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The Wisdom of the Value Crowd Can Be Wrong

NEW YORK (TheStreet) -- The value investing crowd is a fairly small, deep-knitted group, and when we latch onto a theme, or an idea, we usually don't let go of it quickly. Many of us attend the same conferences, pay heed to the same living value investing legends, and still espouse the investment philosophy of those that are no longer with us (such as Ben Graham).

There are times, however, when the wisdom of the crowd, even in value land, is just plain wrong. Certain names become the holy grail of deep value; the can't-miss opportunities. It's hard not to fall prey to this at times, and that applies not just to value investors.

A few years ago, Sears (SHLD) was the name to own, primarily due to the leadership of Chairman Eddie Lampert, and the "hidden" value locked within the company's vast real estate portfolio. I saw all of the calculations generated by some big value players; what the company was said to be worth based on square footage of retail space, and it appeared impressive.

While I'm sometimes enamored with company-owned real estate assets, the Sears story never quite made sense to me, and I passed on it. Right or wrong, I could not escape the view that Sears was no longer the force in retailing that it was in my youth, and that perhaps the real estate was not as valuable as many believed. Assets may appear to have a great deal of value, but not so much if they can't be converted into cash. Shares that were trading above $120 in early 2010, can now be had for $43 and change.

The next big old-time retailing play was J.C. Penney (JCP), and it was a similar story. In this case, new leadership by a legend, Ron Johnson, a former retail wiz at Apple (AAPL), coupled with a formidable real estate portfolio. This was the next can't-miss opportunity, and investors bid shares up from $24 in August 2011, to about $43 in February.

Much of that gain was a "Ron Johnson premium"; based partly on his prowess, but also the fact that he put $50 million into 7.3 million 7.5-year J.C. Penney warrants which he had to hold for at least 6 years. The kicker was the strike price -- $29.92. If Johnson was willing to take such a risk, many believed, in which he could lose his $50 million if the stock did not perform, then he must be a believer.

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