By David Baskin, 11/5/2015
The great thing about the stock market is that it gives you a new price for every stock every second between 9:30am and 4:00pm every working day. The horrible thing about the stock market? It gives you a new price for every stock every second between 9:30am and 4:00pm every working day. All that information is easily available, and its prominence makes it seem important. One of the great secrets of successful investing is that it’s not really important at all. Not for investors, not for us, and not for you.
As value investors we buy companies after detailed analysis, based on their business, their industry and the overall economy. Factors which are important to us such as competitive advantage, balance sheet strength and dividend payment capability may be of little or no significance to traders. Traders live in the moment and for the moment. For them the important things about a stock may have little to do with its business. They are concerned with momentum, the latest tidbit of information on Twitter or the latest musings of an analyst. That’s fine with us. We don’t argue with the traders, who do add liquidity to the markets, and more than occasionally, generate great opportunities for investors.
As I write, the shares of Magna, a great company in our view, are down about 12%. The company had a good quarter and is in a strong sector. Everyone agrees it will make money going forward and will likely raise its dividend, as it has done repeatedly in the past. However, gross profit margins on its products might be somewhat lower in the next period. This has been seized upon by traders as an excuse for reducing the value of a giant world-wide company by 1/8th. On its face, this is absurd. Maybe not for traders, but certainly for value investors. In our view, not much is different today than it was yesterday, and an asset we believe to be worth $1 is now available for $0.88. Clearly we should, and will, buy more for our clients. We are quite certain the price will go up, although we don’t know just when.
Stock prices are inherently unpredictable in the short run, by which I mean periods out to a year or two. The number of factors which induce buyers and sellers to make decisions are numerous and incalculable. We don’t try and figure them out. It is futile and frustrating. Instead, we buy for the long term and wait for the market to recognize value, which it ultimately always does.
And what if we get it wrong? What if, in spite of all of our thoughtful and patient analysis we simply buy a lousy company? In that case we take comfort in the fact that we always diversify our portfolios, never putting too many eggs (in our case more than 5% or so) in any one basket. We will never bat 1.000. No one ever has or ever will. You don’t need to, in order to make good returns over time. We will have winners and losers, and we are confident that the former will be more numerous than the latter. When we get it wrong, we will admit our mistakes and sell them. But we will never sell due to adverse market sentiment, or downward momentum, or the comments of an analyst. We will sell when we are convinced that the facts on the ground have changed, and that our original analysis no longer holds.