I remember looking at Eastman Kodak a number of times over the last decade. Often a few metrics would look cheap, but when I would look at the bevy of factors in the financials and consider the effects of technology, I could never get myself to be a buyer. To me, it seemed to be the ultimate value trap — a modern buggy whip company.
That’s why the behavior of Bill Miller, a so-called value investor, was so surprising to me. He had a saying, “lowest average cost wins,” but that implies that the stock will rise at some point. For stocks that keep falling, the average cost does not matter. And lest I seem to be boasting, I made the same mistake on Deerfield Capital.
But he did the same thing on Freddie Mac, though that was more dramatic.
The core idea of value investing is NOT “buy cheap,” (lowest average cost) but margin of safety. My greatest mistakes in investing came from not seeking enough margin of safety. Same for Bill Miller, though the effect on his track record was far greater.