The reason outperforming a benchmark is so easy on paper yet so difficult in practice is because of human nature: It is mentally and emotionally HARD to practice the value discipline required to outperform.
This is because, as value investors, we are many times most interested in companies when they are experiencing negative issues of some sort (albeit usually of the short-term, correctable variety). It takes intestinal fortitude to follow the fundamentals screaming independent of the consensus opinion focused on the current negatives. As has been the case with Altria (NYSE:MO), Merck (NYSE:MRK), Pfizer (NYSE:PFE), Microsoft (NASDAQ:MSFT) and other high-quality companies recently available at very attractive valuations, this week's activity in Motorola (MOT) has produced a solid investment opportunity.
In short, here we have a global brand name, an established company selling at an approximate EV to FCF multiple of 10x -- implying a FCF yield of 10%, nearly twice the 10 yr. bond yield. Fundamentals are as follows: zero net debt, $10B in excess cash, solid free cash flow generation of between $2.5 and $4.5B (I use $3.5B for the 10x valuation above). I have no particular insight into the near term operating fluctuations of MOT's business, however I do know that owning a portfolio of stocks with these fundamentals is a very intelligent way to go about successful long-term equity investing.
Does this assure that MOT will prove a rewarding buy at $18 and change? Of course not, but a business risk approach suggests that the long term value investor will look back on this several years from now as a wise and profitable purchase.
Remember, if it was easy to outperform every manager would do it. Keep that in mind when evaluating how hard it is to purchase MOT in the current negative environment, that is exactly the reason it makes so much investment sense.
MOT 1-yr chart
Disclosure: Author is long MOT.