3M Company: It Didn’t Take A Crystal Ball To See That It Was Overvalued, Part 3

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Introduction

Regular readers of my work will attest to the fact that I am an avid proponent of valuation. So much so, that I cannot recall writing an article where I didn’t discuss the importance of only investing in a stock when it was fairly-valued, or better yet – undervalued. This obsession with valuation inspired one reader to dub me as “Mr. Valuation.” Frankly, it is a mantle that I covet proudly.  I bring this up for an important reason. Long-running bull markets like we’ve been in since the end of the Great Recession are very difficult markets for value-oriented investors to navigate.

The reasons are simple and straightforward. First, it is very difficult to find attractively valued stocks when investor sentiment is wildly optimistic. Rising stock prices lead to investor overconfidence which often further leads to complacency. Consequently, valuations based on fundamentals, even when they reach dangerous levels, are easily ignored. Rationalizations overtake logic; therefore, bull markets can persist far beyond reason.

This exuberant environment is a scourge to value investors like yours truly. As a result, I have often lamented to clients that I live in money manager hell.  At precisely the time when clients are lavishing me with compliments (the height of bull markets), I find myself in a state of what can only be described as depression. All I see is danger, while all clients see are the recent profits even when they are unjustified by fundamentals.

However, reality inevitably takes its toll.  Unfortunately, the “when” is rarely predictable but inevitable nevertheless. Consequently, selling overvalued stocks that have performed far above what fundamentals dictate creates client unrest and even reprimands, even though it’s the right thing to do. This leads me to sharing what I found as fascinating comments on an article I read on 3M Company (MMM) while conducting research for this article. I will provide excerpts of these comments, but the authors will remain anonymous.

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Disclosure: No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the ...

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