July 8, 2015
Imagine that you are one of the richest persons in a medium-sized town. In the town there are lots of businesses: shops, factories and farms. All are hungry for capital to expand, and would gladly let you invest. After doing some careful research and asking lots of questions, you choose to invest your money with four entrepreneurs: Jack the dairy farmer who makes great cheddar cheese; Fred the pharmacy owner who always has lots of customers in his store; Susan the carpenter who makes beautiful cabinets and has a long backlog of work; and Harry the tech consultant, who seems to keep the computers running for everyone in town.
Being a diligent and careful investor you meet with each of the companies four times a year to see how they are doing. Three of the businesses are doing well and are paying you a dividend, a nice return on your investment. One of them (Harry) doesn’t seem to make any money, and is causing you concern. Maybe Harry is paying himself too high a salary?
Meanwhile, in the rest of the world, there are all kinds of things going on. Greece may be going bankrupt, and Puerto Rico has declared that it can’t pay its debts. Things are bad in the Alberta oil patch and the situation in the Middle East is terrifying. Interest rates might be rising in the U.S., and could soon be falling in Canada, or maybe they are both staying the same. No one seems to know. Farming businesses in the U.S. seem to be selling for a lot more than you paid Jack, but drug store shares are down due to rising competition.
A question crosses your mind: Should I sell my investments in these businesses because of these concerns? Could trouble in Greece result in Jack selling less cheese, or Susan’s customer backlog drying up? On reflection you realize that these concerns are far-fetched. You have not invested in the world economy. You have invested in a group of businesses, which after research, you have decided are well managed and profitable. Why should remote events, however dire, make you change your mind? Exercising your powers of reason, you cast aside the fears that threatened to overwhelm you, and keep doing what you are doing. This turns out to be the right decision and, over time, you prosper.
This small parable may strike you as simplistic and not really relevant to what we do as your portfolio manager, but you would be making a mistake if you dismissed it out of hand. At the core of our investment philosophy, we are very much like the investor in this town. We have lots of investment opportunities. We investigate, research, and consider. We invest in a select few, and then we monitor our investments carefully. Our main concern is how the businesses we have chosen are doing. We have not invested in the stock market. We have invested in a group of businesses.
Obviously we do not invest in a vacuum. What happens in the rest of the world inevitably affects our investments, but not as much as the daily gyrations in the stock markets would lead you to believe. In fact, over a reasonable length of time, the ups and downs of the market tend to fade into insignificance. The value of good investments, ones that make money and pay dividends, go up. Selling them due to fears of what “the market” is doing almost always turns out to be a mistake. Some events in the world are, of course, highly relevant and might cause you to change your mind about an investment. Separating the irrelevant noise from the significant information is a vital part of our job, just as important as our initial selections.