Walt Disney: Lessons Of Value Investing
Summary
- Value investing is easier said than done.
- Holding shares is easy when you can afford it.
- Fear of job loss can lead to lost investment opportunities.
Value investing, while a profitable approach, can prove difficult to execute. Simply put, life interrupts.
I purchased my first shares of entertainment conglomerate Walt Disney (NYSE: NYSE:DIS) over eight years ago, in November 2007. I purchased more shares in subsequent years, and behaving like a good business-oriented investor with a long-term outlook, I never sold a single share. Moreover, I reinvested all of my dividends. However, during that time, I missed out on a monumental value opportunity in March 2009. This represented a rare opportunity for the purchase of a premier publicly traded business at roughly 50% below its normal trading range.
What's the worst part about missing this opportunity? I knew that it was a rare opportunity when it happened. However, one thing got in the way of me pushing the buy trigger at the opportune time. My hesitation enhanced my awareness of the difficulties in actually executing on value investing. Some of you are probably keenly aware of the issues I am about to discuss.
Fear of job loss
From the time I bought my first shares in 2007 until 2012, Walt Disney hovered around $30 a share, give or take a few dollars. However, fear stemming from the financial crisis caused the entire stock market to drop significantly during the final months of 2007 and throughout 2008, finally reaching a bottom around February 2009. According to Yahoo! Finance, the S&P 500 went from a high of 1,549.38 on October 1, 2007 to a low of 735.09 on February 1, 2009, representing an incredible 53% decline. Walt Disney dropped roughly 40% from its usual trading range of around $30 to about $18 a share in March of 2009.
In spite of this dream scenario for the value investor, I hesitated to buy more shares, although not for the reasons you might think. I didn't panic and sell the shares that I already owned. I knew Walt Disney remained a "pillar of civilization" kind of a company - a diverse leader in entertainment and consumer experiences via its motion pictures, television and amusement park businesses. I also took note of Walt Disney's declining revenue, net income and free cash flow, stemming from lower consumer spending as Americans contemplated their professional futures. One of the lessons I picked up from the financial crisis is that some fundamental degradation can follow declines in stock prices during recessions. Maintaining the long view, as well as keeping the big picture in mind, should take precedence when "the sky is falling."
Unfortunately, I was one of those people contemplating their professional futures. At the time, I worked as a purchasing agent in the coal industry and rumors of layoffs were rampant. I had some cash on hand, but was hesitant to invest during this crucial time for the simple reason that I may lose my job and need the cash to pay my bills. I didn't come away totally unscathed. My hours were cut, so my fears weren't totally unjustified. However, my cash cushion was safe because I still had a job. By the time I was confident in my professional security (in the summer of 2009), Walt Disney's stock had returned to its typical $30 trading range, and I lost out on a whopping 67% return.
What can the investor learn?
Personally, I learned that value investing does work - at least in theory. While I have received a total return of around 236% on my Disney shares purchased in 2007 and 2008, if I had invested when Walt Disney was trading around $18 on March 2, 2009, my total return would have equated to 608%! Interestingly, long-term index investors would have garnered superior returns here as well. One of the perceptions in the financial world, especially among value investors, is that investors get scared and panic sell shares during stock market corrections to hurriedly preserve capital, and/or withhold investing during declines missing out on great opportunities. This discounts the possibility that investors may harbor a perfectly rational fear of losing their jobs.
Conclusion
The thing to remember here is that cash is king. In this era of economic volatility, investors should have enough money to live on for a year and a half. Above and beyond that, investors should maintain enough cash in their stock brokerage accounts to take advantage of stock market corrections without fear of compromising their financial security during soft times. Cash building during prosperous times should make this difficult feat easier. Finally, execution of value investing can prove challenging.
This article was written by
Analyst’s Disclosure: I am/we are long DIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (54)
Oh to be back to the future.
