Value investing is considered riskier than growth investing. At least that’s what they teach you in modern portfolio theory as taught in business schools today. Value investor’s want to purchase a stock trading below what they consider its intrinsic value. Value investors buy more of a security as the price declines if their fundamental valuation thesis remains intact. They reason it’s on sale and the sale price just got better. Convinced of their analytic ability, they continue to buy on the way down. Sometimes this approach is dead wrong and the value investor realizes that his perceived value is not an opportunity but instead the reflection of a business whose fundamentals are deteriorating. Hence the expression, the value trap. Unlike a growth investor that overpays for a stock, a patient value investor who “waits it out” generally makes matters worse.
This seems to be the conclusion that Walter Energy director, David Beatty has come to. Mr. Beatty first purchased Walter Energy at $138.69 and continued buying stock over a period of two years as the metallurgical coal company share price dropped all the way down to his last purchase at $16.87. On June 4th, the unfortunate Walter director unloaded all of his holdings at $4.56 per share.
