where the market is limited and sellers are in a hurry.

  

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